Presentation:.

Greetings, and welcome to the REX American Resources Fiscal 2022 Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Tuesday August 30, 2022.

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

Good morning, and thank you for joining REX American Resources fiscal 2022 second 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 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 second quarter increased by 23% as we experienced higher pricing for ethanol, distiller grains and corn oil.

Ethanol sales for the quarter were based upon 71.4 million gallons this year versus 69 million last year. We reported gross profit of $16.6 million this year versus a gross profit of $14.2 million in the prior year. For the current year quarter, improved selling prices were offset by higher corn and natural gas pricing.

Ethanol pricing improved by 20%, dried distiller grains improved by 21%, and corn oil pricing improved by 53% for this year's quarter over the prior year's second quarter.

Corn cost increased by 21% and natural gas pricing increased by 113% for this year's quarter compared to the prior year as inflationary pressures and the impact on commodity pricing from the Ukraine-Russia conflict continued.

Gross profit comparison between years also benefited slightly from fewer ethanol contracts, sold net of freight in the current year, which leads to higher sales.

SG&A increased for the second quarter to $9.1 million from $6.2 million in the prior year, $1.1 million of the increase is due to the increase in the number of ethanol contracts that require the freight to be paid by us compared to the prior year and approximately 900,000 from increased incentive compensation.

We had income of $3.6 million from our unconsolidated equity investment in this year's second quarter versus income of $1.8 million in the prior year. The majority of the increase was a result of funds they received from the COVID-19 relief grants from the USDA.

The company's interest and other income in the current year includes approximately $7.8 million of income from COVID-19 relief grants. The consolidated plans also received from the USDA in May. The discontinued operations reflected in the prior year numbers are from the refined coal business, as we ended those operations on November 18, 2021.

There was no impact in the current year. We reported a tax provision from continuing operations of $4.3 million for this year versus the provision of $1.8 million in the prior year, primarily reflecting the higher level of income in the current year.

These factors led to net income attributable to REX shareholders from continuing operations of $11.2 million for this year's second quarter versus $5.7 million in the prior year.

Total net income per share from continuing and discontinued operations attributable to REX shareholders was $0.63 for this year's second quarter versus $0.44 in the prior year. I would like to point out all outstanding shares for all periods have been retroactively adjusted to reflect the recent 3-for-1 common stock split.

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

Thank you, Doug. Continuing into the current quarter, we continue -- so far this quarter to be profitable. There are challenges in the Ethanol business, which Zafar Rizvi will discuss in his section.

Our carbon capture project continues -- we see very good news with the Inflation Reduction Act continue to work hard on that again Zafar will discuss that in his section. In terms of consolidated funds, we have cash of over $245 million. Our cash flow has significantly helped by the carryforward of tax credits previously earned.

We continue to use that cash for our buyback We buyback on dips. We bought 221,883 shares on a split adjusted basis during the last quarter. We continue to look for a profitable alternative energy possibilities. We're currently studying Inflation Reduction Act to see if there's anything new, then there might be an opportunity for our company.

Again, we're always looking for ethanol plants, but nothing is imminent. We have not found anything. At this point in time, that would really work for us. In terms of our cash, we're now able to invest it at a much higher rate than before between 2% and 4%, which -- versus virtually zero the year before.

So that should help with our current cash position that should help our income over the next few (ph) quarters. I'll now turn the call over to Zafar to talk about ethanol and carbon capture. Thank you..

Good morning. Thank you, Stuart. As I mentioned in our previous quarterly call, the operating environment in the beginning of the second quarter of 2022 has been some improvement. However, since then, it has been challenging for a number of reasons, including serious logistic problems caused by railroad that resulted in delay of shipment.

With an increase in inventory, we had no choice, but to slowdown of the plant's production. We are also seeing an increase in the price of corn greater than the type ethanol price. On top of that high price of natural gas is also negatively affecting the profit margin and production.

The USDA estimates 0.9% less yield and 5% less production of corn this year compared to ’21, ‘22. Crop year (ph) and approximately 20% of the corn production is within area experiencing drought.

The USDA corn report this week showed 39% of Nebraska, 51% of South Dakota and 69% of Illinois corn and 54% total corn production are rated good to excellent this year. However, even the Illinois expected to yield less corn this year compared to last year.

On the bright side, ethanol sales and DDG export have increased compared to last year through June 2022. And the non-food corn oil price continue to increase and is expected to increase more. Despite the challenges, at this very early stage of the third quarter, as Stuart mentioned, we expect the quarter probably will be profitable.

As I mentioned in our previous call, we are also evaluating several other projects that would increase production, efficiency and energy saving as well as reduced water consumption. Some of the small projects, we were able to complete and some of them is expected to complete in the third quarter.

We are still in the process of analyzing capital intensive projects before they can be undertaken and implemented. All of these projects are in a very early stage and may not materialized. Let me share progress of our carbon sequestration project.

As I mentioned in previous call, we are working with the University of Illinois on drilling a carbon sequestration well. The first test well at One Earth Energy was successfully drilled with total depth of around 7,100 feet with almost 2,000 feet of Mount Simon sandstone was incurred.

The geological models are predicting the movement of CO2 injection into the subsurface is complete. The rare core (ph) analysis and well logged (ph) indicate very good reservoir quality and well tests are being performed to further support this data.

The well tests include performing water injection test in the well itself to evaluate the expected movement of CO2 as well as expected plume area and storage capacity under the subsurface area.

The water injection will also tell us more about the reservoir and we are testing an additional backup storage zone, in case it is ever needed for more capacity. This can take a week or sometimes longer than that.

The 3D seismic process is expected to be completed by the end of August, design of the compressor facility and the bidding process are complete. We are in the process of removing contracts. The Class 6 permit documents are near final draft stage and status and are expected to be completed very soon.

The EPA require extensive support documents and complete analysis before granting a Class 6 permit. Our goal is to provide all documents and information with the application. We will continue to evaluate further as we make progress and decide the injection well location.

Once again, this is a highly technical and time consuming project and it will take time to make material progress. We cannot yet predict as a result of the simulation models and whether we will be successful or not.

In summary, we are pleased to announce once again a profitable quarter in very, very difficult environment, as well as progress successful progress with our carbon sequestration project. We are very appreciated and thankful for the hard work of our colleagues on achieving these results. I will hand over to Stuart for further comments. Thanks, Stuart..

Thank you, Zafar. In conclusion, we were helped this quarter by both direct funds from the government and the Inflation Reduction Act, which should help us with our carbon capture project, if assuming we can get permitted and get it built.

But most importantly, we performed among the best plants in the country and again it's because we have good locations -- good plants, good locations, good -- generally good corn areas.

But the greatest asset we have and it's going to help us with everything we have going forward is we feel that we have the best people in the industry and we think that's a real reason why we outperform the industry than significantly better than the industry over the life of the plants. I'll now leave the forum open to questions. Operator Thank you.

[Operator Instructions] And our first question is from the line of Jordan Levy with Truist Securities. Please go ahead..

Hi, Jordan..

Hi, Stuart. Congratulations on a good quarter and also been you -- what seems like pricing progress on the capture side of things. Maybe we could just start off there. Stuart, you mentioned the Inflation Reduction Act and some of the positive read throughs there.

Maybe can (ph) you just talk to the increase in Section 45Q as it relates to your carbon capture project. It's been, I think, a little while since we kind of walk through the potential economics at One Earth with the CO2 emissions there.

So maybe if we could just walk through kind of the potential benefits there?.

The new bill calls previously we were to receive in 2025 I believe it is, $50 a ton in credits and now per ton and now it's about $85 per ton for any carbon we capture in the ground that stays in the ground. In terms of the economics, I'll have Zafar go over that.

But again, we -- once we get the hole completed, we're not just trying to capture our carbon. We will look to -- we're designing the hole to be bigger than just us. We don't make that clear. So we don't have any contract signed with anyone else, but we're definitely designing the hole to capture more carbon than what we can produce.

And we believe that the hole is the most important part and that finding people who are willing to sell carbon will not be as hard as building this hole and that's been the bulk of our efforts. Zafar, do you want to go over economics or….

I can talk briefly as you know, Jordan. If we were able to -- we didn't put the final numbers yet because we are certainly evaluating the total cost of the compressor machine, compressor facility and also to build in and other well factors, which we're looking at it.

But if we were profitable, which we think at that time and we did the last forecast with a $50, we believe we certainly will be profitable at this stage with the $85.

The one thing is certainly open up for us that we can afford to bring or other people can afford to transport by rail or by truck and others to our facility, which as Stuart mentioned, that we will have more capacity for the well than we can really need for our own ethanol facilities.

So we will be able to -- hopefully able to bring from other facilities are able to transport from other area instead of taking so long to build the pipeline $3 billion to $4 billion and go through the whole process. So that certainly will also help us and to increase our capacity for the well -- for the sequestration.

But we certainly think that it will be better to have $85 and $85 can be also in cash for the first five years compared to $50 tax credit. So that will also will be very helpful..

Thanks for that. And maybe just along that line of questioning, just -- so it seems like everything you're doing right now is to get all documentation in order to submit to the EPA for the permit.

I guess maybe do you have a sense on what that timing is looking like at the EPA level or what we should kind of expect over the next few quarters in terms of updates on that project?.

I think as we have pre-built some of this discussion with them, EPA takes somewhere a year to 18 months. But we have -- we are working with the people who have previously submitted these kind of permits.

And if that's the reason we're taking everything practically possible to have document every single thing, including any financial guarantees or whichever they are acquired. So that way, EPA does not delay for asking for the application or for the papers or for the other further documents.

As you know, once you submit this application, then if it's not complete, then EPA can call you for after three or four months and says, I need this document. So you will submit that document, so then they'll start reviewing that document. It takes longer to -- then they read the conclusion.

So our goal is to submit it with all documents as we have seen previously, they asked before we really submit the application. So we are in a final process and we hope that we will submit it by the end of the September or not if middle of September..

Got you. That's all. That makes sense. Moving over to the ethanol side, maybe for Zafar, you all talked to kind of an increase in 2Q, an increase in the number of contracts where you all were responsible for covering freight and Zafar you also talked about just the ongoing logistical challenges with rail delays and that sort of thing.

Maybe if we could just dive in a little deeper on the logistical challenges that are going on and anything that can be done to kind of mitigate any of that?.

I think I'm going to speak generally not specifically each location. but I think what we're finding is that is railroad really is not functioning properly. They certainly, we have seen in some cases that we -- train is ready to pick up. And they're supposed to pick up on Friday, but they will not be there up to next Friday and even Sunday.

So they are delaying seven, seven, eight, eight, nine, nine days. And so I think basically what they are continuously telling us that they have shortage of crews and workers and they cannot find drivers and that causing the further delay.

And I think one thing which I really is carrying stressing in other people that as long as railroad has semi monopoly that nobody has come to their track unless they pay a huge switching fee as President Biden said previously that switching fee is causing delays and transportation problems unless really Federal Government look at growth closely to eliminate a limited switching fee and that every freight company, railroad company to switch each other and pay the freight and they will easily switch the track without any extra charges.

I think that will certainly will increase logistics problems that it will save a lot of hassle because now we are dependent only on rail road. If they don't have drivers, then we stuck. But we don't have any choice to call somebody else to come and pick up our freight and loaded cars and that certainly is a major problem..

Got it. No, I really appreciate the color. I'll leave it at that..

Thank you, Jordan..

Our next question comes from the line of Pavel Molchanov with Raymond James. Please go ahead..

Thanks for taking the question. So first, you talk about being interested in acquiring some ethanol plants. Given all the craziness in the ethanol market in the last 2.5 years, right, with prices as well as feedstock going from record lows to record highs and everything in between.

What is the valuation landscape looking like for existing plants?.

Well, to build a new plant would be well in excess of 200 -- probably today in excess of $225 million. There is no good plants up for sale right now. There's a lot of bad plants. We sold the plant many years ago, 100 million gallon plant for about -- we didn't own it all. We owned about 25% for about $200 million.

And I would say, most of the ethanol plants, ethanol is a unique industry, at the moment the government favors it and it's one of the few that admits pretty much pure CO2 which that's easily captured.

So we think most people and with $85 that could be a huge amount money for the people that actually have the carbon capture, but it can also mean money for any ethanol plant because they can sell their CO2 now. So it's a new a new revenue stream. So I think there's excitement in the industry.

I don't think any of the really good plants would sell for less than -- we have not seen any recently that would sell -- that I know of that would sell for less than replacement value or less built in a new plant in the years past, there have been some and we tried to buy some unfortunately where we've been out there.

But in last year that we tried to buy, but they have been out there. But today, I know nothing that's out there. And I think it is the excitement of carbon capture..

Right. Okay. So in that context, given that you ventured into carbon capture.

I'm curious, do you have any interest in getting into RNG production, landfill or dairy gas?.

No, not at this time. Nothing is impossible, but we have looked at it. And it's -- nothing is impossible, but at this time and I've spent over the years a lot of time looking at landfill gas and it's -- today because of the government what -- because of the new regulations. It's a different business.

I would just say it's something where among many, many things we're studying related to the new act. But at this right time, we have no -- nothing imminent and nothing -- no plans and nothing to -- nothing other than study in that industry. And it's no different than any others to us at this point in time..

And along those lines with carbon credit pricing in Europe is close to EUR100 a ton now, which is a lot higher than the subsidies given domestically through Section 45Q.

With that in mind, would you consider looking at carbon capture projects somewhere in the European Union?.

Sure. We'd look at anything, it’s a carbon capture that's going to be a big part of our business..

Understood. Thank you, guys..

Thanks..

Our next question is from the line of Chris Sakai with Singular Research. Please go ahead..

Hi. Good morning..

Hi, Chris..

Can you talk more about The Inflation Reduction Act, how is -- when are you going to see benefits from that? And can you quantify how much benefits you'll see..

Zafar?.

I think as I mentioned earlier, specifically at this time, we're looking at the carbon sequestration. There is so many other things are really benefits with maybe some people are looking solar, some other projects which can energy saving projects and other which can have generate a lot of tax credit and other.

But specifically looking at it, carbon sequestration, as I mentioned earlier, $50 tax credit, we were still -- when we original projection, we looked at it, we were profitable and now is $85 and that will be -- certainly will help us to get more profitable.

As Stuart earlier mentioned, our well is also capable of taking more carbon than we can really do the carbon sequestration from our ethanol facility alone. So $85 make is easier for us to also bring it by rail or by truck or from other locations closer to us and still will be a profitable of those projects.

So certainly, there is a positive impact on that tax reduction credit (ph) legislation..

All right. Thanks.

And then can you talk about -- are you guys seeing any more gas stations offering E15? How that's going?.

Let me say that, I was in a meeting, we have meeting with agriculture secretary with [indiscernible], I think this Monday. Yeah. Exactly. Yeah, last week Monday and he announced their $100 million for E15 structure bills and other things.

So certainly we have seen some of those in own growers, states like Iowa, Nebraska, even some part of Illinois, even Indiana, we have seen more and more people are offering E15 and IY is also offering more tax credit and even Illinois is offering more tax credit to have encourage E15 pumps more.

And it's certainly helping us lift some this year as it continue. Unless this E15 is available all year round then it becomes difficult. But if it's all year around and certainly it will grow more. And with this $100 million of which is the agriculture secretary announced it's going to help us also..

Okay. Thanks..

Thank you..

And there are no further questions on the phone lines at this time. I'll turn the presentation back to the speakers..

Okay. Thank you. We'd like to thank everyone for listening and then we'll talk to you again the end of this -- we'll report the end of this quarter. Thank you very much. Bye..

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..