REX American Resources (NYSE:REX) Q2 2020 Earnings Call

0:00 Welcome to the RECS American Resources Fiscal 2020 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. 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 Bruggeman, Chief Financial Officer. Please go ahead.

0:29 Good morning and thank you for joining REX American Resources Fiscal 2020 Second Quarter Conference Call. We'll get to our presentation and comments momentarily, as well as your questions and answers, 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 risks 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.

1:25 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 quarter decreased 63% primarily due to lower production levels as we had idled our One Earth and Nugent ethanol plants in March. We reopened the One Earth plant in late May and the Nugent plant in late June, which resulted in approximately one month of production for each of the plants in the second quarter. Ethanol sales for the quarter were based upon 26.5 million gallons this year versus 60.4 million last year. Sales for the quarter were also impacted by 11% decline on ethanol pricing year over year.

2:24 We reported a gross profit of $553,000 in the second quarter for the ethanol and byproduct segment versus a gross profit of $6.2 million in the prior year. The decrease in gross profit was primarily caused by the same factors that impacted sales. Our refined coal segment had a gross loss of $1.8 million for the second quarter of fiscal 2020 versus $2.2 million for the prior year based upon lower volume. These losses are offset by a tax benefit of $2.9 million and $3.2 million for the second quarters of fiscal 2020 and 2019, respectively. Recorded from this section, 45 credits and the tax benefits from operating losses. SG&A was similar between quarters at $4.4 million this year versus $4.8 million in a prior year.

3:16 We had a loss of $507,000 from our unconsolidated equity investment in this year's second quarter versus income of $239,000 in the prior year, reflecting overall ethanol industry conditions. Interest and other income declined year-over-year from $1.3 million to $197,000, primarily due to lower interest rates on our cash and short-term investments as interest rates fell sharply during the current year. We recorded a tax benefit of $4.1 million for the second quarter of this year versus $2.6 million in the prior year. We recorded our federal tax benefit from currently calculated tax losses at 35% rather than the current 21% tax rate based upon our ability to carry back losses five years due to the CARES Act.

4:05 These factors led to a net loss attributable to REC shareholders of $1.7 million in the current year's second quarter versus net income of $2.3 million in the prior year. Stuart?

4:22 Going forward, ethanol is currently profitable with all plants open. The ethanol prices are up over last quarter. Corn appears to be plentiful with hopefully a good harvest in sight. The only negative that we see, or that I see, is at this current time, or the biggest negative I see, is there's 98 refineries that have applied for RIN exemptions. And if they were given all 98, that would have an impact on our business. Or if the government does not follow the law on RINs, that could have an impact on our business. In terms of cash, we had over $180 million on a consolidated basis.

5:11 We continue to work on our potential carbon capture site, which Zafar Rizvi, our CEO, will discuss a little later. We bought back 30,536 shares during the last quarter. We're authorized to buy another 241,185 which we will again work on if the stock dips to levels that we think are attractive for the company to be buying back the stock. We continue looking for quality ethanol plants at reasonable prices. We've not found anything and nothing's imminent there. We continue to look at ancillary products that can be made out of ethanol or its byproducts.

5:58 We would still consider an investment in something other than ethanol that could use our abilities, but again, nothing's imminent in that area. Zafar Rizvi, our CEO, will now discuss further our ethanol business in carbon capture. Thank you.

6:16 Zafar Rizvi Thank you, Stuart.

6:17 Good morning and thank you for joining us today for the second quarter 2020 Covenant Calls.

6:23 As we all know, 2020 fiscal year started in a challenging environment, including decline in the crude and ethanol demand, price, COVID-19 pandemic, and shutdown of business and stay-at-home orders by governors. That resulted in a decrease in the fuel demand and negatively impacted the ethanol industry. Several ethanol facilities across the country were shut down, including both of our majority-owned plants. As I mentioned in the first quarter call, that challenging environment led to the decision to shut down the Mugen plant on March 17 and 1 March 31. By April 2020, we had idled both of our majority-owned plants. We have experienced some improvements in business activity at late May as COVID-19 shutdown order relaxed. That created increase in demand for the gasoline and ethanol. As the demand of ethanol increased, that led to reopening of One Earth Energy in late May and New Gen Energy in late June.

7:24 Since One Earth Energy's second quarter ended on June 30th and New Gen's second quarter ended on July 31st. Due to that reason, second quarter financial results have approximately one month of production activities for each location. We also gone through usual restart of production problem, but these problems are behind us now. We have seen further improvements so far in third quarter and study. and David Bruggeman. We believe this could lead to a profitable third quarter provided economic condition, crush margin, availability of corn continues to improve and COVID-19 threat further reduced. USDA Corn Progress Report shows 64% of the corn is excellent to good condition compared to 57% last year. The corn condition in South Dakota where our ethanol plant Merion is located is 74% excellent to good compared to 63% last year as per USDA report on August 24th.

8:34 The corn crops around our plants draw area in South Dakota and Illinois looks better than last year which could lead to a better yield, early harvest, and better future economic results. But on the other hand, as Stuart mentioned earlier, we are still experiencing continued uncertainty because of the trade disputes and COVID-19 threat and the small refinery exemption. The EPA continues to consider and grant small refinery exemption from RFS compliance here, which could lead to a less blending of ethanol and could lead to a less demand of ethanol. The ethanol and DDG export dropped in the first six months of 2020 compared to last year. The ethanol export totaled 731 million gallons compared to 764 million gallons during the same period last year.

9:27 Export of dried distiller grains through June of 2020 also approximately 5 million tons compared to 5.36 metric tons for the first six months of 2019. Let me also give you some progress on the carbon sequestration project which I discussed in our previous call. As I mentioned during the previous call, we are working with the University of Illinois to explore carbon sequestration project. The university has received the U.S. Department of Energy Award through the carbon safe programs and expected to start work within a couple of months to develop a carbon storage site associated with One Earth Energy ethanol facility. The University of Illinois will drill a test well, performing seismic test surveys, conduct a front-end engineering and design and study of the CO2 capture system. As I mentioned during the previous call, geological mapping, characterization, and modeling have demonstrated that excellent storage potential exists in the Mount Simon storage complex in the density of one facility.

10:39 To date, we have completed the feasibility studies, seismic testing, and have purchased extra land for this project. This project is still at the preliminary stage, and we cannot predict we will be successful with this project. In summary, we have seen some improvements of crush margin and expect better corn crops in our dry area this year, and then last year that could lead to a profitable third quarter. We were very appreciative and thankful for the hard work of our employees during the pandemic, and we are taking every step to keep our employees safe and follow CDC state and federal guidelines. I will give back. give the floor back to Stuart Rose for his further comments. Thank you, Stuart.

11:25 Thanks, Zafar. In conclusion, it looks like the worst is behind us. The ethanol business is now currently profitable. We have great plants, great locations, among the best in the industry. Most important, we have great people, and that's the biggest thing that allowed us to navigate this difficult time and become profitable again. I'll now leave it open to questions. Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You'll 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. Our first question comes from the line of Jordan Levy with Truist Securities.

12:13 Please proceed with the question.

12:16 Morning, Stuart, Doug, and Zafar. Just to start off, just on the industry as a whole, just curious to get your thoughts on how you kind of view the discipline of the overall ethanol industry here in the U.S. And then, you know, we've seen a nice bounce back in production and demand on the ethanol and, you know, subsequently gasoline fronts. And with that, just, you know, Given that we could see more volatility however you view it, what sort of things can you guys do at the corporate level to buffer or better position yourself to go through that volatility versus your peers?

12:57 There's very little discipline in the ethanol industry. When it's profitable, everyone produces like crazy and there's no real discipline. Plants never go away permanently. They just Zafar Rizvi I think we're among the, depending on the price of corn, we have among the most efficient plants in the industry and that's allowed us over the years to way, way outperform the industry. Many of the companies have, if you look at their retained earnings on their income statement, they have negative retained earnings.

13:55 We, of course, have made money virtually every year This year is a very, very difficult year for something none of us expected. But we feel if we're the low-cost producer, we'll always be okay. And so far, that's worked well for us. I hope that answers your question.

14:19 Yeah, it absolutely does. And I think that you guys showed your ability to kind of handle those low costs and drive those costs down this quarter as well. Along the same lines of thought, you discussed briefly ethanol investments and trying to look for the right price. Is there a market signal that you would look for that would make you comfortable expanding the ethanol footprint or something on the price or the crush margin side, or is it just about getting the right plant at the right price?

14:54 I think for sure we would look at whether it's We're better off buying our own plants. Our plants are valued at very, very – we have $30 a share in cash, so our plants by the market are valued, we feel, at a very, very low price. So if we're better off buying our shares or what we call buying back our plants for our shareholders, we would much – that would be a trigger or that would be something we would compare to. We would not want to pay if we can help it less, and we don't think there are better plants than us. but unless it was a better plant than ours, we certainly would not want to pay more than what our plants are selling for on the market. I think that makes a lot of sense.

15:40 Yeah, absolutely. If I could, yeah, just one more. And you've mentioned kind of the ability to realize more value from some of the byproducts that some of your peers are looking into. Just kind of, you know, we've seen a couple, players in the ethanol industry discuss high protein from the DDG stream and that sort of investment. Just kind of thinking about what the potential for that investment is and what you see kind of the upside and downside of pursuing something like that might be.

16:15 Well, there's two places where we've seen people make it, the high protein and the sanitizer, and we're looking at both where we'd rather follow and see other people do well in it.

16:27 Thank you very much.

16:50 and we are definitely studying everything and Zafar, do you want to, I think that pretty much sums it up unless you have anything else you want to say on that Zafar?

17:00 Yeah, only thing I will add to that is, you know, protein market is not mature enough yet and we believe that it will going to take little bit longer period to become mature at that market and as it get little bit mature at that time, we will evaluate Thank you very much. That particular debt will not be available. But most importantly, at this time, we really think the market is not mature enough yet this time to invest 40 to 50 million.

18:02 But we are certainly evaluating as Stuart mentioned.

18:06 Right. No, I think that makes total sense. If I could just squeeze in one more, just looking at crush margins where they are now and moving into the back half of the year and and things have improved as you guys kind of mentioned and the plants are back online. Just curious how you see kind of the rest of the year playing out in terms of production at the plants or just in general trend directionally on volumes from both your operated and non-operated entities? So far.

18:47 Yeah, I think as you can see, as I mentioned earlier, we see the third quarter will be expected to be profitable. So we certainly see that things have improved compared to last six months, and we believe that if it continues to improve, as I mentioned, that we don't see any COVID-19 for the threat, either any kind of availability of corn or something happened to the corn Thank you. Our next question comes from the line of Chris Sakai with Singler Research. Please proceed with your question. Hi.

19:46 Hi, everyone. I had a question regarding globally and your sales globally. Which countries are you currently seeing an increased demand for ethanol, and which countries have not, and why, and how has the pandemic affected these countries?

20:15 as I mentioned previously I think that export is dropped to 731 million gallons compared to last year 764 million and Brazil is always top last year it was about 210 million gallon compared to this year 177 million and Canada is also dropped and Canada, Brazil, Canada, India, I think South Korea. These were the last year in 2019. They were also top four countries. They are still top four countries, but ethanol, they have dropped. The export is dropped compared to last year.

21:00 So I think they're certainly that infected. Also, the other reason is we were also mostly plants were shut down during the March, April or May, and there was no enough production. When there was not enough production, it's hard to export something also. So that's certainly affected in both ways. But these are the top four countries who's always really importing from the US.

21:29 And one thing I want to add is driving because of COVID-19 has been affected throughout the world. People aren't using as many gallons of gasoline or ethanol for driving as they were because of the COVID, or at least they weren't in the second quarter.

21:47 Right. But so is it a fair, I guess it'd be a fair assumption to say that as driving is increasing, then so is the demand for ethanol and so are your sales.

22:02 In the U.S., I think that's a fair hope that if driving increases, but we're still up against last year. And I don't know that driving, I don't have the latest figures so far, Mike. But the other issue that we deal with that we pay attention to is wholesale price of gasoline is fairly low because demand has been low. And we have to compete with that on an export basis, too. So that's another thing that hurts export business when wholesale price of gasoline is low.

22:41 Right? Okay. Yeah. Well, thanks. Thanks for that. I appreciate it.

22:46 Yeah, thank you. Thanks for the question. There are no further questions registered at this time. However, as a reminder, press the 1 followed by the 4 on your telephone keypad to register for a question.

23:06 That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.