REX American Resources (NYSE:REX) Q4 2020 Earnings Call

0:00 Greetings and welcome to the RECS American Resources Fiscal 2020 Fourth Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

0:32 Good morning, and thank you for joining the REFS American Resources Fiscal 2020 Fourth Quarter Conference Call. We'll get to our presentation and comments momentarily, as well as your question and answer session, but first I'll review the Safe Harbor Disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risk and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risk and uncertainties associated with forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's report on Form 10-K and 10-Q.

1:24 Rex American Resources assumes no obligation to publicly update or revise any forward-looking statements. I have joining me on the call today Stuart Rose, Executive Chairman of the Board and Zafar Rizvi, Chief Executive Officer. I'll first review our financial performance and then turn the call over to Stuart Rose for his comments. Sales for the quarter increased approximately 4.2%, primarily reflecting higher year-over-year production in the ethanol segment and increased distillers grain pricing. Sales were based upon 67.7 million gallons this year versus 65.9 million in the prior year fourth quarter. Gross profit for the ethanol and byproduct segment increased for the fourth quarter from 8.1 million to 8.3 million, primarily due to improved distillers and corn oil pricing.

2:17 The refined coal segment had a similar fourth quarter loss of 1.4 million for this year versus $1.5 million for the prior year. SG&A decreased for the fourth quarter from $5.6 million to $4.4 million, largely due to lower ethanol freight charges recorded in selling general administration due to certain contract terms. The company recorded income from its unconsolidated equity investment of $332,000 for the fourth quarter of this year versus $1 million in the prior year. We recognized a tax benefit of $1.8 million in this year's fourth quarter versus a benefit of $3.4 million in the prior year's fourth quarter. The refined coal segment contributed a benefit of $1.7 million this year versus $1.5 million in the prior year fourth quarter for the tax benefit.

3:08 The above factors led to net income for the fourth quarter of fiscal 2020 of $3.5 million compared to $4.4 million in the prior year. while diluted earnings per share decreased from 70 cents to 59 cents. Stuart, I'll now turn the call over to you.

3:25 Thank you, Doug. Going forward, ethanol now is currently profitable and we're up against a period last year, a COVID-related closure period last year. In terms of corn and ethanol prices, they're both up as virtually all commodities are up and crush spreads remain challenging. DDG is up. with the price of corn. The new Biden administration appears to have appointees that are favorable to the ethanol industry, but RIN pricing is still up right now. We are still waiting to see how they will treat RIN pricing. In terms of the COVID, the COVID news is with the opening up of different states, it should help driving, which should improve demand for our product.

4:17 especially versus last year. In terms of refined coal, remains profitable on an after-tax basis. We plan on ending that operation by year-round this year. In terms of going forward with our cash, we have about $180 million in consolidated cash and equivalents, no debt. Our plans are to continue to explore investing in carbon capture. We've made progress there and I spent a fair amount of time on working on that project. We also are looking, continue to look for high quality ethanol plants. The ethanol plants we would hope to find if we, should we find ones to buy would be in our opinion something that has the best technology, has good technology, good locations, good people.

5:09 At this point I'll turn it over to will talk a little bit more about our carbon capture business and our ethanol business. Thank you.

5:21 Thank you, Stuart. As I mentioned in the last three calls, 2020 started in a challenging environment due to the COVID-19 pandemic. We temporarily shut down our plants during the first and part of the second quarter, and we struggled to find corn for a new gene facility we started. and others. During the third quarter, conditions improved. We received a steady flow of corn at both of our majority-owned as well as minority-owned locations. This resulted in an improved crush margin and a very profitable third quarter. These improved conditions continued through the beginning of the fourth quarter. Later, we began to see a decline in the crush margin. In addition to the price of ethanol failed to keep up with the increase in corn price.

6:09 Farmers lost interest in selling their corn because they were receiving direct payment from the federal government under the CARE Act. When China stepped up its corn purchases, that led to the higher corn prices. Behind these factors, we experienced political uncertainty and trade disputes. In addition, the EPA continued to consider and grant small refinery exemption from RFS compliance here. We expect the crash margin in the near future to continue to be under pressure, but we also expect it to improve once the threat of COVID-19 declines with the progress in vaccination and people begin to drive more again.

6:55 March 9th, The report of the USDA showed that carryout stayed at 1.5 billion bushels with export at 2.6 billion bushels. The estimated corn yield is 172 bushels per acre and ethanol plants are expected to consume approximately 5 billion bushels in 2021 crop year. Export of the distiller grain in 2020 was approximately 10.96 million tons compared to 10.8 million in 2019. We saw considerable improvements in export during the last quarter of the year. January 2021, Mexico, South Korea, and Indonesia were the top three importers in January 2021. Ethanol exports during 2020 totaled 1.3 billion gallons compared to 1.46 billion gallons of 2019. January 2021 export totaled 164.7 million gallons compared to 151.3 million gallons in January.

8:03 India, China, and Canada were the top three importers. So we saw that India suddenly is on the top of the list compared to Canada. and Zafar Rizvi. We are working with the University of Illinois to drill a carbon sequestration test well to determine suitability for an injection well at our One Earth Energy facility. The University of Illinois is in the progress of evaluating a permit application determined to select a test well location and conducting a front-end engineering and design feed study of the CO2 capture system.

8:53 The data will be analyzed to make sure the location is suitable for test characterization well. The university expects to start drilling the test well. Once the drilling permit is granted and the design is completed, we expect to start drilling The characterization well in early September. It should take approximately six weeks to drill and another several weeks of testing. It will require extensive modeling and computer stimulation to predict the behavior of the CO2 when it is injected. These stimulation models will determine how much CO2 can be injected at the location and what rate and it is eventual distribution in the subsurface area. This project is still at a preliminary stage and we cannot predict yet that we will be successful.

9:45 Our target is to achieve net zero emission. In summary, we are pleased to announce a profitable quarter and year in spite of a very difficult environment for the ethanol industry and other businesses last year. We are very appreciative and thankful for the hard work of our colleagues during this pandemic to achieve these results. and I will give back the floor to Stuart Rose for his further comments. Thanks Stuart.

10:11 Thank you Zafar. In conclusion, the economy is starting to open up. We have great plants, great people, great locations. We have high hopes that when the economy does open up that our business will improve as demand improves. Most importantly and the biggest thing that we have going for us is our people. They've stuck with us through Thick and Thin, and they are what we feel makes a difference and what separates us from the rest of the industry and what will continue to allow us to outperform the industry. Thank you. I'll now leave it open to questions. Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request.

11:02 If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. Once again, to register for a question, please press the 1 followed by the 4 on your telephone. One moment, please, for the first question. Our first question comes from the line of Jordan Levy with Truist Securities. Please go ahead.

11:25 Morning, all, and nice quarter against a pretty challenging backdrop on the macro front. That's true. Maybe if we could just start on the carbon capture side. You guys provided an update on the Illinois program. Could you just talk to the potential you see? We've seen some private companies and whatnot announce projects around large-scale carbon capture pipelines and and Sequestration Facilities. Could you just talk to how you're viewing that market potential outside of the University of Illinois project if it's something that's of interest? Zafar?

12:07 Yeah, I think as you know that there is some going something also is happening in North Dakota, Wyoming and some other area. But we are working with the university almost over a year and we have the land and we know exactly where we will be drilling and we are evaluating all those things. We seem to be ahead of most of other people who are at the stage. It takes approximately from start to end, it takes about two to three years before you're really able to drill your first well, which is characterization well.

12:52 Thank you very much. Thank you very much. and if we don't have a storage, the pipeline can bring the CO2 and where exactly we're going to store that. So our thinking is we should have a storage well and then we take the next step about the pipeline. So that's the direction we are going compared to other people who are really discussing the pipeline only.

13:44 As far as stated, we think people are going backwards on this. They're doing the pipeline which that's nice to have a pipeline but you could always truck CO2 in if you don't have a hole to put it in which we think is the most important thing. It doesn't really mean anything. So we're working on the hole first and assuming we can get that done then we'll work on the pipeline and deal with that and deal with the delivery. But if you don't have a hole in our opinion, if you don't have a place to store the product, You're really not even in the ballgame, in our opinion.

14:28 Because the permitting process along from EPA, after you drill that and you really realize that this is the proper location and from characterization well to then injection well, then first you get the permission from the state and then it take a permission from EPA A U.S. EPA, that takes about six to 12 months. So I think that's why it is important to start well first so that way by the time we have well ready, the pipeline can come and bring it there too. And as I mentioned previously, that we have some non-binding agreement with some of the ethanol facilities in Illinois who are willing to also supply the carbon to us.

15:19 So we're looking at that way to make sure we have storage facility first before we go to the pipeline side.

15:30 No, I think that makes a lot of sense. Stuart, maybe a question for you and Zafar as well. talked about as is natural, you guys are always kind of looking at the potential ethanol plants that you could expand to and depending on the quality of the plant and that sort of thing. Could you just discuss how you see that market today versus maybe a year ago and historically? We've seen some deals go across recently, some sales, some purchases on the ethanol facility side, but just curious how you're viewing that market.

16:07 There are plants for sale right now. A lot of our competitors seem to be emphasizing other products. So they're definitely plants for sale. For us to buy one, we'd have to find something that fits our mode of operation, which is they have the best plants, good locations, good corn supply. And those are fewer to find, but... they potentially are out there we'll see what happens it's an interesting time because we're probably the company that most seriously takes the ethanol industry most seriously and we think the ethanol industry especially if it can become close to a zero carbon industry has a huge future ahead of it and that's our opinion other people in the industry seem to be backing away so We're pretty excited about possibilities there, but you never know what will happen.

17:09 And maybe just one more, Zafar, maybe for you. You talked about the The crop yields and how they're shaping up this year. I know that a lot more corn planted this year than last year with the increase in demand. Can you just talk to the specific regions you all supply from and how you're seeing that shape out? I know it's early days, and I'm not sure if you can get a sense of that yet, but just curious if that's something you can comment on.

17:39 Yeah, I think, as you know, the corn last year was planted about 90%. I think they are there. I just saw the report actually from Future Average that they showed that it's going to be probably going to be close to 93.6 million acres will be planted. That's about 3.1% more than last year. As you know, the insurance value is close to, I think, $4.65 approximately somewhere. So I think we see that certainly is due to insurance value and also corn prices staying above $5 at this time and will be more acres will be planted this year even compared to last year.

18:28 But certainly we have also seen farmers have enough money and they are really keeping that in the storage and not bringing out there in selling. So we have seen the both things. And if you remember last year, this time also was very difficult to find the corn. And then suddenly after the COVID, after planting season started, the corn was available everywhere and you can buy very cheap. So I think there is certainly, we see farmers are, sellings are not as we like to see. But we see that this year, It will be more acreage will be granted than last year and hopefully, depending on the weather, will be a good crop.

19:21 Great. Thanks so much for the details, Cass. Thank you, Jordan. As a reminder, to register for a question, please press 1-4. Our next question comes from the line of Chris Sakai with Singular Research. Please go ahead.

19:41 Hi, everyone. Good morning. I had a question on if you guys had any sort of weather-related production delays this last quarter, and if so, for how long?

19:57 There was some delayed in the area. I think it was slowed down. Some of those people aren't all around, actually, in South Dakota, North Dakota, and somewhere in Iowa also. but that was for about maybe three to four days was slow down. So but it was not more than because that was supply due to the supply of natural gas, but overall, it was not any delay.

20:29 Okay, great. And as the economies reopen globally, you know, where do you see, you know, the the I guess the biggest country.

20:45 Biggest country of ethanol export, you mean?

20:49 Yes, yes.

20:51 I think as you can see, recently as I mentioned in my prepared remarks, India was suddenly almost in January, it's a 53.2 million gallon India jumped in and we see always before and Zafar Rizvi. and Zafar Rizvi.

22:08 I think we certainly see that growing in those areas. Even some of the oil producing companies are buying it to make sure they're due to the environmental reason.

22:27 Okay. All right. Great. Thanks. Thank you. There are no further questions at this time. I'll now turn the call back over to the presenters for closing remarks.

22:40 We thank everyone for listening to our call and we look forward to talking to you after the end of next quarter. Thank you very much. Bye. Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.