REX American Resources Corporation (NYSE:REX) Q2 2024 Earnings Conference Call August 27, 2024 11:00 AM ET
Company Participants
Douglas Bruggeman – CFO
Stuart Rose – Executive Chairman
Zafar Rizvi – CEO
Conference Call Participants
Jordan Levy – Truist Securities
Pavel Molchanov – Raymond James
Chris Sakai – Singular Research
Operator
Good morning, and welcome to the REX American Resources Second Quarter 2024 Conference Call. As a reminder, today’s call is being recorded. And at this time, all participants are in 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.
Douglas Bruggeman
Good morning, and thank you for joining REX American Resources Q2 2024 conference call. We’ll get to our presentation and comments momentarily, as well as your questions. But first, I will review the safe harbor disclosure. In addition to historical facts or statements of current conditions, today’s conference call contain 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 the forward-looking statements are described in today’s news announcement 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’d now like to turn the call over to our Executive Chairman, Stuart Rose.
Stuart Rose
Good morning, and thank you again to everyone for joining us.
During the second quarter, REX American Resources made excellent progress in the three goals for the remainder of the year that I laid out in our last call. As a reminder, these were to continue profitable operations, to complete the construction phase of our One Earth carbon capture and compression facility, and to complete the capacity expansion of our One Earth Energy ethanol production facility to 175 million gallons per year and move toward the planned further permitting of the facility to 200 million gallons.
To the first goal, we were entirely successful. REX had very profitable operations relative to the prior year’s comparable quarter. Our team produced strong gross margin in the second quarter, improved by 37% over the first quarter and by nearly 8% over second quarter 2023. Net income per share also improved more than 20% over the first quarter of 2024 and more than 35% over second quarter 2023.
While we have our eyes on the future, we continue to emphasize our core business of ethanol production, which has allowed us to accomplish three goals, as well as produce consistent industry-leading results for our shareholders. The success of this core business has allowed us to grow without burdening the company with any debt. Our team executes at a high level every day, and I want to say thank you to them for their efforts this quarter.
On the second goal, to complete construction, the capture and compression portion of our One Earth Energy CCS project in Gibson City, Illinois, we continue to make progress. Zafar will discuss this project in detail later in the call.
Our third goal, to complete construction of the One Earth ethanol production capacity expansion to 175 million gallons per year to prepare for further permitting production levels of 200 million gallons per year is on track for the first quarter of 2025.
This expansion will further improve our ability to realize strong returns. We are very excited for the expansion and what it means for our business. We are making progress on all of our goals and in preparing REX American to have success both now and over the long term.
I’d now like to turn things over to our CEO, Zafar Rizvi, to give further updates on our One Earth Energy CCS and ethanol production capacity expansion projects.
Zafar Rizvi
Thanks, Stuart.
Our carbon capture and sequestration project in Gibson City, Illinois continue to progress. You can see updated picture of the carbon capture and compression portion of the facility in our second quarter investor presentation, which was posted to our website this morning.
Due to regulatory action by the state of Illinois, which is in July imposed a moratorium on the construction of CO2 pipelines, we have adjusted our construction schedule for the initial portion of the project. We believe this is the most prudent path from both on operational and financial prospects.
Operationally, completing the capture and compression facility later in the year will mean a shorter period between completion of the construction and testing of the portion of the facility, which will require utility interconnection that is planned to be completed by the end of the first quarter of 2025.
From a budgetary perspective, taking a more measured approach to construction allow us to more closely monitor our spending without incurring potential extra cost to meet the accelerated deadline. Given the new permitting reality, we are confident that pursuing the several ongoing portion of this project in this way is the right path.
While pipeline permitting in Illinois is being worked out, our Class VI injection well permit application with U.S. EPA is still in process. And we anticipate a draft permit being issued by 2024 under year-end. On the timeline currently estimated by the EPA itself, we would then anticipate final approval of the project in the second quarter of 2025.
As a reminder, as of last quarter, REX had secured easement for enough of the subsurface area to allow us the capacity to sequester all of our carbon emission from the One Earth Energy plant for the next 15 years, and also secured easement from our neighbor farmers for well number one and two, which will allow us to completely avoid the use of eminent domain in eventual construction of our carbon delivery pipeline.
The expansion of our One Earth Energy ethanol facility to 175 million gallons per year of production is on track for completion in the first quarter of 2025. Final testing and commissioning depends on the completion of the electric interconnection from our local utility. After necessary emission certification from the increased production levels, we then expect to begin the planned further permitting of the One Earth ethanol facility to allow it to produce 200 million gallons per year.
This additional permitting is the only step necessary to allow for the expanded capacity to 200 million gallons as no additional construction or capital spending is expected. This [25] and eventual 50 million gallons per year expansion in production capacity added on to our current highly efficient and profitable facility we expect will enable us to expand our already stand-out profitability in our core ethanol business line.
As of quarter-end, we have invested approximately $91 million into the One Earth carbon capture project and associated ethanol production capacity expansion. Spending for the carbon capture and sequestration project stood at $49.1 million as of second quarter end, while expenditure on the ethanol expansion stood at $41.7 million as of the same date. This is compared to total combined budget amount of $165 million to $175 million for both the CCS project and ethanol production expansion at Gibson City.
I would now like to hand the call to our CFO, Doug Bruggeman, to discuss our operational and financial results. Doug?
Douglas Bruggeman
Thanks, Zafar.
I’ll begin with our operational results. REX ethanol sales volume during the second quarter 2024 were 65.1 million gallons, a reduction of approximately 6% versus second quarter 2023 sales volume of 69.1 million gallons. Average selling price for our consolidated ethanol volumes was $1.79 per gallon for the second quarter, compared to $2.42 per gallon in the second quarter of 2023.
Dry distillers grain sales volume during the second quarter of 2024 totaled 132,850 tons, a 6% decrease over second quarter 2023 volumes. Average selling price for DDGs were $164.45 per ton for the second quarter 2024, compared to $226.48 per ton in the second quarter of 2023.
Modified distiller grain sales volumes were 17,650 tons in the second quarter 2024, compared with approximately 10,600 tons in the second quarter of 2023. Average selling price for modified distiller grain was $63.61 per ton for the second quarter. The average selling price for the modified distilled grain in the second quarter of 2023 was approximately $103.
Corn oil sales volumes in the second quarter 2024 were approximately 20.2 million pounds compared to 20.7 million pounds sold in the second quarter of 2023. The average selling price for REX’s corn oil product was $0.43 per pound for the second quarter 2024 compared to $0.55 per pound in the second quarter of 2023.
Gross profit for the second quarter 2024 was $19.8 million versus gross profit of approximately $18.4 million for the second quarter of 2023. The 8% increase in gross profit was achieved despite lower average selling prices for all products, which was more than offset by lower corn and natural gas input prices.
Our selling, general and administrative expenses decreased to $6.4 million for the second quarter of 2024 versus $8.6 million in the second quarter of 2023. The decrease was primarily due to the expensing of executive stock grants in the prior year, which did not recur this year.
Interest and other income totaled $4.4 million in the second quarter of 2024, compared with approximately $3.3 million for the second quarter of 2023. This reflects higher balances and better earnings on our cash and short-term investments. Income before taxes and non-controlling interest for the second quarter of 2024 was approximately $19.5 million, an increase of more than 21% over the second quarter of 2023.
Net income attributable to REX shareholders for the second quarter was $12.4 million compared to $9.1 million in the second quarter of 2023. On a per share diluted basis for the second quarter 2024, this amounts to $0.70 per share of net income compared to $0.52 per share in the second quarter of 2023.
We ended the second quarter with total cash, cash equivalents and short-term investments of $346 million, compared with $378.7 million as of January 31, 2024. The uses of cash during the first half were primarily related to our ongoing construction projects at the One Earth Energy facility. REX American also ended the quarter without any bank debt.
I’d now like to turn the call back to Zafar.
Zafar Rizvi
Thank you, Doug.
I would now like to give some color around how we see market progressing through the remainder of the year. For the third quarter, we are off to a strong start and we expect to see the same corn market drivers that were supportive to this point in the year continue to play out. With this, we expect to see the result of the third quarter exceeds those of the second quarter of this year.
Additionally, we believe increase in ethanol per export, which on a volume basis, was 36.5% higher through June than at the same point last year, according to the USDA, have had a positive impact across the industry.
As far as corn inputs at the current time, we are looking toward harvest and what is expected to be a bumper crop. For corn in the Midwest, crop condition near our two consolidated plants are expected to be strong. We are anticipating the robust harvest coupled with the current corn in the farm inventories will lead to a continued favorable corn input pricing.
Above all, we have focused on profitability over product pricing or production numbers, as evidenced by our improved gross margin performance this quarter, despite lower ethanol pricing and volume sold. It is this focus and the people in our plants who live it every day that continue to make us the successful, profitable company we are.
Now I would like to open things up to the questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Jordan Levy with Truist Securities. Please proceed with your question.
Jordan Levy
Morning all, and thanks for all the updates. I just wanted to talk first on the carbon capture sequestration side of things. You guys did a good job calling out in the press release kind of the various external forces that you have to think through when you’re going through this process, but maybe just help us think about in the event and in the time frame that assuming you do get the permit approval that you need, can you just talk to the timeline around the build out of the pipeline and then any remaining necessary equipment at that point?
Stuart Rose
Zafar?
Zafar Rizvi
Yes, I think if you look at that information, which we provided, the EPA permit is expected to be in — sometime in second quarter of 2025. But in the meantime, our construction is in a full swing. We are already taking care of it. Carbon sequestration facility, which will be ready by the end of this year, depending on the utility connection, interconnection with — to provide that utility to the CCS and also to ethanol facility.
So once we have this utility received and then construction of the One Earth Energy ethanol facility is completed, we’re going to concentrate on ethanol facilities to restart as soon as possible. As you know, One Earth Energy has produced over the last 15 years, I can say with confidence, no — not a single year they lost that money. And that ethanol location is very important to us and that facility will produce much better profit moving forward once we complete that facility.
And the second, we will certainly continue to do construction work and try to reach as soon as possible when we receive all these permits and then ICC permit and other permits as we received and construction will be completed. And once the electric connection is connected, we will start the testing.
So I will say sometime probably once we receive the permit from EPA, we will start the construction of the well. So we will say probably sometime August or September next year we should be in operation. But that’s just expected to depending on all of those permits we receive. Otherwise, we are waiting for all those permits. So — but it depends on the permits, but facilities…
Stuart Rose
Jordan, to further answer your question, the biggest delay is in receiving permits. We call it a pipeline, but it’s really just a three, four mile connector, the pipe itself. But we have to wait for Illinois to give us a permit on that, which is not — which is not easy, but building the pipeline and building the whole itself are not nearly as time consuming as waiting for these permits. And that’s, I think was your question is once we get the permits, how long will it take? That will not be nearly as long as waiting for the permits. And Zafar gave you a pretty good time schedule of that.
Jordan Levy
Yes. Absolutely. I appreciate all those details and certainly you all have done an impressive job of how much you’ve been able to get done on your own. And now just waiting on the pipelines. And maybe just a clarifying question once you on the…
Stuart Rose
The pipeline may not be the — there’s more than the pipeline. We’re also waiting on the EPA, which is…
Zafar Rizvi
Yes. EPA permits – exactly.
Stuart Rose
And a lot of local permits too. There’s lots of permits involved there.
Zafar Rizvi
But I think the main thing which I really wanted to emphasize is ethanol facility itself does not need any pipeline. And we are in a full swing on the construction of the ethanol facilities from 150 million to 175 million and then move toward to 200 million gallon facility. And that should be completed by the first quarter of 2025 depending on utility providing the electric connections.
So once that facility is completed, we will be able to produce ethanol at that kind of rate. And also, as you know, our core business is very important to us and we have produced great results on our core business. And One Earth Energy is the star student of our — all of our facilities. And we hope that will continue to produce that profit as it produced from the last 15 years.
Stuart Rose
One other thing that Zafar is not mentioning, Jordan, is we hope that with — and we’re — it’s our hope and our plans that the construction to expand our plants will also lower our CI score. We have not been told how to measure CI score exactly by the federal government, but depending on how they measure it, we hope that that in itself will lower our CI score, the construction.
Jordan Levy
Yes, that’s actually a good segue to my follow-up question, which is just going to be Stuart, Zafar, your thoughts going into the election with kind of some of the main guidance items still outstanding for as it relates to CCUS and ethanol. Just wanted to get your high level thoughts there.
Stuart Rose
My opinion is it’s a bipartisan. CC, carbon capture was a bipartisan issue. And I don’t think that one party or the other will do — will affect the current law. What happens if there are some proposals out there to extend certain things and that may be affected by one party or the other? I think it’s a good thing the Democrats nominated a Minnesota person for Vice President. He certainly is from a farm state, from an ethanol state and understands the issue. But otherwise, I don’t think that it really one party or the other is really taking a firm stand on expanding the CCS tax credit amounts that are out there.
Jordan Levy
Absolutely. Thank you all so much, and nice job with the continued strong results.
Stuart Rose
Thank you, Jordan.
Operator
Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.
Stuart Rose
Hi, Pavel.
Pavel Molchanov
Thanks for taking the question. So even with our — I suppose particularly with the slowdown in carbon capture construction, you are going to be stockpiling even more cash on the balance sheet beyond the sizable amount that you already have. What is the kind of allocation? What’s the current priority for using the $350 million of cash that you already have and even more that you’re going to be putting on?
Stuart Rose
First priority is the carbon capture and expansion of the Gibson City plant. Second priority is possibly looking at expansion of our South Dakota plant. That’s a possibility, especially if we can lower our carbon capture score and get some tax credits. That would be a possibility. We’re always looking for acquisitions.
We’ve looked at a couple this year. They weren’t for us, but you never know what’s going to come up. We would consider stuff related to the tax credits and related to energy outside of ethanol, but nothing’s come along that we think is better than ethanol. So we stuck to our field.
And the last thing that we’ve been really good at over the years, and you never know where the stock market is. We didn’t buy shares this quarter. But over the years, we’re probably the buyback kings and percentage of shares bought back.
And we’re really, really — we know what we’re doing there. And we buy on dips, which is important. We don’t just buy to lower the share count. We don’t buy at the stock highs. We buy low to protect our shareholders when the stock’s down. And that’s been very, very successful. That’s been very successful strategy for us. And that’s still there. We still have buyback authorization, but we have not used it — we did not use it in the last quarter.
Pavel Molchanov
What’s the latest on your thinking about sustainable aviation fuel?
Stuart Rose
Zafar?
Zafar Rizvi
I think for that, we have to have low carbon at fuel produced. We believe that we certainly will need carbon sequestration for that location. And also, as you know, there’s no clear guideline for 45Z at this time. So once the 45Z clearly guideline is issued, then we can certainly can look into it. But at this time, we certainly believe that we need to further reduce our CI score, so that we can qualify for 45Z tax credit and then move — and then move toward to SAF.
Pavel Molchanov
Got it. Thank you very much.
Stuart Rose
Thanks, Pavel. Thank you.
Operator
Thank you. Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.
Chris Sakai
Hi. I have a question on capital expenditures. How are you doing compared to your budget — budgeted amount for capital expenditures?
Stuart Rose
Zafar?
Zafar Rizvi
I think we — at this time, we are right on track.
Chris Sakai
Are you seeing any possible need for more to spend more there?
Zafar Rizvi
No, not at this time, but as you know, it depends on inflation factor in the future. But at this time, we do not see any major increase. The main things we have seen is delay in receiving lot of equipments and components of electric components that is causing some delay of our completion of these facilities. But we are overall right on budget.
Chris Sakai
Okay, thanks. And then have you seen any weather-related issues over the last quarter?
Zafar Rizvi
No, we have not seen any major weather-related issue. There was some issue in the South Dakota area where there was a heavy rain and there was some railroad track washed out for few days, but not a major problem.
Stuart Rose
We are expecting very good crops this year.
Zafar Rizvi
Correct. Yes, the crops is very — expected very good, not only in Illinois, Illinois is expecting the bumper crops which will be record crops this year. And the same time, South Dakota is 73% to excellent to good crops, which is also near-record crops for that area.
Chris Sakai
Okay, great. Thanks.
Stuart Rose
Thank you, Chris.
Operator
Thank you. Our next question comes from the line of Jordan Levy with Truist Securities. Please proceed with your question.
Jordan Levy
Hi, guys. Just a follow up for me. Zafar, I think you mentioned or Stuart, maybe it was you on Pavel’s question, the potential for a NuGen expansion at some point in the future. Maybe just talk to what you need to see whether it relates to Summit or something else there in order to kind of warrant that investment.
Stuart Rose
At this time, Summit, the investment would not be because of the Summit pipeline. It may be later, but at this time, South Dakota has, in my opinion, this is my opinion, some eminent domain issues. And so if we were to invest in the next year, it would not.
Being in the Summit pipeline will be an advantage, we hope, someday. But we would just do it because it would be more efficient to have a larger plant. And if the corn supports it, we would consider it. So that’s the biggest issue is always corn, whether a bigger plant would raise the corn prices. So we have to be very careful on that.
The third thing is, we do not have the 45Z regulations, but if we can lower our CI score below 50, there are some tax credits involved. So simultaneously, as we did in One Earth, we will — if we do invest to make and expand that plant, we will make sure that we’re doing it to bring our CI score or try our best to bring our CI score down at the same time.
Again, we don’t know the regulations. They’ve not come out of what even defines your CI score. But that would be — the bigger goal is just bring it down and maybe get it below 50 without the pipeline. And then when the pipeline comes in, we would probably qualify for — and if it ever — and when it does start capturing our CI too, we would follow — we would qualify for 45Q or 45Z.
Jordan Levy
Thank you, Stuart.
Operator
Thank you. And 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
All right. I’d like to thank everyone for listening again. Corn crops are good right now. As Zafar said, we’re running at a rate currently better than the second quarter. Things seem to be going moving along with our carbon capture project. We have great plants, great locations, but the biggest thing that we have and the reason we’re doing we’re ahead of most people in carbon capture and doing better than virtually everyone in ethanol is we feel we have the best people in the industry, and that includes our CEO, and it includes the people that work for them all the way down the line. And we have very, very good people. And that’s really what separates us.
Again, thank you for listening, and we’ll talk to everyone next quarter. Bye.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. We thank you for your participation.
