REX American Resources - Q4 2024

Transcript

Operator (participant)

Good morning and welcome to the REX American Resources fourth quarter and full fiscal year 2023 conference call. As a reminder, today's call is being recorded, and at this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I would now like to turn the call over to Mr. Doug Bruggeman, Chief Financial Officer of REX American. Please go ahead.

Doug Bruggeman (CFO)

Good morning, and thank you for joining REX American Resources Q4 and full fiscal year 2023 conference call. I have joining me on the call Stuart Rose, Executive Chairman, and Zafar Rizvi, Chief Executive Officer. We'll get to our presentation and comments momentarily, as well as your questions-and-answer session, but first I will 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 a 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 would now like to turn the call over to Stuart Rose.

Stuart Rose (Executive Chairman)

Good morning, and thank you again to everyone for joining us. Fiscal 2023 was a great year for REX American. Our core business of ethanol and co-product production was strong, with 285.9 million gal of ethanol sold, an increase of more than 7% over 2022. We kicked off construction of the One Earth Energy carbon capture and sequestration project at our Gibson City, Illinois location. We are also on track to complete the first phase of ethanol production capacity expansion to One Earth Energy facility. On the financial front, 2023 saw the most profitable quarter in the company's history from a net income per share perspective during the third quarter. I'm also proud to announce about fourth quarter and full year 2023 were the second most profitable quarter and full year in REX's 39-year history as a public company. This is quite an achievement for our company.

Across the board during 2023, the team at REX American consistently looked over the horizon, identified and met challenges, proactively drove success throughout the year. I'd like to thank everyone at our company for their hard work and dedication to making REX a successful and profitable company that it is. Our operational excellence has been the cornerstone of our success. Team is in the market every day monitoring and optimizing our contract positions to continue producing ethanol and co-products efficiently and profitably. Our commitment to innovation and sustainability has never been stronger, as evidenced by the ongoing construction and permitting process for our carbon capture project, which, if successful, will reduce REX's carbon footprint and produce net income benefits. We expect the One Earth Energy CCS project to add significantly to our financial results once it is approved and up and running.

This assumes we receive all necessary permits and approvals. As far as the additional avenues of growth, we're always looking at facilities that come in the market. Though at present, we do not see opportunities that fit within our standards of quality and which make economic sense to our portfolio. I'm proud of the work we have done and excited about the direction of our company as we look into the next several years. I now turn things over to CEO Zafar Rizvi to discuss the One Earth project in greater detail.

Zafar Rizvi (CEO)

Thanks, Stuart. Our carbon capture and sequestration project in Gibson City, Illinois, is not only a testament to our commitment to the environment but also to our strategic foresight in positioning the company for profitability well into the future. As we have discussed with you before, the One Earth Energy project, if all approvals are received and the facility is operational, should contribute to REX's bottom line through both 45Z and 45Q tax credit, which we plan to maximize with the related expansion of our Gibson City ethanol production facilities capacity to 200 million gal per year. We expect these two projects together could add significantly to our bottom line.

The addition of CCS to our ethanol facility also opens up other potential business lines, such as production of low-carbon ethanol for use in so-called alcohol-to-jet process for sustainable aviation fuel products, as well as the potential for us to sequester stored carbon for other producers in our Class VI injection wells. Both of these are additional business options for us. We are exploring. However, the near-term focus is getting the facility up and running. To that point, we continue to make progress in construction of the CCS. And you can see a picture of the in-process project in our updated investors' presentation, which is available on our website as of this morning. Currently, the team is focused on completing construction of the carbon capture portion of the facility, preparation for emergency response plans, and getting all of the required permitting completed.

We continue to expect completion of construction of the carbon capture facility by the end of the second calendar quarter of 2024 and beginning of testing after additional power sources are in place. As far as permitting and approvals, we continue to monitor our Class VI injection permits, application for the Environmental Protection Agency, our pipeline application with the Illinois Commerce Commission, and obtaining our special-use zoning permit for the county. We are very keen to ensure complete compliance with all regulatory requirements and are committed to working closely with all appropriate agencies to get the One Earth Energy project approved and into service as fast and as safely as possible. As of year-end, we have invested approximately $38.6 million into the One Earth carbon capture project and associated ethanol production capacity expansion.

This is compared to total budget amount $165 million-$175 million for both the CCS projects and ethanol production expansion at Gibson City. This investment underlines our beliefs in the project's potential and our commitment to sustainable energy solutions. I would now like to hand the call to our CFO, Doug Bruggeman, to discuss our operational and financial results.

Doug Bruggeman (CFO)

Thanks, Zafar. I'll begin with our operational results. REX's ethanol sales volume during fiscal year 2023 were 285.9 million gal, an increase of 7.5% over fiscal year 2022 sales volumes of 265.8 million gal. Average selling price for our consolidated ethanol volumes was approximately $2.22 per galfor the full year. Dry distillers grain sales volume during fiscal 2023 totaled 652,000 tons, a 9% increase over fiscal 2022 volumes. Volumes during the fourth quarter were approximately 169,000 tons, an increase of 13.4% over fourth quarter 2022. Average selling price for DDG was approximately $213.55 per ton for the full year. Modified distillers grain sales volume were 54,000 tons in fiscal year 2023, compared with approximately 94,000 tons in fiscal year 2022. For the fourth quarter, MDG volumes totaled approximately 18,000 tons, an increase of 7.3% over the same period in 2022.

Average selling price for modified distillers grain was approximately $103.54 per ton for the full year. Corn oil sales volume in fiscal year 2023 were approximately $87.5 million, compared to $77.8 million sold fiscal year 2022, an increase of approximately 12.5%. For the fourth quarter, corn oil sales totaled approximately $22 million, an increase of 7% over fourth quarter 2022. Average selling price for REX corn oil products was approximately $0.60 per pound for the full year. Gross profit for fiscal year 2023 was $98.2 million versus gross profit of approximately $48.6 million for fiscal year 2022. The more than 100% increase in gross profit was due to improved production levels and lower corn and natural gas prices. Gross profit in Q4 2023 was $30.4 million, compared to $13.3 million in Q4 2022. The increase was due to similar dynamics as seen for the full year.

Our SG&A expenses increased to $29.4 million for fiscal year 2023 versus $22.8 million in 2022. SG&A in the fourth quarter increased to approximately $7.4 million versus $5.1 million in the fourth quarter of 2022. In each case, the increase was primarily due to higher incentive compensation related to the company's performance. Interest and other income grew by approximately 21% in 2023, totaling $15.7 million, compared with approximately $13 million for fiscal 2022. We reported interest and other income for the fourth quarter of approximately $4.8 million versus $2.6 million for the same period in 2022. Income before taxes and non-controlling interest for 2023 was approximately $98.5 million, a significant increase from $47.5 million in 2022. During the fourth quarter, we reported approximately $32.5 million in this metric versus $13.3 million during the same period during the previous year.

As Stuart mentioned at the beginning of the call, 2023 was the second best year from a net income perspective in our company's history. Net income attributable to REX shareholders for the year was $60.9 million, compared to $27.7 million fiscal year 2022. For the fourth quarter 2023, this equaled $20.6 million, compared with $8.2 million for the fourth quarter 2022. On a per share diluted basis for the full year, this amounts to $3.47 per share of net income in 2023, compared to $1.57 per share in 2022. And for the fourth quarter 2023, diluted net income per share was $1.16 per share, compared to $0.47 per share the same period in the previous year. We ended the year with total cash, cash equivalents, and short-term investments of $378.7 million, compared with $280.9 million for fiscal year-end 2022.

The cash build during 2023 was reflective of our conservative fiscal approach and anticipated capital expenditures related to the One Earth Energy CCS project and ethanol production capacity expansion at our Gibson City location. Also relating to this conservative approach, REX American ended the year without any bank debt. I'd now like to turn the call back to Zafar.

Zafar Rizvi (CEO)

Thanks, Doug. I would now like to give some color around how we see the ethanol market progressing through the remainder of the calendar 2024. Looking at the ethanol and co-product market, we anticipate continued changes in the commodity market. However, as we have seen over the years, our incredibly capable team is in the market every day, watching these markets, adjusting our positions, and looking at our forward contracting strategy. It puts us in a better position no matter the market conditions. As far as the market for our most important inputs, corn and natural gas, so far during calendar year 2024, we are seeing pricing run more in our favor than a year ago. This has resulted in ethanol profitability currently running slightly ahead of the same period a year ago.

In closing, I want to thank our very dedicated employees whose hard work and innovation have driven our success. We are excited about the future and confident in our strategy to deliver value to our shareholders. Thank you for your continued support. Now, I would like to open this thing up for questions. Operator.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull four questions. Our first question comes from the line of Jordan Levy with Truist Securities. Please proceed with your question.

Henry Yun (Analyst)

Hi, guys. It's Henry Yun for Jordan here. Congratulations, firstly, on another excellent quarter. Just to start with, on the regulatory side, are there any incremental updates or color you can give us on the discussions with the EPA and the Illinois Commerce Commission?

Stuart Rose (Executive Chairman)

Zafar?

Zafar Rizvi (CEO)

Sure. Let me give you some information where we stand today. Our carbon facility is under construction. As you know, it's expected to complete by the end of July or beginning of August. The permitting process for the Class VI permit is under review by the EPA, which we have no knowledge when they will approve, but it is under technical review. We also filed for the pipeline to ICC, and we are waiting on that process. We are going through the process and expected to complete by the end of July or early August. We are also able to get well number 1 and well number 2 and well number 3. All the easement is signed for all the 3 wells. We also have 91% of the pore space at this time for the well number 1.

We also have approximately 62% of the easement for the 6-mile pipeline, which will take us to well number 1 and 2 is completed. We also have the NuGen facility signed agreement with the Summit last year. The Summit is also improving there, able to successfully get some legislation passed in the South Dakota. So as far as basically coming back to Jordan again, that certainly this process is a long process, and it's government agencies, and we have no knowledge when they will approve that.

Stuart Rose (Executive Chairman)

Henry, I want to add that 91% is an incredible number to get that much. A lot of people, virtually everyone else, has less than that in their holds than they tried for things like eminent domain and stuff like that. It's our hope that we won't have to do anything like that. We have an incredible amount of support from our farmer partners to get this project done, and that's, we think, something that separates us from a lot of the other people that might be having a little more trouble than us.

Henry Yun (Analyst)

Thank you guys for all that color. Just a quick follow-up around capital allocation. I know you mentioned in the call you're not, you haven't seen anything in the ethanol asset space that's, I guess, worthy of purchasing at this point. I'm just wondering if there's, in terms of thinking of use of cash outside of your current One Earth and carbon capture projects, are there any other things you guys are thinking about or looking at for uses?

Stuart Rose (Executive Chairman)

That's a good question. We have looked at a couple of other assets at some plants. So far to date, we haven't found anything that we're so focused at the moment on this carbon capture, but there could be a lot of uses for our capital. For example, I mean, this is way in the future, way, way in the future, and just talk at this point. But let's say jet fuel. Let's say if CO2 can be emitted, there's a number of power plants nearby that emit a lot of CO2. We have carbon capture wells. We're getting permitted now. There's chances to be partners with them. There's cement plants. We also, as you probably know, when our stock drops, we're prolific buyback people. So there's always the opportunity to use the cash for that.

So we're excited about the future after carbon capture or our carbon capture combined with other people's carbon capture. There's so many things we can do in the future.

Zafar Rizvi (CEO)

Yeah. And also, as you know, that we're going to have approximately $165 million-$175 million is for CCS and expansion of the plants, which is expected to complete by the end of this year or early 2025. So I think that will be also we'll be taking a lot of cash, which we have at this stage. And then it still leaves us to for the future expansion or future purchase of any other properties available, as Stuart mentioned.

Operator (participant)

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Pavel Molchanov (Managing Director and Equity Research Analyst)

Thanks for taking the question. Good to connect, as always. I've kind of posed this question before. I thought I'd get your latest thoughts on this. I mean, you're extremely cash-rich, to state the obvious, for a company of your size. There are ethanol assets that periodically come up for sale, maybe not as good as yours, but they are for sale. Is there any opportunity to add to your existing production asset base?

Stuart Rose (Executive Chairman)

We are Pavel, hi, Pavel, by the way. We're always looking. We are looking, but at this time, we have nothing imminent. What we would ideally want, which is hard to find, is a large Fagen ICM plant that's near Illinois or near someplace that's near carbon capture because we have the potential, at least for the next few years, to make as much in carbon capture on these plants as we can in the ethanol business. So that would be ideal. We would look at something that wasn't ideal if it was a good plant. It would have to be a really good plant that has good corn supply, that's relatively new, preferably Fagen ICM. We're pretty stringent on what we look for, and we have things so much planned right now that if we never found one with carbon capture, we have great plans for the future.

Zafar Rizvi (CEO)

And I add to that, also, Pavel, we are organically also growing. So as you can see, originally, these plants were 100 million gal. Then we expanded to 125 million each, then 150. And now we are expanding these One Earth Energy plants to 200 million gal. So I think we certainly is we believe that our plants at the best location possible, CCS project, and they have produced much better than any other location, any other ethanol location. So we are trying to make sure that we reinvest also in our locations and grow organically before we also try to buy something which may not fit our criteria.

Stuart Rose (Executive Chairman)

To be honest, that's been less expensive than some of the transactions that have taken place when lesser plants have changed hands.

Pavel Molchanov (Managing Director and Equity Research Analyst)

Okay. So earlier this year, the first ethanol to or, I guess, alcohol to jet facility in the world opened up in Georgia. Of course, this is the LanzaJet project. And I'm curious if at any of your existing ethanol sites or potentially at some future M&A opportunity, you would be interested in running this kind of conversion project to produce SAF?

Zafar Rizvi (CEO)

Yeah, Pavel. I was at the SAF conference earlier this week, actually last Thursday and Friday, hearing about some of the dynamics and projection for this market. Approximately, there was expected to be approximately $30 billion gal market is there. And one thing is very consistent. There is no different kind of aviation fuel. Aviation fuel is only one kind of aviation fuel, which everyone use that. And there is approximately 7 million barrels per day demand. There were American Airlines, United Airlines, and Southwest Airlines also there. So we are currently looking into how REX's could participate and what may make the most sense on this part. However, right now, we really are focused on our first getting the One Earth plant up and running, which means permitted it, built, and in operation.

We are looking at options for CCS beyond sequestration of our own carbon, but are concentrating on making our first ethanol plant successful and first and most importantly, CCS project successful at this time. But there is great market. There is in the future, that will be the right things to do to maybe even pivot in maybe two or three or four years from now. But at this time, there is only, when I learned from that SAF conference, there's only 50 million gal are produced, and there is not enough market, but it's expected to grow by 2032 to approximately 30 billion gal. So yes, there is a great future, but at this time, there isn't really enough market demand there.

Stuart Rose (Executive Chairman)

All right. Well, so one of the keys to our success, Pavel, has not been to be the pioneer, but to have the best technology and wait for the best technology and see who has the best technology out there. So we are not jumping into it. We'll let someone else be the pioneer and take the arrows, but we'll come in as soon as someone shows that this is a or we'll at least look at it very seriously as soon as someone shows that this can be a profitable business.

Pavel Molchanov (Managing Director and Equity Research Analyst)

Thanks very much.

Stuart Rose (Executive Chairman)

Any other questions?

Operator (participant)

Thank you. Our next question comes from the line of B.J. Cook with Singular Research. Please proceed with your question.

B.J. Cook (Analyst)

Hey, guys. Thanks for taking my call. Just quick, do you guys have any new info or update on the capacity expansion in Gibson City?

Zafar Rizvi (CEO)

I'm sorry. I didn't hear your question. Could you repeat that again, please?

B.J. Cook (Analyst)

Yeah. Sorry. Is there any new information or update on the capacity expansion at Gibson City?

Zafar Rizvi (CEO)

I think, as I mentioned previously, that we are expanding that plant. The ethanol facility is going to be a 200 million gal, and the construction is in progress. For the ethanol facility, we expect that will be completed before the end of this year. Then the CCS project is also the construction of the building is compressor facility building is almost complete. Equipment is arriving every single day, and we expect that by the end of July or early August, CCS facility will be completed. But we still have to wait for the pipeline permit and the EPA Class VI permit before we start any kind of carbon sequestration. So those are the main things we are waiting for the permits. But as far as concerned about the facility, it's going very well.

Doug Bruggeman (CFO)

This is Doug. Let me add. When we expand that facility, the construction will be to take us to 200 million gal. Initial plans are to run at 175 million gal. Once we achieve that and get EPA further approval, then we can go to 200 million gal.

B.J. Cook (Analyst)

Fantastic. Thanks. How are you guys looking at capacity utilization? It's kind of a moving target, I get it. But for the remainder of the year, can you guys expect to run it up?

Stuart Rose (Executive Chairman)

The question was capacity utilization. Assuming that we get a decent corn crop, we plan on running pretty much full capacity. The only time we've ever cut back, there'll be times when we cut back for maintenance. There'll be times when we cut back just because we're doing with the CCS where we can't quite run as much as we usually do. But basically, we'll be full capacity. We'll go all out. And we always go all out when it's a profitable market.

Zafar Rizvi (CEO)

Yeah. We have not really a slowdown. Our slowdown is processes. Sometimes it's maintenance or unexpected some kind of shutdown. So we try to use the full capacity practically possible because we are in a basically in Illinois is in a corn belt area, and South Dakota crops was great last year and expected to be this year same. So we have no plan to really slow down at this stage.

B.J. Cook (Analyst)

Okay. Thank you very much.

Stuart Rose (Executive Chairman)

Thank you.

Operator (participant)

We have reached the end of the question and answer session. I'll now turn the call back over to Stuart Rose for closing remarks.

Stuart Rose (Executive Chairman)

Okay. I'd like to thank everyone for listening. As you have heard, we have great plants, terrific plants, great growth prospects. And the key to everything is the execution of our employees. We feel we have the best employees in the industry, the best people working for us. We think that's what really makes a difference between REX's and everyone else in our industry. And we just want to thank them. And we also want to thank you for listening to the call. We appreciate it very much. Talk to you next quarter. Bye.

Operator (participant)

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.