REX American Resources Corporation

Greetings and welcome to the RECS American Resources Fiscal 2021 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 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. I would now like to turn the conference over to Doug Brueggemann, Chief Financial Officer. Please go ahead.

Doug Brueggemann Good morning, and thank you for joining REX American Resources Fiscal 2021 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 the 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 reports on Form 10-K and 10-Q. 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 review our financial performance and then turn the call over to Stuart for his comments. Sales for the fourth quarter increased by 68% as we experienced higher pricing for ethanol, distiller grains, and corn oil. Ethanol sales for the quarter were based upon 69.9 million gallons this year versus 67.7 million last year. We reported gross profit of 38.7 million from continuing operations versus a gross profit of 8.3 million in the prior year. For the current year quarter, improved selling prices were offset somewhat by higher corn and natural gas pricing. Ethanol pricing improved by 74%, dried distilled grain improved by 19%, and corn oil pricing improved by 122% for this year's quarter over the prior year fourth quarter. Corn cost increased by 44%, and natural gas pricing increased by 80% for this year's quarter. SG&A increased for the fourth quarter to $6 million from $4.2 million in the prior year. This primarily represents increased incentive compensation based upon higher earnings in the current year. We had income of $3.9 million from our unconsolidated equity investment in this year's fourth quarter versus income of $332,000 in the prior year, again representing strong fourth quarter industry fundamentals. Interest and other income decreased to approximately $13,000 versus $415,000 in the prior year, primarily reflecting lower interest rates. We expect to begin to see some improvement in this area in the current year as rates increase on short-term investments. As mentioned last quarter, the refined coal operation is now classified as discontinued operations, and its results and historical results are now reflected on one line on the income statement. including the tax benefits from this business. We reported $159,000 of net income reportable to REC shareholders from discontinued operations in the fourth quarter as we ended operations on November 18, 2021. We reported tax provision from continuing operations of $10.7 million for the fourth quarter of this year versus a benefit of $102,000 the prior year. Tax provisions and rates will be impacted from time to time based upon levels of income Permanent tax items and uncertain tax position adjustments. These factors led to net income attributable to REC shareholders from continuing operations of $21.3 million for this year's fourth quarter versus $3.3 million in the prior year. Our net income per share from continuing operations attributable to REC shareholders was $3.58 for this year's fourth quarter versus $0.56 in the prior year. Total net income per share attributable to direct shareholders was $3.61 for this year's fourth quarter versus 59 cents in the prior year. Stuart, I'll now turn the call over to you.

Thank you, Doug. We had a very good fiscal 2021, but now business has become a little bit, I'd say much tougher. We're projecting for this quarter possible losses tied to higher corn prices. George Munro, Ph.D.: : Gas prices and ethanol prices not rising as fast, cutting into our crush margins. Corn could be an issue for the for the rest of the year, especially relating to Ukraine, along with normal seasonal issues. Rins could be an issue next year. It'll be up to the EPA to decide what that RIN level is. It won't be legislative anymore. So a lot will depend on what happens with the EPA chief, and that could affect this year's rents, and sometimes they allow the current year rents to be spread out. Another issue that we're having is logistical issues, inflation, labor shortages could be issues. So we have a number of things that we are worried about. The positive side, our product is American-made. We need more. U.S., we're going to need more U.S. fuel as the rest of the world does not seem to be willing to help us as much as we would like in that area. And we are a more green fuel than oil, and it could be used up to 15%. So our blending rate could go up. We are hopeful blending rate would go up to 15%, and that, of course, would increase demand. We now have over 250 million on a consolidated basis, 250 million cash on a consolidated basis. In terms of uses of cash, we will be talking to you. So far, we'll be talking to you about carbon capture. We'll also talk to you more about our ethanol plants and what we expect to happen there. We also, in terms of spending the cash, are looking for other ethanol plants that are successful. We have not found anything in our price range as of this time. There's ancillary businesses in ethanol, like high protein, a number of different techniques to make that high protein. No one to date has shown great earnings, so we're waiting to see who's the most successful before we decide whether or not to get into that business. But, again, other people are looking at it. We also are looking at other industries that might fit our skills, especially commodity-driven industries, where we might be able to potentially turn them more green. We continue to buy back our stock on dips, and last year we bought some of the stock dips significantly. We have the cash available to buy more. We have exited the refined coal business, but we still carry forward a large amount of tax credits. which can be used to lower our taxes paid and increase our cash flow. I'll now turn the call over to Zafar, who will talk more about the ethanol business and the carbon capture business. Zafar.

Thank you, Stuart. Good morning. As I mentioned in our previous quarterly calls, the operating environment in the fourth quarter improved, and we are very pleased with the results of the fourth quarter and the fiscal year. Since last month, as Stuart mentioned, it has become very challenging due to several reasons, including an increase in ethanol production and stock, challenging logistic problems, and an increase in the price of corn greater than the ethanol price, which are negatively affecting the crush margin. As a result, the first quarter of 2022 may not be profitable. if this trend continues into the second quarter or maybe longer, which could adversely affect production and net income. We also plan to shut down for the regular maintenance and safety check-offs during the month of April. We are also, as Stuart mentioned again earlier, we are also evaluating several other projects which could help to increase production efficiency, energy saving, as well as reduce water consumption and further enhance safety. Some of these projects are capital intensive and require much analysis before any can be implemented. All of these projects are in a very early stage and may not materialize. Let me share progress of our carbon sequestration project. As I mentioned in several previous calls, we are working with the University of Illinois in drilling a carbon sequestration well. The first well at One Earth Energy was successfully drilled to a depth of around 7,100 feet, in which almost 2,000 feet of Mount Simon Stone was encountered. The geological model has been established and is being used as a basis for simulation to predict the movement of the CO2 injection into the subsurface. Additionally, we will be performing additional testing at the well itself over the next several months. These simulation models will help to make progress on the completion of the Class VI permit application, which we have started. The completion of the application process will continue as we begin to receive more information from simulation models to predict the behavior of the CO2 when it is injected. These simulations are currently at a very preliminary stage, and a lot of more work is required, but the data include indicate all the CO2 produced by the One Earth Energy Facility can be injected and stored at the potential site. We will continue to evaluate further as we make progress. This is a highly technical and time-consuming project, and it will take time to make material progress. The 3D seismic testing was completed in the middle of February. Almost 16,000 nodes were placed At different points, 160 million points of data have been collected and being analyzed. A phase study of the capture of CO2 and the design of the facility are completed. The bidding process will start after the completion of engineering. As I have mentioned in previous calls, this project is still at a very preliminary stage. It requires a lot of time-consuming modeling. and analysis, we cannot yet predict the result of the simulation models and whether we will be successful or not. In summary, as Stuart mentioned, we are very pleased to announce once again a profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues on achieving these results. I'll give the floor back to Stuart Rose for additional comments. Stuart?

Thank you so far. In conclusion, we had a great 2021, but we are very cautious on 2022. But we believe and continue to believe we have great plants, great locations, and most importantly, great people. And we believe with this combination, as we have done in the past, we'll continue to greatly outperform our competitors, the bulk of our competitors, well into the future. I'll now leave the forum open for questions.

Thank you. If you would like to register a question, please press the 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment please for the first question. We have a question from Bertrand Dennis with Truist. Please proceed.

Good morning, guys. Hello. Hi. Good morning. On the carbon capture topic, you know, right now, obviously, the focus is on the test wells and the reservoir modeling. Are there any things you might consider working on simultaneously, like initial infrastructure planning or maybe talking about third parties that might accelerate the timeline if the tests are successful?

We are working with several different people for that. As I mentioned previously, the design of the facility is completed, and engineering work is now in process of completing, and then we will be able to put, after the engineering, for the buildings, and then we will start that. But I think we want to make sure that the well is completed, And now we are in the process of filing a V6 permit, and all those things, when you start doing these things, it is required a lot of modeling, simulations, and other things, because without that data information, we cannot complete the permit, the EPA permit, V6 permit. So that permit, while we are trying to complete that permit, at the same time we are working on the facilities, and I think we have appropriate team, which is working with several different people. And then we will like to sell the project, but I think there is, you know, sometimes nothing we can do unless we have more data.

That makes total sense. And then maybe jumping topics. In the prepared remarks, I think you mentioned that you're not seeing anything in your price range for ethanol facilities. But could you just talk about what you're seeing in the M&A market, you know, given the volatility and crush spread? Are sellers pulling away? Are they looking, you know, are bid asks, you know, too wide?

I haven't seen any plants for sale this year that weren't for sale previous. I haven't seen anything. During the fourth quarter, I think prices probably went up significantly because the really good plants had a really good fourth quarter. But I'm not seeing those prices. I haven't seen anything, to be honest, come on the market since last year. And we did make a run at plants last year and came very close. Anyway, but we did not get them. So maybe something will come this year. But as of now, I have not seen anything that would fit. what we're looking for in our price range.

That makes perfect sense. Thanks for the update, Pat.

Thank you. As a reminder to register a question, please press the 1-4 on your telephone keypad. That's good.

If there are no further questions, are there any further questions?

If not... I'm sorry, sir, we do have a few more questions.

Oh, go ahead. Good.

Our next question comes from Chris Sakai with Singular Research. Please proceed.

Yes, hi. Good morning. I had a question on if you're experiencing any weather-related issues.

this quarter and recently I think the more is about logistic is the performance of the railroad and as you probably heard that even Canadian Pacific has a strike and that's also affecting and previously also shortage of labor for the railroad companies and they cannot find drivers to make it Sometimes the drivers bring that rail and then power out there and then he goes and then that next person who's supposed to be there, it does not show up. So that's mostly related with that. Yeah, but I think weather is some effect, but it's not the major effect. The major effect is continuously about the railroad performance.

Okay, great.

Go ahead.

Oh, okay. And you mentioned about a tight labor market. I just wanted to get an idea about what you're seeing at Rex, and are you having to increase wages because of that?

I think our company, we always have very competitive wages, and we always pay it. We always take care of our employees, and we also have bonuses systems and other systems to continue to have their incentives. As we make money, they certainly make more money, and they have also, I can assure you, none of them is minimum pay or all those kind of numbers. So we have very competitive wages, and we always review every year and their salaries and other things to make sure they are above the market value.

Okay. Okay, great. Thanks.

Our next question comes from Jared Edelman with South Dakota Investment Office. Please proceed.

Hi, guys. Thanks. I have a couple questions. The first related to the Clearly the crush margin has contracted as corn has run up, but it looks like also the byproducts that you guys sell, corn oil and distillers grains, prices are very strong. Can you just talk about the margin impact that those have and do they make the overall picture look pretty good or at least okay right now?

I think let me say that certainly there is recently we have seen increase in DDG value also, which is previously it was close to 90 to 95% of the corn value. And recently we have seen close to 100 to 106% of the corn value. Certainly we have seen ethanol, not ethanol, corn oil value has increased as Doug mentioned also in his presentation. prepared remarks. As far as ethanol margin, as you can see, today's corn is trading $2, $7.63, and ethanol is trading close to $2.48. So you can see that how much there is not enough cash margins. I think the other concern we certainly have is, moving forward, as Stuart mentioned, that, as you know, Ukraine produce close to 1.6 billion bushels a year. And they export about a billion bushels a year, they export. And we are concerned that if the export completely stopped from Ukraine and then the world moved direction toward to U.S., then it could be some problem of shortage of corn. Our monthly usage for U.S. is 1,245,000 bushels a year. And we're expecting our ending stock will be close to, you know, 1,440. $1,044,000, and then if we roughly take it out, $300,000 to $400,000 exported more, million exported more, then our stock will continuously be going to drop, and it may not meet the usages, which is approximately 1.2 billion bushels a month. So those are some concerns, and that's why you can see the market is reacting, and although there is an inverse in the future, but presently that's the other problem with the market. There's no carry in the corn at this time, but there is a fear of shortage of corn if Ukraine's situation did not improve.

Great. Thank you for that. Secondly, it appears the global refined products market has tightened significantly in the last month, and Can you just touch on any opportunities you guys have had to capture better margins exporting ethanol?

I think, though, if you look at the export, really last year export was dropped compared to last year. Export was $1.2 billion compared to the year before, approximately $1.3 billion. And January export was $123 billion. $123 million that compared to in 2020, it was January export was $124 million gallon and that was less than last year. We can see that export is consistently dropping even in month of January compared to last year in January. Last year in January, it was $165 million. And this year is $123 million. But we have seen recently Brazil has lifted their tariff, which is 18%. If that goes away, then maybe we see more export activities.

Great. Thank you.

Our next question comes from Mary Rose with Infusion Partners. Please proceed.

Hello, I think an operator move on.

Mr. Rolls-Darnold for the questions at this time.

Okay. Anyway, we'd like to thank everyone for listening today. I appreciate it very, very much, and we will look forward to reporting next quarter. Thank you again for listening to the call. Bye, everyone.

Thank you. Bye-bye.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.