Greetings, and welcome to the REX American Resources Fiscal 2023 Q2 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 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 Bruggeman, Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining REX American Resources fiscal 2023 Q2 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 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 Q2 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 Q2 .
SG&A increased for the Q2 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 Q2 , 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 and 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 and 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 Q2 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 plants. 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 quarter two 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 to REX shareholders of $9.1 million for this year versus $11.2 million in the prior year's Q2 . Net income per share attributable to REX shareholders was $0.52 for this year versus $0.63 in the prior year. I'll now turn the call over to Stuart for his comments.
Thank you, Doug. Earnings right now are running at a rate in the Q3 that is expected to be significantly better than last year's Q3 , or excuse me, significantly better than last year's quarter, or than the quarter that we're currently in, and significantly better than the Q3 that we're about to go into. Zafar will discuss this further. Our cash balance is approximately $284 million. Uses include short-term investments, which we expect, during the Q3 , to earn a higher rate in the Q3 than the Q2 . Ethanol expansion, which Zafar Rizvi, our CEO, will 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 are not buying back stock, but we'll buy back if we see dips. We're also big issues will also be the carbon capture 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 about 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 Q2 , which led to the quarter profit than in this Q1 2023. We are pleased with our team. They produced better results than in the previous quarter and even better than last year's Q2, after considering the total $9.4 million impact of the COVID-19 grants. According to the EIA August 23 report, ethanol stock and production dropped during the week ending August 18. 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 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 continue. Ethanol export through June 2023 was 705 million gallons compared to 828 million gallons in 2022. During the same period, ethanol export have dropped 15% since 2022. DDG export through June 2023 were 5.1 million 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 Q3 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 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 at 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, compression, and storage facility, the expansion of the One Earth Energy plant to 200 million gallons annually, and other projects related to reducing carbon intensity. We plan to build a One Earth Energy sequestration 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 2024. 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 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 permit. 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, state, and federal governments, and any delays in construction. In other update, our NuGen ethanol 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 approval 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 a 200 million gallons a year production permit. Because this is a two-step process, we have to achieve 175 and before we apply 200 million gallons. So this but the facility will be capable of producing 200 million gallons from the day one. The plant current capacity is approximately 150 million gallons a year. We also continue to evaluate other projects that would improve energy efficiency and reduce carbon intensity.
The clean fuel production credit, Section 45Z, 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 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 45Z benefits, and signed carbon offtake agreement with the pipeline companies at NuGen 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 it to significantly better in the Q3 of this year than we did in the Q3 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 among the best ethanol plants in the industry. Location is good. The crops look like they'll be pretty good, pretty good to real good this year. We were a little worried about that earlier, but things seem to have gotten better.
The biggest thing we have, as Zafar 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. 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 one, four 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 one followed by the three. Once again, to register a question, please press the one, four 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.
Hi, Jordan.
Oh, hey. Hey, Stuart. A really exciting update and a nice quarter. And just thinking about the carbon capture side of things, maybe for Zafar. 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 and 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.
I think, 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 papers, you know, documents which we provided.
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 plants to 200 million gallon. And once we expanded that 200 million gallon, if there is any delay, we will be still working on several other project, which can reduce our carbon intensity score 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 intensity reduction, which we working on different other projects.
Uh, a-absolutely.
Jordan, to answer your question a little further, a lot of johnny-come-latelies are applying. We've worked on this with the, 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, and you, you're right, we are seeing a lot of applications. But they are so far behind, we believe, where we are, and 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 it's 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 gonna approve us, but we do know that 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 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 other at this stage. So I, I'm not sure, that I can disclose that at this stage, but we certainly had total budget we estimate, because $165 million, that include the, you know, subsurface area, the well, and pipeline, about 4-5 miles, and then construction of the facility, and then, included that, to—from production from 150 to 200 million gallon. So that, that's all, all inclusive, $165 million.
Oh, okay, that, that's great. And, and just to clarify, Zafar, you, 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 tanks have already been built. So which we design is going to will be capable of producing 200 million gallon 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 and for the 200 million and we received in 2025, that will apply for the whole year, that we can produce 200 million gallon. So, so even we receive in February or March for 200 million gallon, so but that will be 200 million gallon for 2025.
Got it. Thank you all so much. I'll hop back in the queue.
The $165 million also, as Zafar 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 45Q calculations. And we are working very hard. He is working, and our company's working very hard at reducing our CO2 score.
Awesome. Thanks so much.
Thank you.
Our next question comes from Pavel Molchanov 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's now the cheapest it's been since the 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 depend, you know, ultimately the production, and then also depends, how quickly the harvest comes. And, so it-- and then if the harvest, the final results could be different than what we see it 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 the matter of supply and demand... and export. And then as you know, Ukraine and so too many international events can, change that, price of the corn.
We have seen that Brazil has producing a bumper crops, but even then their crops is, price is coming very close to the U.S., corn crops since we have a corn price, since the corn price has dropped. So this is really depend on several international matters. It's hard to say, Pavel, at this stage.
Okay. Maybe 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, you know, in terms of getting, you know, getting your capacity expanded through some asset acquisitions?
Not currently. We have in the past, and we've tried hard to get them, but currently we - I don't. 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 are 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... 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.
Yeah. I will add that, I think, Pavel, if you look at it, originally, the ethanol facility was 100 million gallon, and we have grown that our consumption from to 150 million plus, the 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 how this, what is corn's availability is from that area, and we think it's much better to grow organically than do a 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-
Hi, Chris.
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-$7. Now, it's about $4, and $3 or less. Certainly it's a major impact on P&L because that's the second highest expense we have. So certainly it's certainly is helping, and we believe that this will continue at least this year. The natural price will continue to be same or little bit better, but we cannot predict what happen in the winter season, in January, February, March, and that depends, little bit different situation can be. But through December, we feel much better. The prices will stay, you know, same or little close to, close to this, this pricing, which we have now.
Have you put a thought about potentially hedging this price and locking in these prices for the future?
We, we do, we do consider that there is a lowest price. We consider, we do buy those prices, those consumption for our ethanol facilities. We do not leave everything open. But certainly, November, January, February, March, 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, Netherlands and U.K., South Korea, and Peru. These are the top five countries which is exporting from U.S. But certainly the demand, ethanol export has dropped, as I mentioned previously.
Okay, great. Thanks for the answers.
You're welcome.
Our next question comes from David Locke 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 cost of new capacity in the industry is in terms of, call it, $ 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's 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 $2.5-$3 a gallon, but that's just an off-the-cuff estimate. It depends on the project. And we have not. 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 business right away to get 45Z credits. So there's a big advantage if there was something for sale.
But, in all honesty, everyone in the industry knows all about this. There's no secrets in the prices of... If you were to find something, the price would be pretty high.
In terms of, like, brownfield expansion, of 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 terminal loading facilities 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 in ethanol to sustainable air fuel, 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 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 discussion with several other companies who are really, you know, believe they have the technologies, and it can convert the ethanol to SAF. So we're having 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. 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 don't 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.
Oh, I just wanna 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.