10-Q: REX American Resources Reports Mixed Q3 Results Amidst Carbon Sequestration Project Progress

REX American Resources Corporation reported a decrease in net sales and revenue for the third quarter of fiscal year 2024, while making progress on its carbon sequestration and plant expansion projects.

Summary

• REX American Resources Corporation's net sales and revenue decreased by 21% in the third quarter of fiscal year 2024 compared to the same period last year, totaling $174.9 million.
• The company's ethanol revenue decreased by 19% in the third quarter due to a 21% drop in average selling price, despite a 3% increase in gallons sold.
• Dried distillers grains revenue fell by 28% due to a 25% decrease in average price and a 5% decrease in tons sold.
• Distillers corn oil revenue decreased by 31% due to a 28% drop in average price and a 3% decrease in pounds sold.
• Cost of sales decreased by 26% in the third quarter, primarily due to lower corn and natural gas prices.
• Gross profit increased slightly by $0.4 million compared to the prior year's third quarter.
• The company's income before income taxes was $39.5 million for the third quarter of fiscal year 2024, compared to $41.3 million for the same period last year.
• Net income attributable to REX common shareholders was $24.5 million for the third quarter of fiscal year 2024, compared to $26.1 million for the third quarter of fiscal year 2023.
• The company is progressing with its carbon sequestration project, having spent $52.9 million to date and committed to an additional $2.4 million.
• REX is also expanding its One Earth ethanol plant, with $50.2 million spent to date and an additional $7.4 million committed.
• The company expects total capital expenditures for these projects to be between $165 million and $175 million.
• The company had 17,567,152 shares of common stock outstanding as of December 4, 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with decreased revenue and profits but progress on strategic projects. The delays in the carbon sequestration project and the uncertainty around tax credits temper the positive aspects. The sentiment is neutral to slightly negative.

Positives

• Cost of sales decreased by 26% in the third quarter, primarily due to lower corn and natural gas prices.
• Gross profit increased slightly by $0.4 million compared to the prior year's third quarter.
• The company is making progress on its carbon sequestration project, having secured subsurface easements and nearing completion of the capture and compression facility.
• The company is also expanding its One Earth ethanol plant, with a construction permit to increase production from 150 million to 175 million gallons per year.
• The company has a strong working capital position of approximately $392.5 million.

Negatives

• Net sales and revenue decreased by 21% in the third quarter of fiscal year 2024 compared to the same period last year.
• Ethanol revenue decreased by 19% in the third quarter due to a 21% drop in average selling price.
• Dried distillers grains revenue fell by 28% due to a 25% decrease in average price and a 5% decrease in tons sold.
• Distillers corn oil revenue decreased by 31% due to a 28% drop in average price and a 3% decrease in pounds sold.
• Net income attributable to REX common shareholders decreased to $24.5 million for the third quarter of fiscal year 2024, compared to $26.1 million for the third quarter of fiscal year 2023.

Risks

• The company's ethanol operations are highly dependent on volatile commodity prices, especially for corn, ethanol, distillers grains, distillers corn oil, and natural gas.
• The carbon sequestration project is subject to regulatory approvals and may be impacted by new legislation, such as the Illinois Senate Bill 3968.
• The company's ability to obtain tax credits under the Inflation Reduction Act is subject to final guidance from the U.S. Department of the Treasury.
• The company's future operating results are difficult to predict due to the volatility of commodity prices and the relatively short duration of fixed-price contracts.
• The company is subject to ongoing legal challenges related to the EPA's handling of small refinery waivers under the Renewable Fuel Standard.

Future Outlook

The company expects total capital expenditures related to the construction at the One Earth facilities to approximate $165 million to $175 million, inclusive of the carbon sequestration project and plant capacity expansion and ongoing efforts to reduce CI scoring, which they currently plan to pay from their available cash. The company also plans to spend $25 million to $35 million during the remainder of fiscal year 2024 on these projects. The company is also investigating various uses for its excess cash and short-term investments and continues to seek investment opportunities.

Management Comments

• Management believes that any current legal proceedings will not have a material adverse effect on the company's financial condition or results of operations.
• Management is of the opinion that the company will utilize available federal deferred tax assets prior to their expiration.
• Management is closely monitoring the Illinois Senate Bill 3968 and any impact it would have on the company's carbon sequestration project.

Industry Context

The report highlights the challenges and opportunities within the ethanol industry, including the impact of commodity price volatility, regulatory changes, and the push for carbon reduction. The company's carbon sequestration project and plant expansion are aligned with industry trends towards sustainability and renewable fuels. The company is also impacted by the Renewable Fuel Standard (RFS) and the Inflation Reduction Act, which are key drivers for the ethanol industry.

Comparison to Industry Standards

• The company's ethanol production is expected to be approximately 2.9 gallons of denatured ethanol for each bushel of corn processed, which is a typical industry standard.
• The company's use of forward contracts and commodity futures to manage price risk is a common practice in the ethanol industry.
• The company's investment in carbon capture and sequestration is a leading-edge initiative, as many ethanol producers are exploring ways to reduce their carbon footprint.
• The company's focus on reducing its carbon intensity (CI) score is in line with the industry's efforts to qualify for tax credits under the Inflation Reduction Act.
• The company's financial performance is impacted by the crush spread, which is a key metric for ethanol producers, and the company's results are in line with the volatility of the market.

Related Party Transactions

• During the third quarters of fiscal years 2024 and 2023, One Earth and NuGen purchased approximately $22.7 million and $32.7 million, respectively, of corn (and other supplies) from minority equity investors and board members of those affiliates.
• During the nine months ended October 31, 2024, $1.5 million was paid to landowners who are minority equity investors of One Earth Energy, for land easements related to the carbon sequestration project.

Stakeholder Impact

• Shareholders may be concerned about the decrease in revenue and profits, but encouraged by the progress on strategic projects.
• Employees may be impacted by the company's ongoing projects and the potential for future growth.
• Customers may be affected by the company's production levels and pricing of ethanol and related products.
• Suppliers may be impacted by the company's purchasing decisions and the demand for corn and other raw materials.
• Creditors may be interested in the company's financial health and its ability to repay debts.

Next Steps

• The company will continue to work with government agencies to obtain all required permits and approvals for the carbon sequestration project.
• The company will continue construction of the capture and compression facility for the carbon sequestration project.
• The company will resubmit an application to the Illinois Commerce Commission for a certificate of authority under the CO2 Act after rules are finalized or subsequent to July 1, 2026.
• The company will continue to expand the One Earth ethanol plant and work to reduce its carbon intensity score.
• The company will continue to monitor the Illinois Senate Bill 3968 and any impact it would have on the carbon sequestration project.
• The company will continue to seek investment opportunities.

Key Dates

Keywords

ethanol, carbon sequestration, renewable fuels, commodity prices, distillers grains, distillers corn oil, Inflation Reduction Act, RFS, corn, natural gas