REX American Resources Corporation

Greetings and welcome to the RECS American Resources fiscal 2023 second quarter conference call. During the presentation, all participants will be in the 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 Mr. Doug Brueggemann, Chief Financial Officer. Please go ahead.

Doug Brueggemann Good morning, and thank you for joining Rex American Resources Fiscal 2023 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'll first review our financial performance and then turn the call over to Stuart for his comments. Sales for the second quarter decreased by 11.8%, primarily due to lower unit pricing across all products, as well as slightly lower ethanol gallons sold year over year. Ethanol sales for the quarter were based upon 69.1 million gallons this year versus 71.4 million in the prior year. We reported gross profit of 18.4 million this year versus gross profit of 14.1 million in the prior year, as we benefited from lower corn and natural gas pricing over the prior year's second quarter. SG&A increased for the second quarter from $6.7 million to $8.6 million. This increase is primarily related to stock incentive executive compensation expense upon issuance during the quarter. As highlighted in the press release in the second quarter, the company made a change in the method of accounting to begin classifying shipping and handling costs as cost of sales rather than within selling general administrative expense as historically presented in order to improve the comparability of gross profit and SG&A reported. The company has applied a retrospective application of its new accounting policy. I'd like to point out this change only impacts cost of goods sold in selling general administrative expense and has no impact on earnings reported. We had income of $3 million from our unconsolidated equity investments in this year's second quarter versus 3.6 million in the prior year, as the prior year number included approximately 1.6 million of income for our share of their COVID relief grants received from the USDA in the prior year. We reported interest and other income of 3.3 million versus 8.2 million in the prior year. The prior year included approximately 7.8 million from the aforementioned USDA COVID-19 relief grants received by our consolidated plans. In the current year, the company has continued to benefit from higher interest rates on our cash and short-term investments. These items led to income-before-income taxes and non-controlling interest of $16.1 million compared with $19.2 million in the comparable year-ago period. However, excluding the benefit of the COVID-19 relief grants received in quarter two of last year, income-before-income taxes and non-controlling interest increased 64.3% to $16.1 million in Q2 of the current year versus $9.8 million in the prior year. We reported a tax provision of $3.8 million for this year versus a provision of $4.3 million in the prior year. This led to net income attributable direct shareholders with $9.1 million for this year versus $11.2 million in the prior year's second quarter. Net income for share attributable direct shareholders with $0.52 for this year versus 63 cents in the prior year. And I'll turn the call over to Stuart for his comments.

Thank you, Doug. Earnings right now are running at a rate in the third quarter that is expected to be significantly better than last year's third quarter, or excuse me, significantly better than last year's Quarter are then the quarter that we're currently in and significantly better than the 3rd quarter that we're about to go into. So far we'll discuss this further. Our cash balance is. Approximately 284Million uses include short term investments, which we expect to during the 3rd quarter to earn a higher rate in the 3rd quarter than the 2nd quarter. Ethanol expansion, which Safar Rizvi, our CEO, we'll talk about later. Stock buybacks continue, but only on dips. We have not had dips recently. So at the moment, we have not bought back stock or not buying back stock, but we'll buy back if we see dips. We're also, biggest use will also be the carbon capture stock. operation that is well on the way, which, again, Zafar will talk about later. We also have hopes, if possible, to use our carbon capture operation, not just for our operation, but for others that may come along eventually that could also be a use of our cash. I'll now turn the call over to Zafar Rizvi, who will talk more about our ethanol operation and our carbon capture operation. Thank you.

Good morning, everyone. Thank you, Stuart. As I mentioned in the previous call, we saw improvements in the early stage of the second quarter, which led to the quarter profit. Then in this first quarter, 2023, we are pleased with our team. They produced better results than in the previous quarter and even better than last year's second quarter. After considering the total 9.4 million impact of the COVID-19 grants, According to the EIA August 23rd report, ethanol stock and production dropped during the week ending August 18th. We have also seen natural gas price drop considerably, which has a positive impact on our financial results. The August 11, 2023 USDA report shows an expected output of 15.1 billion bushels of corn. second highest on the record and 175.1 bushels per acre yield for the year 2023-2024. We are pleased with the early forecast of corn yields in the Marion South Dakota this year, 145 bushels per acre compared to 132 bushels last year. And also approximately 458,000 more acres of corn were planted this crop year compared to last year. We expect corn yield in the Gibson City, Illinois area to be less favorable, which is 201 bushels per acre this year compared to 214 bushels per acre last year. But almost 700,000 more acres were planted this year compared to last year. Looking ahead, the drop in ethanol and DDG export could negatively affect future results of this If this continues, ethanol exports through June 2023 were 705 million gallons compared to 828 million gallons in 2022. During the same period, ethanol exports have dropped 15% since 2022. DDG exports through June 2023 were 5.1 million gallons. metric tons compared to 5.7 million metric tons, a decrease of approximately 584,000 metric tons compared to the same period, 2022. Considering all these factors, if we continue to source corn at a reasonable price, export of ethanol DDG increase, and we don't face any major logistic problem, we believe at this early stage of the third quarter will be profitable and even better than last year and could be better than this quarter. Let me provide an update on our carbon sequestration project and One Earth ethanol energy plant expansion. As I mentioned in our previous call, we are pleased to publish the inaugural sustainability report early in the year highlighting what we have accomplished while addressing the sustainability economy and our social responsibilities as a large. We believe our carbon capture project will further advance our sustainability goals and financial impact that improves company performance for our shareholders. We have budgeted approximately $165 million to build a carbon capture project compression and storage facility, the expansion of the One Earth Energy plant to 200 million gallon annually, and other projects related to reducing carbon intensity. We plan to build a One Earth Energy square station carbon capture and storage facility in Gibson City. The contract to build the capture and compression facilities have been signed and long lead items was ordered previously. We expect Facility construction will start in the middle of September. The delivery of all modular compression equipment for the facility is scheduled to be delivered by February 2020-24. The construction of the facility is expected to be completed by July 31, 2024, at which time testing of the facility will commence. We continue to complete the paperwork of different government permits and requirements of agency agencies while we are waiting for the EPA-approved Class VI permit for carbon injection. We answered two inquiries of the EPA regarding Class VI permits. This is a highly technical, very time-consuming project, and it depends on several local, state, and federal agencies' approval. Unfortunately, we cannot predict when we will receive all these permits from different local states and federal governments. and any delays in construction. In other update, our NUGEN Aetna facilities partnered with Summit Carbon Solutions, a developer of the world's largest carbon pipeline. In addition, Big River Resources entered an agreement with Navigator, another carbon pipeline company. We are pleased about the big milestone we have reached so far and hope different government agencies will complete their approvals this year or early next year. Regarding the One Earth Energy Plant expansion, we have plans to increase ethanol production to 200 million gallons a year. We have received an EPA permit to produce 175 million gallons per year for this facility. We must achieve 175 million gallons a year production, which is expected late next year before we can apply for 200 million gallons a year production permit because this is a two-step process. We have to achieve 175 before we apply 200 million gallons. But the facility will be capable of producing 200 million gallons from day one. The plant's current capacity is approximately 150 million gallons a year. We also continue to evaluate other projects that would improve energy efficiency. and reduced carbon intensity, the Clean Fuel Production Credit Section 45 , which is related to a reduced fuel carbon intensity score, could provide as much as $1 a gallon, depending on the carbon intensity of the ethanol produced and sold. If we successfully achieve these goals, we will be prepared to provide low-carbon ethanol and bioproducts with a social impact on reducing carbon in the atmosphere and the financial impact that improved the company's performance for our shareholders. In summary, we are pleased to announce a profitable quarter, actually the 12th consecutive profitable quarter, continuous progress on our carbon sequestration project, a plan to increase ethanol production at one earth energy to 200 million gallons to maximize 45G benefits, and signed carbon offtake agreements with the pipeline companies at New Gen and Big River. 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 goals. I'll give the floor back to Stuart Rose for additional comments. Stuart.

Thank you, Zafar. In conclusion, our results again this quarter outperformed most of the industry, especially the other public companies. Going forward during the next quarter, again, we expect to do significantly better in the third quarter of this year than we did in the third quarter of last year if our results keep going along as they have gone along so far during this quarter. We feel we have the best ethanol plants in the, among the best ethanol plants in the industry. Location is good. The crops look like they'll be pretty good and pretty good to real good this year. We were a little worried about that earlier, but things seem to have gotten better. And the biggest thing we have, as Afar said earlier, is we feel we have the best people working for us in the ethanol industry, and these are the same people that will be working for us and for our shareholders in the carbon capture industry. And if we can do what we did in ethanol and carbon capture, we hope to have a much, much larger, much, much more profitable company. I'll now leave the floor open to 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. Once again, to register a question, please press the 1-4 on your telephone. One moment please for the first question. Our first question comes from Jordan Levy with Truist Securities. Please proceed.

Morning, all, and thanks for the updates. Hey, Stuart. Really exciting update and a nice quarter. And just thinking about the carbon capture side of things, maybe for the FAR, there's clearly been a lot of Class VI permits that have been submitted for approval, but You all talked to moving forward with construction starting in September and that sort of thing. And I think it's fair to say that you all as a team tend to be pretty conservative with how you approach investment opportunities. So maybe just give us a little bit on how you're thinking about, you know, potential for approval in the timeline there on the EPA, knowing that you kind of have a timeline and you've ordered some of the long lead time equipment there.

As I mentioned that we have two inquiries from EPA. So it's almost nine months since we applied for the permit. Generally speaking, it takes about somewhere six months to 18 months. So we expect that we will have the permit before the end of 2024. And earlier, since we have not many inquiries for our conversation with EPA, we understand they are now looking at the technical aspect of those documents which we provided. And so far, we have no inquiries. But if we don't start our construction and we don't do all these things, then the people who have not started already, they will be at least two to three years behind. Because a lot of these lead items, it takes some close to 18 months to two years before you receive. So some of these we had started earlier. And then part of the thing is we are also expanding our plant to 200 million gallons. And once we expanded that 200 million gallons, if there is any delay, we will be still working on several other projects which can reduce our carbon intensity score for our for our ethanol plant. So we will still benefit from 45Z, but we may not benefit as much as we'd like to have from carbon sequestration. So delay can delay that, but we still will benefit partly in the early stage of 2025 from carbon density reduction, which we're working on different other projects. Absolutely.

Jordan, to answer your question a little further, a lot of people of Johnny-come-latelys are applying. We've worked on this with the University of Illinois, with the University of Illinois getting a government grant. We've been working on this for years. People think they can just walk in and get this type of permit. You're right. We are seeing a lot of applications. But they are so far behind, we believe, where we are. And we're so far behind in both the permitting process and the work that they've done on their projects that they can't even, they're not even close to being at the same level that we are. And a lot of people are just putting these projects and talking about it. They're not, they may or may not happen and they may or may not be real. They don't even know yet if the EPA is, and we don't know for sure that the EPA is going to approve us, but we do know We've been working on it the right way and doing it for a long, long time with U.S. government grant to the University of Illinois, which has been working on it with us, which has already done a carbon capture project with Archer Daniels. So we have a lot going for us, and a lot of these others just think you can throw in a permit application and get a well. It doesn't work that way. It's a very, very complicated process. And we're way, way along in that process.

Yeah, absolutely seems that way and certainly impressive the work that you've all been able to do on that front. Maybe on a somewhat separate issue, the $165 million that you all talked about being budgeted for carbon capture and plant expansion, maybe if you could just help break that down for us in terms in terms of what that all constitutes and any sort of incremental capex that might be required for any additional initiatives?

I think we have not really disclosed. This is basically a budget we estimate, but we have not disclosed how much will be for carbon sequestration and how much will be for ethanol facility and others at this stage. So I'm not sure that I can disclose that at this stage, but we certainly have total budget we estimate. because 165 million that include the, you know, subsurface area, the well, and pipeline about four to five miles, and then construction of the facility, and then included that from production from 150 to 200 million gallons. So that's all inclusive 165 million.

Okay, that's great. And just to clarify, Zafar, you mentioned this being kind of a two-step process on the plant expansion, but the 165 would include the expansion to 200 million, even if you have to show you can run 175 first.

That's right, exactly. So, yeah, the plant will be designed, which we already designed, and some of the fermentation times have already been built. So which we design is going to be capable of producing 200 million gallons the day one when it will be in expansion will be completed. But the EPA required to from 150 million to we have to show them to stack testing and other testing to see we are 175 million. And then immediately after that, they do the testing to make sure we are complying with that. Then we apply for 200 million. So even in 2024 when we apply for the $200 million and we received in 2025, that will apply for the whole year that we can produce 200 million gallons. So even we receive in February or March for 200 million gallons, but that will be 200 million gallons for 2025. Got it.

Thank you all so much. I'll hop back in the queue.

The $165 million also, as Savar pointed out, includes a lot of improvements we're making to lower our CO2 intensity, which it's technical, but it makes a big difference in 45C calculations. And we are working very hard. E is working, and our company is working very hard at reducing our CO2 score.

Awesome. Thanks so much.

Thank you.

Our next question comes from Pavel Malkinov with Raymond James. Please proceed.

Hi, Pavel. Thanks for taking the question. You touched on what you've seen in terms of corn purchasing. I guess if we zoom out for a moment, corn is now the cheapest it's been since the you know, pre-COVID era. And I'm curious if you think this kind of $4 a bushel number is sustainable.

It's hard to say. I think it all depends, you know, ultimately the production, and then also depends how quickly the harvest comes. And so, and then if the harvest, the final results could be different than what we see now. And as you know, there's some heat waves going on, but we believe that not going to be major impact because the corn is already denting. But we really cannot predict what will be the price will be in the future. But it's all a matter of supply and demand and export. And then, as you know, Ukraine and so many international events can change that trend. the price of the corn, we have seen that Brazil has producing a bumper crops, but even then their crops is the price is coming very close to the U.S. corn crops since we have corn price since the corn price has dropped. So this is really depend on several international matters. It's hard to say at this stage.

Okay. In terms of what you guys can control, and I've asked you this question before multiple times, are you seeing any opportunistic M&A kind of potential in terms of getting their capacity expanded through some asset acquisitions?

Not currently. We have in the past, and we've tried hard to get them. but currently I have not seen anything. In fact, I think people are doing better now, and the best time to buy a company at the prices we want to pay is when things aren't so good, and things in the industry have certainly become much better in the last couple months. So I think our attention properly is on carbon capture and maybe other uses of our energy, We have three potential carbon capture projects. One of them we hope to be ready pretty quick in the next couple years, but we have two others that we've applied with the EPA. I think our potential of growth is to find uses for those carbon capture projects, whether it's our own uses or taking someone else's carbon in, and that's probably more than mergers of other ethanol companies. I think that is probably a better focus of our time at this point in time.

I will add that I think, Babal, if you look at it, originally the ethanol facility was 100 million gallons. And we have grown that our consumption from 250 million, both locations from 100 to 150 million. Now we are growing organically from 150 to 200 million. So we certainly are growing. our ethanol production over the year. And then the most important thing is we know these plants, we know what cones of availability are from that area, and we think it's much better to grow organically than to acquisition of some other location and find out that location was not as good as we had our own plants.

Got it. Thanks very much, guys.

Thank you, Pavel. Our next question comes from Chris Sakai with Singular Research. Please proceed.

Yes, hi. Can you talk about, yes, the price of natural gas and how that's affecting your profitability?

I think the natural gas price has considerably dropped over the last year. At this time, it was trading close to $6 to $7. Now it's about $4, $3 or less. Suddenly it's a major impact on P&L because that's the second highest expense we have. So certainly it's helping, and we believe that this will continue at least this year. The natural price will continue to be substantial. same or a little bit better, but we cannot predict what happens in the winter season in January, February, March, and that depends. A little bit different situation can be. But through December, we feel much better. The prices will stay, you know, same or a little close to this pricing which we have now.

Have you thought about potentially hedging this price and locking in these prices to the future?

We do consider that it is the lowest price we consider. We do buy those prices, those consumption for our ethanol facilities. We do not leave everything open. But certainly, January, February, March, we We look at it, see if it's feasible at this stage or not, but through December we have purchased some of those natural gas throughout the year.

Okay, sounds good. And then can you talk about demand for ethanol globally? Which countries are demanding it more?

I think the ethanol demand is basically continuously, Canada is on the top of the list. We have seen the last year, last month, the Netherlands and UK, South Korea and Peru, these are the top five countries which is importing from US. But certainly the demand, ethanol export is dropped as I mentioned previously.

Okay, great. Thanks for the answers.

You're welcome.

Our next question comes from David Lockie with Old Mammoth Investments. Please proceed. Good morning, gentlemen. How are you today?

Good morning.

Good, thanks. Could I ask a quick question about just sort of what do you guys think the the cost of new capacity in the industry is in terms of call it dollars per gallon of throughput. And then related to that, since it doesn't seem like there's any assets trading in the business right now. And you guys have said that you haven't found anything that you've been able to buy. What sort of the ask in terms of what holders of assets want on that same kind of metric?

The cost to build would probably be in the $2.50 to $3.00 a gallon, but that's just an off-the-cuff estimate. It depends on the project. I would think it would cost somewhere in that level to buy a plant if there was even one for sale. The advantage of buying a plant versus building one, and I don't know of anyone building one at that price, the big advantage is that you could be in operation pretty much right away and take advantage, whether it's through a pipeline or whether it's through your own carbon capture project, but you could be in, you could be in business right away to, to get 45 Z credits. So there's a big advantage if there was something for sale, but, uh, in all honesty, everyone in the industry knows all about this. There's no secrets and the prices to, if you were to find something, the price would be pretty high.

And, um, In terms of like brownfield expansion, like along the lines of what you guys are doing, moving one plant from 150 to 200, is that a lot less or is that sort of similarly high to that $2 kind of range?

It certainly is a less than $2 range because you have already a lot of, you know, equipment and other equipment Loading facility is already there and so many other facilities already exist.

So it certainly is less than $2 Okay, and On an unrelated topic. Can you guys spend a couple of seconds? Reflecting on any opportunities and sustain ethanol to sustainable air fuel and if there's anything that you guys might do there at some point, or in general, just if sustainable air fuel might sort of soak up some ethanol capacity going forward?

Yeah, I think that that's one of the other reasons which, as you can see, we have expanded our ethanol facility not only to take advantage of 45Z, and then in the future, if we have to pivot, we can certainly pivot to, you know, SAF and because every two gallon of ethanol produce approximately one gallon of SAF. So we have we have discussion with several other companies who are really you know believe they have technologies and it can convert the ethanol to SAF. So we have in discussion with those we are certainly try to make sure what exactly is in the market so that way if we decided to pivot at the later stage, we certainly will pivot to SAF. But there is no proven technologies at this time which can we feel comfortable, and we let other people to experiment. And once we know this is successful, we certainly will get into it.

It reminds me of an old saying, pioneers take the arrows, and we're not the pioneers. We'll watch and see who's successful at it. And we think someone will be successful, and then we'll have the ethanol and possibly get into that business. We'll be one of the largest producers of ethanol, and we believe that it will take ethanol to make the fuel. So we'll be ready if someone is ever successful with the technology. We'll see what happens.

Okay, thanks very much for your time, gentlemen.

Mr. Rose, there are no further questions at this time. Please continue with your presentation or closing remarks.

Well, I just want to thank everyone for listening, and we hope you'll listen and be with us next quarter. Thank you. 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.