Greetings, and welcome to the REX American Resources Fiscal 2023 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] 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 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 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 second quarter. SG&A increased for the second quarter 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…

Thank you, Doug. Earnings right now are running at a rate in the third quarter that is expected to be significantly better than last year's third quarter -- excuse me, significantly better than last year's quarter -- than the quarter that we're currently in and significantly better than the third quarter 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 third quarter to earn a higher rate in the third quarter than the second quarter. Ethanol expansion, which Zafar Rizvi, our CEO, will talk about later. Stock buybacks continue, but only on debts, we have not had dips recently. So at the moment, we have not bought back -- or are not buying back stock, but we'll buy back if we see dips. We're also -- biggest use 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 and 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 second quarter, which led to the quarter profit than in this first quarter 2023. We are pleased with our team. They produced better results than in the previous quarter and even better than last year's second quarter, after considering the total $9.4 million impact of the COVID-19 grants. According to the EIA August 23rd report, ethanol stock and production dropped during the week ending August 18th. We have also seen natural gas price dropped considerably which has a positive impact on our financial results. The August 11, 2023, USDA report showed 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-'24. 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 result of this -- if this continue, ethanol export through June 2023 were 705 million gallons compared to 828 million gallons in 2022. During the same period, ethanol export have dropped 15% since 2022. DDG export dropped -- DDG export through June 2023 were 5.1 million metric ton compared to 5.7 million metric ton, a decrease of approximately 584,000 metric tons compared to the…

Thank you, Zafar. In conclusion, our results again this quarter outperformed most of the industry, especially the other public companies. And going forward, during the next quarter, again we expect to do significantly better in the third quarter of this year than we did in the third quarter 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 in the -- among the best ethanol plants in the industry, location is good, the crops look like they'll be pretty good and pretty good to real good this year. We were a little worried about that earlier, but things seem to have gotten better. And the biggest thing we have, as Zafar said earlier, 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. And 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. [Operator Instructions] Our first question comes from Jordan Levy with Truist Securities. Please proceed.

Good morning, all, and thanks for the [Multiple Speakers].

Hi, Jordan.

Hey, Stuart. Really exciting updates 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 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?

Thank you. 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 documents which we provided. And 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 years to three years behind because a lot of these lead items, it takes some close to 18 to two -- 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 plant 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 projects, which can reduce our carbon intensity of the intensity score for our ethanol plant. So we will still benefit from 45Z but we may not be benefit as much as we like to have on carbon sequestration. So delay can delay there, but we still will benefit partly in early stage of 2025 from a carbon intensity reduction, which we're working on different other projects.

Absolutely. And [Multiple Speakers]

Jordan, to answer your question a little further, a lot of people of Johnny-come-latelies are applying. We've worked on this with the University of Illinois -- with the University of Illinois getting the 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 were right, we are seeing a lot of applications, but they are so far behind we believe where we are and we're so far behind that 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 going to approve us, but we do know that we've been working on 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 this, 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.

Yes. 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 us -- break that down for us and 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'm not sure that I can disclose that at this stage. But we certainly had total budget, we estimate -- $165 million that include the subsurface area, the well and pipeline for about 4 miles to 5 miles and then construction of the facility and then included that production from 150 million to 200 million gallons. So that's all inclusive, $165 million.

Okay. That's great. And just to clarify, Zafar, you mentioned this being kind of a two-step process on the plant expansion, but the $165 million would include the expansion to $200 million, even if you have to show you can run $175 million first?

That's right. Exactly. So, yes, the plant will be designed, which we already designed and some of the fermentation tanks are already been built. So which we designed is going to -- will be capable of producing 200 million gallon the day 1 when it will be in -- expansion will be completed. But the EPA required to -- from $150 million, do 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 '24, when we apply and that for the $200 million, and we received in 2025, that will apply for the whole year that we can produce 200 million gallon. So even we received in February or March for 200 million gallons, 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 45Z calculations. And we are working very hard. He is working and our company is working very hard and 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 -- 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 is 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's all depend ultimately the production and then also depends how quickly the harvest comes. And so -- 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's not going to be a 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 a matter of supply and demand and export. And then, as you know, Ukraine and so 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 -- the price is coming very close to the U.S. corn crops since we have -- corn price since the corn price has dropped. So this is really depend on several international matters. It's hard to say all 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 in terms of getting our 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, when things aren't so good, and things in the industry has certainly become much better in the last couple of 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 of 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.

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 250 million the both location from 100 million to 150 million. Now we are growing organically from 150 million 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 the -- what corns of availability from that area. And we think it's much better to grow organically than 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 to $7. Now it's about $4, and $3 or less. Suddenly, it's a major impact on P&L because that's the second highest expense we have. So certainly is helping and we believe that this will continue at least this year. The natural price will continue to be same or a little bit better, but we cannot predict what happened in the winter season in January, February, March and that depends a little bit different situation can be. But through December, we feel much better, the prices will stay same or a little close to the pricing which we have now.

Have you [indiscernible] thought about potentially hedging this price and locking in these prices for the future?

We do consider that it is the lowest price we consider, we do buy those prices -- those consumption for our ethanol facilities. We do not leave everything open. But certainly, 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 that ethanol demand is basically continuously Canada is on the top of the list. We have seen the last year -- last month, the Netherlands and UK, South Korea and Peru. These are the top five countries, which is importing 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, dollars 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 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 to $3 a gallon, but that's just 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. I don't -- the advantage of buying a plant versus building one. And I don't know if 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. If you were to find something, the price would be pretty high.

And in terms of like brownfield expansion, like along the -- along the lines of what you guys are doing moving one plant from 150 million to 200 million. Is that a lot less? Or is that sort of similarly high to that $2 kind of range?

It certainly is -- it certainly is less than $2 range because you have already lot of equipment and other loading facility is 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 points or in general, just if sustainable air fuel might sort of soak up some ethanol capacity going forward?

Yes, I think that that's the one of the other reason 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 SAF. And because every 2 gallon of ethanol produced approximately 1 gallon of SAF. So we have -- we have discussion with several other companies who are really -- believe they have technologies and they can convert the ethanol to SAF. So we have in 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 that to SAF. But there is no proven technologies at this time, which can we feel comfortable and we'll let other people to experiment. And once we know this is successful, we certainly will get into it.

That 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. And we think someone will be successful, and then we'll have the ethanol and possibly get into that business will be one of the largest producers of ethanol and we don't -- we 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.

No, I just want to 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.