REX American Resources Corporation (REX) Q3 2021 Earnings Call Transcript

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REX American Resources Corporation (REX 0.05%)
Q3 2021 Earnings Call
Dec 1, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the REX American Resources Fiscal 2021 Third Quarter Conference Call. [Operator Instructions]

I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead.

Douglas L. Bruggeman -- Chief Financial Officer

Good morning and thank you for joining REX American Resources fiscal 2021 third 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 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 risks and uncertainties associated with forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission including the Company's reports on Form 10-K and 10-Q.

REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I have joining me on the call today Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer. I will first review our financial performance and then turn the call over to Stuart for his comments.

REX is very pleased to report on our strong third quarter results. As you will note in the press release, we have now discontinued the refined coal operations as we are no longer able to earn tax credits beginning on November 18, 2021 and have classified it as discontinued operations. We now have just one reportable segment of ethanol and by-products.

Sales for the quarter increased by 63% as we experienced higher pricing for ethanol, distiller grains and corn oil. Ethanol sales for the quarter were based upon 69 million gallons this year versus 74.6 million last year. The reduced gallons were primarily due to limited corn supply at the beginning of the quarter which abated once the current year corn harvest began. We reported gross profit of $25.2 million from continuing operations versus a gross profit of $18.9 million in the prior year.

For the current year quarter improved selling prices were offset somewhat by higher corn and natural gas pricing. Ethanol pricing improved by 76%, dried distiller grain improved by 43% and corn oil pricing improved by 146% for this year's quarter over the prior year quarter. Corn cost increased by 97% and natural gas pricing increased by 119% for this year's quarter compared to the prior year.

SG&A increased for the third quarter to $6.3 million from $4.3 million in the prior year. This primarily represents increased incentive compensation based upon higher earnings in the current year and increased railcar lease costs. We had income of $349,000 from our unconsolidated equity investment in this year's third quarter versus income of $1.2 million in the prior year. Interest and other income decreased to approximately $35,000 versus $537,000 in the prior year, primarily reflecting the lower interest rate environment.

As mentioned above, since refined coal operation is now classified as discontinued operations, its results and historical results now reflected on one line on the income statement including the tax benefits from this business. We reported $2 million of net income reportable to REX shareholders from discontinued operations for the third quarter. This also resulted in us reporting a tax provision of $4.3 million for the third quarter of this year versus a provision of $5 million in the prior year from our continuing operations.

These factors led to net income attributable to REX shareholders from continuing operations of $13.3 million for this year's third quarter versus $9 million in the prior year, a 47% improvement. Our net income per share from continuing operations attributable to REX shareholders was $2.23 for this year versus a $1.47 in the prior year. Total net income per share, attributable to REX shareholders, including the discontinued operations was $2.56 for the quarter versus a $1.44 in the prior year.

Stuart, I'll now turn the call over to you.

Zafar Rizvi -- Chief Executive Officer

Doug, is Stuart there still?

Douglas L. Bruggeman -- Chief Financial Officer

Zafar, why don't you go ahead?

Stuart A. Rose -- Executive Chairman of the Board

Sorry, I'm on, I'm on. Going forward, we are currently running in a significantly higher rate of earnings per share in the quarter that we currently reported. Crush spreads have risen greatly even with higher input prices of corn and natural gas. Zafar Rizvi will discuss this later in his section. Refined coal operations as Doug ended in the middle of November. After tax, it was profitable all the way up to the end. Tax credits that -- we have not used that yet, we'll carry forward for up to 20 years, will help our cash flow significantly over in the next few years, assuming we continue to make good earnings.

The sequestration project is moving forward. Carbon sequestration, Zafar Rizvi again will discuss that in his section. Cash balance right now has risen to $219 million, up significantly from year-end of $108.7 million. We currently, based on current operations, we again expect that to rise over the next -- over the next couple of -- over this quarter. Uses include buybacks. We bought back almost 67,000 shares in the quarter, we're working on our carbon capture project which Zafar again will talk about.

We continue to look for top quality ethanol plants, we tried, but we've not been as imminent at this time, we know nothing that's top quality that is up for sale at a price, we would consider buying it for. We are open to considering other alternative energy projects and carbon capture opportunities. So we'll see what happens in those areas. Again, our cash balance as you can see on the balance sheet, $219 million. Zafar will now discuss the operations.

Zafar Rizvi -- Chief Executive Officer

Thank you, Stuart. Good morning, everyone. As I mentioned in our previous quarterly call, the operating environment in 2021 improved in the first and second quarter. We saw a decline in the crush margin in the beginning of the third quarter due to several factors. But then the operating environment has begun to change. An early harvest resulted in an increase in the availability of the corn -- favorable ethanol and corn oil prices helped to increase the crush margin due to the availability of corn. We were able to increase the production at our plants, which is resulted in a very profitable quarter as Doug and Stuart mentioned earlier. We continue to see favorable trend as Stuart just mentioned in crush margin, which could result into another profitable quarter. Both of our majority-owned plants currently are producing at near capacity, are the logistic problems continue to be very challenging and are beginning to get worse due to the slowdown of the railroad and the availability of DDG containers and trucks. We expect this trend may continue into the first quarter of next year or maybe longer which could adversely affect production and net income.

Let me give you a little bit of progress of our carbon sequestration project. As you know, we are working with the University of Illinois to drill carbon sequestration well. We have received a permit from the Illinois Department of Natural Resources to drill a test well, the site for the drilling has been prepared. Rigs and other materials and equipment have arrived at the site. We expect drilling will start today. We hope to convert the test well into Class VI in the monitoring well. The first stage of preparing the Class VI permit application has been using. Existing information and US EPA has been notified. The completion of the application process will continue -- will continue as we began to receive more information after the test well is completed in January 2022. It will require another several weeks of testing, extensive modeling and computer stimulation to predict the behavior of the CO2, when it is injected, it is a very slow process.

This stimulation model will determine how much CO2 can be injected at the location, at what rate and it is eventual distribution in the subsurface area. 2D seismic processing has just finished and currently, preliminary [Phonetic] reports looks good at the proposed site. The process [Indecipherable] testing has started, permitting fertility [Phonetic] usually takes more time than 2Ds as there is more land involved. The fertility require us to enter in the fields and run linear grids across the property after receiving permission from the landlord -- landowners.

Our FEED study of the capture of CO2 and the design of the facilities are underway. The design of the capture CO2 facility is expected to be completed soon. As I have mentioned in the previous calls, this project is still at a very preliminary stage, and we cannot predict yet that we will be successful.

In summary, we are pleased to announce once again a very profitable quarter and progress with our carbon sequestration project. We are very appreciative and thankful for the hard work of our colleagues to achieve these results.

I'll get back -- I'll give the floor back to Stuart Rose for additional comments. Thanks, Stuart.

Stuart A. Rose -- Executive Chairman of the Board

Thank you -- thanks, Zafar. In conclusion, we had a very, very good quarter as we both mentioned. We're in the midst of an even better quarter, a significantly better quarter as crush spreads have risen. We have continued to outperform the industry. Significantly, we have good plants, good locations and as Zafar mentioned, we believe we have the best people in the industry and much capable people in the industry. That's really what sets us apart from what the average plan is currently doing.

I'll now leave the floor open to questions.

Questions and Answers:

Operator

Thank you. [Operator Instruction] And our first question comes from the line of Jordan Levy with Truist Securities. Please proceed.

Jordan Levy -- Truist Securities -- Analyst

Good morning, Stuart, Zafar, Doug.

Stuart A. Rose -- Executive Chairman of the Board

Hi, Jordan.

Jordan Levy -- Truist Securities -- Analyst

I'm curious if you all could -- hey, thanks for all the commentary. Nice quarter. I wanted to start out on more of a macro front and see if I could get your thoughts on the activity we've seen as it relates to the significant move higher and ethanol prices we've seen recently and especially relative to gasoline prices that have come down more in the last couple of weeks. And what do you think is really driving this dynamic right now and then going forward, how do you see crush margin set up heading into '22.

Douglas L. Bruggeman -- Chief Financial Officer

Zafar?

Zafar Rizvi -- Chief Executive Officer

I think that there is several factors which we see, originally the price of ethanol was going up. The most important thing -- I think the fact that was involved in logistic, there is lot of ethanol was not able to reach to east and then also in the Chicago market and due to transportation and logistic problems and demand was still there and supply was not able to reach at the location where the people needed most and that's helped to increase the ethanol price. And as you have seen that yesterday and today it's also a little bit ethanol price dropped since that time, but logistic problems as I've mentioned is still really continuous problem happening and due to that reason, just today's report shows that the production has dropped, but stock is still high and because lot of people were not able to ship their railcars or other transportation that was causing the price of ethanol was also going up.

I think as far as concerned looking at 2022, I think as you know we are in a commodity market and previously I've mentioned in my call that we were beginning to see decline in the crush margin at the end of the call for the third quarter, but things changed so rapidly. And you can see that we end up in a much better ethanol profit margin for the third quarter than we anticipated. So it's very hard to say really what happened in 2020 and going forward. It depends on several factors including the COVID, supply and demand and ethanol corn pricing and then supply of blending credit and all those things. So it's very hard to predict anything on commodity market.

Douglas L. Bruggeman -- Chief Financial Officer

One other thing I want to add Jordan is our people have done really well in getting the goods out. We're one of the few companies that actually concentrates on ethanol and not this other stuff that other people are looking at, because of that I think, we -- our eye is on the ball for these types of time since Zafar especially working with getting -- I mean he works really hard and our people work really hard at delivering which is a big part of -- which right now is a big part as a whole ethanol business. So again, this is something during these -- we're able to separate ourselves during these times by just being on the ball by concentrating on the main products.

Jordan Levy -- Truist Securities -- Analyst

Absolutely. I appreciate the color. Certainly shows the new results, maybe just a quick follow-up on the carbon capture side of things. I don't want to get too far ahead of knowing where this project is, but soon as I step back and think big picture and get your thoughts on assuming this all goes in the direction that you wanted to go in, what is a larger scale sort of investment or larger scale business line in carbon capture will look like to you all [Phonetic].

Douglas L. Bruggeman -- Chief Financial Officer

Zafar?

Zafar Rizvi -- Chief Executive Officer

Yeah, I think the project, which we have starting at the One Earth Energy, we estimate close to $35 million to $50 million will cost probably for one One Earth Energy's close to that number. But as our ultimate goal is to have this area which have a hub for carbon sequestration and we can bring to up from other people carbon also for sequestration but it all depends really that how this test well, will be able to define that how much carbon sequestration we can do in that particular area, which we are located.

We are very -- it looks very promising and we have great results. At this time, but I think once that well is start digging and that will define exactly how much more carbon we can bring in that area, but so preliminary somewhere $35 million to $50 million and then if this is successful, then we will -- probably we'll spend more money to have more well around that area. We have plenty land at this time and we are also trying to get more subsurface area options to use that land.

Douglas L. Bruggeman -- Chief Financial Officer

Jordan taking the optimistic case -- taking the optimistic case on this which I want you to understand that's the optimistic case. We have $219 million in cash right now. Our earnings -- our earnings are looking good this quarter with the cash and it generates a significant cash flow especially because we have tax credits.

There is the potential to maybe do and again I'm taking the optimistic case but to store if everything went perfect and we're able to get the land and get the approvals and get -- there's a lot of ifs in there, but there is a potential to the store a couple of million -- up to 2 million tons a year of CO2 in the ground or that would be our ultimate goal if everything works right and again -- keeping going on the optimistic case in the bill right now on the outside side that just passed, they're talking $80 a ton. So I don't need, and Zafar, we know there will be significant more if we're taking other people and obviously can get significantly more expense but we have the cash flow that you can figure out the numbers at $80 a ton.

We're actually able to do 2 million tons in the ground and again 1 million ifs in this and we're -- we're not the type of Company that floats our horn and say this will happen, but we are working really hard to try and make it happen. That's our goal.

Zafar Rizvi -- Chief Executive Officer

And so I think I will add to that, we also -- we have no debt. So we have $200 million cash and no debt and yeah, go ahead Stuart.

Stuart A. Rose -- Executive Chairman of the Board

I was going to say, the $200 million is on a consolidated basis, but virtually all of that is available for this project.

Jordan Levy -- Truist Securities -- Analyst

Correct. That's great insight. I appreciate the comments guys. Looking forward to hearing more as this moves on.

Operator

And our next question comes from the line of Graham Price with Raymond James. Please proceed with your question.

Graham Price -- Raymond James -- Analyst

Hi. Good and thanks for taking my question. The first one I had was on M&A. In your prepared remarks, you mentioned that you could potentially consider other types of alternative energy projects or assets. So just wanted to get a little more detail on what that could look like.

Stuart A. Rose -- Executive Chairman of the Board

Well, there's so many things in this House Bill that related to carbon capture. For example, there is a talking a large number, if you can pull carbon out of the air. No one has been able to do that. But that -- if that -- we're going to -- if you can pull out carbon out of the air, you're still going to need a place to put the carbon. And so there is just a small example of what could be and what could be done. There's people in the industry and we look at them doing other things that may be successful, may not be successful and are currently making money, but the plan is to make money, if they do make money in the industry, we could -- we could license a product. They're anxious to license that product.

So there's things out there. Many things that are potential for us, but to us, the biggest potential and the biggest and we're pretty -- we're already -- our ethanol plant carbon is already considered the cleanest CO2 coming from a plant, it's sitting right in our backyard at one of our plants. So that's what we're working toward. It's been, that's the biggest thing we're working toward.

Graham Price -- Raymond James -- Analyst

Got it. Understood. And then for my follow up, I guess, now that we're in December, it's pretty safe to say that the EPA's RVO targets won't be coming out here until after the end of the year given such a strange situation. What are your views on the legal status of RINs for 2021?

Stuart A. Rose -- Executive Chairman of the Board

Zafar?

Zafar Rizvi -- Chief Executive Officer

I think as you know that they extended -- last Thursday, I saw they extended the 2020 and '21 to the compliance year. So I think as you consider from last few days, RIN's price continue to drop and is now traded yesterday at $7, $8. So we really, it's hard to say what EPA is going to do, but at least they are not giving more exemptions and they may have extended -- let them extend it than to give them a good exemption. So that' -- so I don't know what else that I can add to it.

Graham Price -- Raymond James -- Analyst

Got it. Understood. That's it from me. Thank you for taking my questions.

Douglas L. Bruggeman -- Chief Financial Officer

Thank you. Any other questions? There is no other questions. I thank you -- oh, here's another. Go ahead. Any other questions?

Operator

No. Pardon me, sir. We have no further questions at this time.

Douglas L. Bruggeman -- Chief Financial Officer

Okay. Well, we thank everyone for listening to our call and we'll look forward to the call at the end of next, actually at the end of the fiscal year. Thank you so much. Bye.

Stuart A. Rose -- Executive Chairman of the Board

Thanks, everybody. Bye.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Douglas L. Bruggeman -- Chief Financial Officer

Zafar Rizvi -- Chief Executive Officer

Stuart A. Rose -- Executive Chairman of the Board

Jordan Levy -- Truist Securities -- Analyst

Graham Price -- Raymond James -- Analyst

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