REX American Resources Corporation

Greetings and thank you for standing by. Welcome to the REX American Resources Fiscal 2023 First Quarter Conference Call. During your presentation, all participants will be in a listen-only mode and afterwards we'll 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. And now I'd like to turn the conference over to Doug Brueggemann, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining REC's American Resources Fiscal 2023 First 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 filing 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. Sales for the first quarter increased by 9.5% as we experienced higher volume for ethanol, dried distiller grains, and corn oil. Ethanol sales for the quarter were based upon 71.5 million gallons this year versus 64.5 million last year. Higher volumes were partially offset by lower ethanol selling prices as the price per gallon went from $2.28 to $2.21. We report a gross profit of $15 million this year versus a gross profit of $11.9 million in the prior year. Meanwhile, the SG&A increased from the first quarter increased for the first quarter from $5.2 million to $10.6 million. There was a tradeoff between these two line items between the years, as we currently classify freight costs we pay to an outside vendor as SG&A expense. We incurred charges of $5.1 million for that this year. In the prior year, more contracts called for the buyer to pay these fees, and it was netted out of the ethanol price. We had income of $1.5 million from our unconsolidated equity investment in this year's first quarter versus $2 million in the prior year. We reported interest and other income of $2.8 million versus $174,000 in the prior year as we benefited from higher interest rates on our cash and short-term investments. We reported a tax provision of $2 million this year versus a provision of $1.8 million in the prior year. This led to net income attributable to REC shareholders of $5.2 million for both this year and the prior year first quarter. Net income per share attributable to REC shareholders was 30 cents for this year versus 29 cents in the prior year. Stuart, I'll now turn the call over to you.

Thank you, Doug. Going forward, business improved at the end of the quarter and continues to improve. Currently, we're running at a rate of earnings per share that is higher than the first quarter. And we hope that trend continues. It's been a great improvement over the beginning of the first quarter. We have $270 million in consolidated cash and short-term investments. Our plans with that cash, first of all, our cash flow is, although we report a tax rate higher, we actually report a tax rate higher than our than what we paid due to tax credits that we've carried forward. So our cash flow continues to improve both by earnings and by a lower rate than the stated rate on the GAAP earnings per share. In terms of going forward, as Doug mentioned, we're benefiting right now from higher interest rates. We have the $270 million earning significantly more than previously. As you can see in the first quarter, We're also working hard, which so far we'll talk about, on carbon capture, both at our One Earth plant and what he has signed up or what our company has signed up with Summit. There's no guarantees, but we are moving forward on this and have great hopes that it will be a great contributor to our company in the future. We also continue to have our buyback plan in place. We use this on dips. And it's been something that's helped stabilize the stock a little bit, I believe, when the stock has dropped. And the last thing, we continue to look for opportunities, not just in ethanol, but in carbon capture. And we have nothing other than what Zafar is going to talk about going on right now. But there's always a chance that something will come along. And we do have the cash right now to take advantage of it, should we see it. I'll now turn the call over to Zafar Rizvi, our Chief Executive Officer.

Thank you, Stuart. Good morning, everyone. As I mentioned in our previous call, at the early stage of the quarter, we were facing a challenging operating environment. But later in the quarter, we saw improvements which resulted in a profitable first quarter. On the other hand, DRAT has created a strong cone basis, particularly at the Marion South Dukera locations. We are pleased with the availability of corn in the Gibson City, Illinois area because of growth in domestic export from Illinois. The corn bases are beginning to summit. According to EIA May 24th report, ethanol stock and production has dropped during the last few weeks due to planned shutdowns of ethanol facilities and increase in blending because of higher consumption of gasoline. We have also seen natural gas price drop considerably, which has a positive impact on the financial results. As a result, all of these factors, we continue to source corn at, if we continue to source corn at a reasonable price and we don't face any major logistic problems, we believe we will have better financial results in the second quarter than the first quarter of 2023, as Stuart mentioned earlier. The May 2023 USDA report was also very positive. It's expected to be 15.26 billion bushels and 181.5 bushels per acre. And if this happened, and we will see that, if this is realized, it could have very positive impact on future earnings. But as we all know, we have a long way to go yet. Ethanoxport was dropped this year. This quarter, first quarter 2022-2023 were 354 million gallons compared to 394 million gallons. Same period last year, DDG export through March 2023 were 2.4 million metric tons compared to 2.88 million metric tons, degrees of approximately 400,000 metric tons compared to the same period of 2022. Let me provide you an update on carbon sequestration project and sustainability report. We are very pleased to announce our inaugural sustainability report highlighting what we have accomplished while addressing the sustainability economy and our social responsibilities at large. We are delighted to partner with Summit Carbon Solutions, a developer of the world's largest carbon pipeline for the new gene facility in South Decatur. Our goal to reduce greenhouse gas emissions perfectly aligned with summit carbon solution expertise. At the 1 o'clock question location in Gibson City, we continue to complete the paperwork for different government permits and requirements of agency while we are waiting for EPA to approve class six permit for carbon injection. This is highly technical, very time-consuming project, and it depends on several local, state, and federal agencies' approval. Those decisions are behind our control, which has meant we are moving forward a bit slower than we would like to. But we are, however, pleased about the big milestone we have reached so far. We submitted the Class VI permit for three wells, ordered long lead equipment, expect to build a modular compressor plant will be delivered by the end of 2023, with construction around the modular unit will start in 2024. We are also in the process, as I mentioned previously, in evaluating whether to increase the ethanol capacity of One Earth Energy in the Gibson City, Illinois, to 200 million gallons instead of 175 million, as I mentioned in the previous call. The current capacity is approximately 150 million gallons a year. The clean fuel production credits section, 45Z, which is related to reduced fuel carbon intensity score, could provide as much as a dollar a gallon, depending on the carbon intensity of the ethanol produced and sold. That could continue to enhance the strong position of our company. We also continue to evaluate other projects that would improve energy efficiency and reduce carbon intensity. We believe completion of these projects will lead to a greater benefit under the Inflation Reduction Act passed by Congress. In summary, we are pleased to announce a profitable quarter, good progress on our carbon sequestration project, a plan to increase ethanol production at one earth energy to 200 million gallons to maximize 45Z benefit, and a new gene facility signed a carbon offtake agreement with Summit Carbon Solutions. If we continue to make progress, we will be ready to provide low-carbon ethanol and byproducts with the social impact of reducing carbon in the atmosphere and the financial impact that improves company performance for our shareholders. Once again, we could not achieve this milestone without the hard work and dedication of our colleagues. We are very appreciative of their efforts on achieving these positive results. I will give the floor back to Stuart Rose for additional comments. Thanks, Stuart.

Thanks, Safar. In conclusion, we have great plans as shown by our numbers. We drastically outperformed the other public companies in the industry as far as I know. Great locations, including a great carbon capture possible location in Illinois, which will be our own project, and we also now have a partnership with Summit for our South Dakota plant. We have great opportunities going forward, but the most important thing, and I talk about it all the time, is we have the best people in ethanol, and now we're leveraging those great people to take advantage of the opportunities in carbon capture. And if things go right, hopefully we can do great things in carbon capture. Best business in the world is a business that can be socially responsible and also have great returns for our shareholders, and that's our goal. And we work towards that so far, and this team works towards that every day. I'll now leave the floor 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. If your question has been answered and you 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 request. Once again, that's 1-4 to register for a question. One brief moment for the first question. And we have a question from Jordan Levy with Trua Securities. Please go ahead. Your line is now open.

Hey, morning guys. It's Mo on for Jordan. Thanks for taking my questions. Well, congrats on the solid results. Yeah, so maybe pivot to pricing. Can you talk about how the corn pricing is tracking recently? And what is your visibility into the summer fall season for pricing? Presumably it's a better harvest year. How should we think about that? Thanks.

I'm sorry, could you repeat that again? Sorry, I just didn't hear properly.

Oh, yeah. So can you talk about the corn pricing? How should we think about the pricing trending into the summer for Vermont? Thank you.

Okay. I think, as you know, as I mentioned, that the corn bases are continuing to strengthen. And even in Illinois, which they are exporting to other Western states, including South Dakota and Kansas and other sites. So I think we've Probably it's going to increase the price as it seems to be. But then on the other hand, we have seen that China canceled some of those orders, and that's the reason price dropped. But the bases are still very strong. We have seen somewhere 65 to 90 cents plus bases.

Is that answer your question? Yes, appreciate the call.

It's going to be tough. Corn is going to be tough, but so far it's done an excellent job in its team in managing to get the corn and still get the corn at a price where ethanol plants can be profitable. Hopefully, if we get a good rainy season, and last year was drought in South Dakota, if we can get a good rainy season, we can get back to normal basis and get back to paying normal over or under basis, but presently we're paying significantly over basis. Any other questions?

We do have a question from Robert Maltby with Singular Research. Please go ahead, your line's open.

Hey, guys, great quarter. I'm subbing for Chris, who can't be with us at the moment. We had an overflow from our conference. It's good to see so much interest in the small and micro-cap space. Probably had about 500 investors on the call. So he's a bit tied up, and here I am, and he's giving me some notes to follow up. Congrats on the quarter. It's good to see you. A small cap wide up the tape here and a day dominated in a market dominated by the big cap. So congrats on that. My questions are twofold. One, could you elucidate a little bit more on the opportunity and the carbon capture as per earnings accretion, revenue growth over the longer term, and how much of a contributor will that be And the second part is, wow, you have, by my quick calculations, still about $15 a share in cash. And my question is, if at what point would you consider, you know, a large dividend or, you know, some type of a return of capital to shareholders of that cash? Thank you.

Thanks for the questions, Robert. First, in terms of carbon capture, we have hopes, but there's no guarantees. The law allows for, I believe it's $85 a ton in direct pay from the government, and 45 C could be a dollar a gallon. So our plant, the one plant that we're doing independent of Summit, will, after expansion, produce about 200 million gallons. So you can do the arithmetic, but there's no guarantees of anything. This is a couple of years, maybe a year and a half, two years off at the earliest. So we don't want you to go crazy with your numbers or anything like that. But you can see there's great potential there. In terms of the cash and the We do, and I think you've followed us a long time. We probably are the kings of spending our cash and buying back stocks. I know of no company on the New York Stock Exchange that has bought back a larger percent of their stock. And when you're a small cap stock and you generate cash like we do, you usually have one of two choices to pay a dividend or buy back stock. It's always been my feeling that buying back stock is a lot smarter because it reduces the earnings per share or reduces, excuse me, the number of shares outstanding and drastically and has a potential if we're making money to drastically increase the earnings per share, whereas a dividend, it just goes and it doesn't have that potential to increase earnings per share. So that's our chosen method. And that's what we have preferred to do with our cash. Any other questions?

Thank you. We have a question from David Locke with Old Mammoth Investments. Please go ahead. Your line's open.

Hey, guys. Good morning. How are you? Good. Good. Thank you. A couple completely unrelated questions. The first one is, have you guys given any guidance for how much capital you're going to need for the plant expansion and for the carbon capture project?

Absolutely. I think, as I mentioned previously and just now in my prepared remarks, we are still evaluating the top, you know, we are trying to expand from $150 million to $200 million instead of $175 million. And when you put those bids to the different people and getting information and that, then you realize that it would be better to do $175 million than $200 million. So we are still analyzing and budgeting those numbers. But at this time, I really cannot pin it on.

Okay. And then the second question is, do you guys have any opinion or thoughts on sustainable aviation fuel and if that's something that RECS could participate in or to what extent might that just stoke up some demand for or stoke up some of the supply of U.S. ethanol production?

I think I can say that we are always looking for new cheese, and we have done some research, and we are in process of talking to some different companies and trying to find out more about SAF. and we that's the one of the also reason that once this 45z or carbon sequestration things gone away by that time the technology will be developed and we will we will have a 200 million gallon plant at one earth energy and then about 150 new gene and as i understand from my research it's approximately For each two gallons of ethanol, it's one gallon of SAF you can produce. So we are trying to evaluate all those things and looking at the return on investment and analyze also how much investment will be needed to convert those. So at this stage, we have no immediate plans, but we are certainly doing a lot of research on it.

One thing I can tell you is we're laser focused on carbon capture, and we don't want to take our eye off the ball, and there's a lot of money if we can do it. There's no guarantees, but if we can do it, there's a huge amount of potential income in that area, whereas aviation fuel to date, we don't see anyone investing. We are looking at it. We have interest in it. But like a lot of things, we want to see someone else make some money at it before we jump right into it.

Right. But do you think, would you agree that you guys could essentially sort of passively participate in that market to the extent that it develops just because? It should use a substantial amount of ethanol as a feedstock.

We absolutely, sure. If someone's successful, they're going to, a lot of these companies are not big ethanol players that are developing, that are trying to develop aviation fuel. So they're going to need a source of ethanol. We'll sell our ethanol to anyone at the highest price. We have every chance to benefit from that if someone is successful. In fact, we're more likely, some people have contracts to sell their ethanol for other uses. Ours, we have very little and we don't have like your, we might go a month or two out, but we don't have contracts. So we'd be a perfect place for people to buy ethanol if they're successful and would be a perfect place to supply them their ethanol.

And then just on capital allocation, and you guys regularly talk on every call about how you're always looking around for plants that might be for sale, I'm assuming that it's very much cheaper to expand capacity at existing plants than it is to buy somebody's existing plant at this point in terms of just increasing the overall footprint of your company?

Yes. We've come close to buying plants before and have tried very hard to buy plants before. But today, I don't know of any really good plants that can be bought at a reasonable price. So I think what you're saying is exactly right. It's much cheaper in today's market to try to expand capacity, and that's what Zafar is doing.

Okay. And is there anybody out there that's thinking of building a greenfield plant, or is everything just kind of, 25 million gallons here and another 25 million gallons there.

We know of no one, but there could be. Zafar, do you know of anyone that's considering it at this time?

I'm not really aware of that.

I don't know of anyone, and I don't. It's been a tough market over the years, so we think it's going to – we've done way better than the industry, but the industry has not done – it hasn't been as good of an investment for everything else, for most of the other players as us. So I think most of the other players are doing what we're doing is concentrating on other – ways to make money out of the ethanol instead of opening new ethanol plants. That does not mean we'll never look at opening new ethanol plants. But to date, we don't. We have no plans, and I don't know of anyone else.

And also, I think we are concentrating to make sure that we reduce our CI score, which is, you know, as I mentioned, we are looking at several other projects. So our goal is to... somehow further reduce our CI score as low as practically possible, and that also needs some investment, and we'd rather spend that money on those which will be more beneficial for 45Z and carbon sequestration, and return on investment will be very huge.

Okay, perfect. Hey, thanks for your time, and good job with the quarter, gentlemen.

Thank you. Thanks for the call.

And there are no further questions at this time. I'll turn the call back to Stuart Rose.

Thank you, and we'd like to thank everyone for being on the call, and we'll talk to you at the end of next quarter. Thank you very much. Bye.

That does conclude the call for today. We thank you for your participation. I say please disconnect your line.