REX American Resources Corporation

Greetings and welcome to the RECS American Resources Fiscal 2022 Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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. As a reminder, this conference is being recorded Tuesday, August 30th, 2022. I would now like to turn the conference over to Doug Bruggerman, Chief Financial Officer. Please go ahead.

Good morning and thank you for joining Rex American Resources Fiscal 2022 Second 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 will first review our financial performance and then turn the call over to Stuart for his comments. Sales for the second quarter increased by 23% as we experienced higher pricing for ethanol, distiller grains, and corn oil. Ethanol sales for the quarter were based upon 71.4 million gallons this year versus 69 million last year. We reported gross profit of 16.6 million this year versus a gross profit of $14.2 million in the prior year. For the current year quarter, improved selling prices were offset by higher corn and natural gas pricing. Ethanol pricing improved by 20%, dried distilled grain improved by 21%, and corn oil pricing improved by 53% for this year's quarter over the prior year's second quarter. Corn costs increased by 21%, and natural gas pricing increased by 113%. for this year's quarter compared to the prior year as inflationary pressures and the impact on commodity pricing from the Yukon-Russia conflict continued. Gross profit comparison between years also benefited slightly from fewer ethanol contracts sold net of freight in the current year, which leads to higher sales. SG&A increased for the second quarter to 9.1 million from 6.2 million in the prior year. $1.1 million of the increase is due to the increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year and approximately $900,000 from increased incentive compensation. We had income of $3.6 million from our unconsolidated equity investment in this year's second quarter versus income of $1.8 million in the prior year. The majority of the increase was a result of funds they received from the COVID-19 relief grants from the USDA. The company's interest and other income in the current year includes approximately $7.8 million of income from COVID-19 relief grants, the consolidated plans also received from the USDA in May. The discontinued operations reflected in the prior year numbers are from the refined coal business as we ended those operations on November 18, 2021. There was no impact in the current year. We reported a tax provision from continuing operations of $4.3 million for this year versus a provision of $1.8 million in the prior year, primarily reflecting the higher level of income in the current year. These factors led to net income attributable to REC shareholders from continuing operations of $11.2 million for this year's second quarter versus $5.7 million in the prior year. Total net income per share from continuing and discontinued operations attributable to Rex shareholders was 63 cents for this year's second quarter versus 44 cents in the prior year. I would like to point out all outstanding shares for all periods have been retroactively adjusted to reflect the recent three-for-one stock split. Stuart, I'll turn the call over to you.

Thank you, Doug. Continuing into the current quarter, we continue so far this quarter to be profitable. There are challenges in the ethanol business, which Zafar will discuss in his section. Our carbon capture project continues to receive very good news with the Inflation Reduction Act. Continue to work hard on that. Again, Zafar will discuss that in his section. In terms of consolidated funds, we have cash of over 245 million. Our cash flow is significantly helped by the carry forward of tax credits previously earned. We continue to use that cash for our buyback. We buy back on dips. We bought 221,883 shares on a split adjusted basis during the last quarter. We continue to look for profitable alternative energy possibilities. We're currently studying the Inflation Reduction Act to see if there's anything new that might be an opportunity for our company. Again, we are always looking for ethanol plants, but nothing is imminent. We have not found anything at this point in time that would really work for us. In terms of our cash, we're now able to invest it. at a much higher rate than before, between 2% and 4%, versus virtually zero the year before. So that should help with our current cash position. That should help our income over the next few quarters. I'll now turn the call over to Zafar to talk about ethanol and carbon capture. Thank you.

Good morning. Thank you, Stuart. As I mentioned in our previous quarterly call, the operating environment in the beginning of the second quarter of 2022 has been some improvement. However, since then, it has been challenging for a number of reasons, including serious logistic problems caused by railroad that resulted in delay of shipment. With an increase in inventory, we had no choice but to slow down of the plant's production We are also seeing an increase in the price of corn greater than the ethanol price. On top of that, high price of natural gas is also negatively affecting the profit margin and production. The USDA estimates 0.9% less yield and 5% less production of corn this year compared to 21-22 crop year, and approximately 20% of the corn production is within area experiencing drought. The USDA corn report this week showed 39% of Nebraska, 51% of South Dakota, and 69% of Illinois corn, and 54% total corn production are rated good to excellent this year. However, even the Illinois expected to yield less corn this year compared to last year. On the bright side, ethanol sales and DDG export have increased compared to last year through June 2022, and the non-food corn oil price continues to increase and is expected to increase more. Despite the challenges at this very early stage of the third quarter, as Stuart mentioned, we expect the quarter probably will be profitable. As I mentioned in our previous call, we are also evaluating several other projects that would increase production efficiency and energy saving as well as reduced water consumption. Some of the small projects we were able to complete and some of them is expected to complete in the third quarter. We are still in the process of analyzing capital intensive projects before they can be undertaken and implemented. All of these projects are in a very early stage and may not materialize. Let me share the progress of our carbon sequestration project. As I mentioned in a previous call, we are working with the University of Illinois on drilling a carbon sequestration well. The first test well at One Earth Energy was successfully drilled to a total depth of around 7,100 feet, with almost 2,000 feet of Mount Simon stone was incurred. The geologic models are predicting the movement of CO2 injection into the subsurface is complete. The raw core analysis and well log indicate very good reservoir quality and well tests are being performed to further support this data. The well tests include performing water injection tests in the well itself to evaluate the expected movement of CO2 as well as expected plume area and storage capacity. under the subsurface area. The water injection will also tell us more about the reservoir, and we are testing an additional backup storage zone in case it is ever needed for more capacity. This can take a week or sometimes longer than that. The 3D seismic process is expected to be completed by the end of August. Design of the compression facility and the bidding process are complete. We are in the process of removing contracts The Class VI permit documents are near final draft status and are expected to be completed very soon. The EPA requires extensive support documents and complete analysis before granting a Class VI permit. Our goal is to provide all documents and information with the application. We will continue to evaluate further as we make progress and decide the injection well location. Once again, this is a highly technical and time-consuming project, and it will take time to make material progress. We cannot yet predict the result of the simulation models and whether we will be successful or not. In summary, we are pleased to announce once again a profitable quarter in a very, very difficult environment, as well as substantial progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of all colleagues on achieving these results. I will hand over to Stuart for further comments. Thanks, Stuart.

Thank you, Safar. In conclusion, we were helped this quarter by both direct funds from the government and the Inflation Reduction Act, which should help us with our carbon capture project, assuming we can get permitted and get it built. But most importantly, we performed among the best plants in the country And again, it's because we have good locations, good plants, good locations, generally good corn areas. But the greatest asset we have, and it's going to help us with everything we have going forward, is we feel that we have the best people in the industry. And we think that's a real reason why we outperform the industry, have done significantly better than the industry over the life of the plants. I'll now leave the forum open to questions.

Thank you. And if you would like to register for a question at this time, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your requests. Once again, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. One moment please for the first question. And our first question is from the line of Jordan Levy with Truist Security. Please go ahead. Hi, Jordan.

Hi, Stuart. Congratulations on a good quarter and also continued what seems like pretty strong progress on the capture side of things. Maybe we could just start off there. Stuart, you mentioned the Inflation Reduction Act and some of the positive read-throughs there. Maybe... We just talked to the increase in Section 45Q as it relates to your carbon capture project. It's been, I think, a little while since we kind of walked through the potential economics at One Earth with the CO2 emissions there. So maybe if we could just walk through kind of the potential benefits there.

The new bill calls previously we were to receive in 2025, I believe it is, $50 a ton in credits per ton, and now it's about $85 per ton for any carbon we capture in the ground that stays in the ground. In terms of the economics, I'll have Zafar go over that. But again, once we get the hole completed, we're not just trying to capture our carbon. We're designing the hole to be bigger than just us. We want to make that clear. So we don't have any contracts signed with anyone else, but we're definitely designing the hole to capture more carbon than what we can produce. And we believe that the hole is the most important part and that finding people who are willing to sell carbon will not be as hard as building this hole. And that's been the bulk of our efforts. Zavardi, you want to go over economics?

Yeah, I think I can go briefly, as you know, Jordan. If we were able to, we didn't put the final numbers yet because we are certainly evaluating the total cost of the compressor machine, compressor facility, and also the building and other well factors which we're looking at it. But if we were profitable, which we think at that time when we did the last forecast with the $50, we believe we certainly will be profitable at this stage with the $85. The one thing is certainly open up for us that we can afford to bring or other people can afford to transport by rail or by truck and others to our facility, which, as Stuart mentioned, that we will have more capacity for the well than we can really need for our own ethanol facilities. So we will be able to, hopefully, able to bring from other facilities or able to transport from other area instead of taking so long to build a pipeline, $3 to $4 billion, and go through the whole process. So that certainly will also help us and to increase our capacity for the well, for the sequestration. But we certainly think that it will be better to have $85, and $85 can be also in cash for first five years compared to $50 tax credit. So that also will be very helpful.

Thanks for that. And maybe just along that same line of questioning, just so it seems like everything you're doing right now is to get all the documentation in order to submit to the EPA for the permit. I guess maybe do you have a sense on what that timing is looking like at the EPA level or what we should kind of expect over the next few quarters in terms of updates on that project?

I think as we have previous some discussion with them, EPA takes somewhere year to 18 months. But we have, we are working with the people who have previously submitted these kind of permits. And if that's the reason we're taking everything practically possible to have document every single thing, including any financial guarantees or whichever they're required. So that way, EPA does not delay for asking for the for the application or for the papers or for the other, for the documents. As you know, once you submit this application, then if it's not complete, then EPA can call you for after three or four months and says, I need this document. So you submit that document. So then they'll start reviewing that document. It takes longer to then they reach the conclusion. So our goal is to submit it with all documents As we have seen previously, they ask before we really submit the application. So we are in a final process, and we hope that we will submit it by the end of September or not, in the middle of September.

Gotcha. That totally makes sense. Moving over to the ethanol side, maybe for Zafar, you all talked about an increase in in 2Q, an increase in the number of contracts where y'all were responsible for covering freight. And Zafar, you also talked about just the ongoing logistical challenges with rail delays and that sort of thing. Maybe if we could just dive in a little deeper on the logistical challenges that are going on and anything that can be done to kind of mitigate any of that.

I think I'm going to speak generally, not specifically each location, but I think what we're finding is that is, railroad really is not functioning properly. Suddenly we have seen in some cases that the train is ready to pick up, and they're supposed to pick up on Friday, but they will not be there up to next Friday or even Sunday. So they are delaying 7, 7, 8, 8, 9, 9 days. And so I think basically what they are continuously telling us that they have shortage of crews. and workers, and they cannot find drivers, and that's causing the further delay. And I think one thing which I really carry on stressing in other people that, you know, as long as railroad has a semi-monopoly, that nobody has come to their train track unless they pay a huge switching fee. As President Biden said previously, that switching fee is causing delays and transportation problems unless really federal government look at close closely to eliminate that limited switching fee and let every train company, railroad company to switch each other and pay the freight and they will be easily switch the track without any extra charges. I think that will certainly will increase logistic problem that it will save lot of hassle Because now we are dependent only one railroad. If they don't have drivers, then we're stuck. But we don't have any choice to call somebody else to come and pick up, you know, our freight and loaded cars. And that certainly is a major problem. Got it.

No, I really appreciate the color. I'll leave it at that.

Thank you, Jordan.

Our next question comes from the line of Pavel Mokhtanov with Raymond James. Please go ahead.

Thanks for taking the question. So first, you talk about being interested in acquiring some ethanol plants. Given all the craziness in the ethanol market in the last two and a half years, right, with as well as feedstock going from record lows to record highs and everything in between. What is the valuation landscape looking like for existing plants?

Well, to build a new plant would be well in excess of 200, probably today in excess of $225 million. There is no good plants up for sale right now. There's a lot of bad plants. We sold the plant many years ago, 100 million gallon plant. We didn't own it all. We owned about 25% for about 200 million. And I would say with excitement, most of the ethanol plants, ethanol is a unique industry. At the moment, the government favors it. And it is one of the few that emits pretty much everything. pure CO2, which is easily captured. So we think most people, and with $85, that could be a huge amount of money for the people that actually have the carbon capture oil, but it can also mean money for any ethanol plant because they can sell their CO2 now. So it's a new revenue stream. So I think there's excitement in the industry. I don't think any of the really good plants would sell for less than, we have not seen any recently that would sell that I know of that would sell for less than replacement value or less than building a new plant. In the years past, there have been some, and we tried to buy some. Unfortunately, we've been out there the last year that we tried to buy, but they have been out there. But today, I know of nothing that's out there, and I think it is the excitement of carbon capture.

Right. Okay, so in that context, Given that you ventured into carbon capture, I'm curious, do you have any interest in getting into RNG production, landfill or dairy gas?

No, not at this time. Nothing's impossible, but we have looked at it. Nothing is impossible, but at this time, and I've spent over the years a lot of time looking at landfill gas and today because of the government because of the new regulations it's a different business I would just say it's something among many many things we're studying related to the new act but at this point in time we have nothing imminent no plans nothing other than studying that industry it's no different than any others

And along those lines, with carbon credit pricing in Europe is close to 100 euros a ton now, which is a lot higher than the subsidies given domestically through Section 45Q. With that in mind, would you consider looking at carbon capture projects somewhere in the European Union?

Sure, we'd look at anything related to carbon capture. That's going to be a big part of our business.

Understood. Thank you, guys.

Thanks. Our next question is from the line of Chris Sakai with Singular Research. Please go ahead.

Hi, good morning. Can you talk more about Can you talk more about the Inflation Reduction Act? When are you going to see benefits from that, and can you quantify how much benefits you'll see?

As I mentioned earlier, specifically at this time, we're looking at the carbon sequestration. There are so many other things that are really benefits, which may be Some people are looking solar, some other projects, which can energy-saving projects, and others which can generate a lot of tax credit and others. But specifically, looking at it, carbon sequestration, as I mentioned earlier, $50 tax credit, we were still, when the original projection, we looked at it, we were profitable, and now it's $85,000. and that certainly will help us to get more profitable. As Stuart earlier mentioned, our well is also capable of taking more carbon than we can really do the carbon sequestration from our ethanol facility alone. So $85 makes it easier for us to also bring it by rail or by truck or from other locations closer to us. and still can be profitable, those projects. So certainly there is a positive impact on that tax reduction legislation.

All right, thanks. And then can you talk about, are you guys seeing any more gas stations offering E15, how that's going?

Let me say that I was in a meeting. We have a meeting with the agriculture secretary on this Monday. Yeah, exactly. Yeah, last week, Monday. And he announced their $100 million for A15 structure bill and other things. So certainly we have seen some of those. In corn growers, states like Iowa, Nebraska, even some part of Illinois, even Indiana, we have seen more and more people are offering E15. And Iowa is also offering more tax credit. And even Illinois is offering more tax credit to encourage E15 pumps more. And it's certainly helping us this year as it continues. Unless this E15 is available all year round, then it becomes difficult. But if it's all year round, then certainly it will grow more. And with this $100 million, which the Agriculture Secretary announced, it's going to help us also.

Okay, thanks.

Thank you. And there are no further questions on the phone lines at this time. I'll turn the presentation back to the speakers.

Okay, thank you. We'd like to thank everyone for listening, and we'll talk to you again. We'll report the end of this quarter. Thank you very much.

Bye. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.