REX American Resources Corp (REX) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the REX American Resources second quarter results conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr.

Doug Bruggeman, Chief Financial Officer at REX American Resources.

Please go ahead, sir.

Good morning, and thank you for joining us.

This is the REX American Resources fiscal 2010 second quarter conference call.

We'll get to our presentation and comments momentarily, as well as a 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 risk and uncertainties within the meanings 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 risk 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 report on Form 10-K and 10-Q.

REX assumes no obligation to publicly update or revise any forward-looking statements.

With that, I'd like to turn the call over to Stuart Rose, Chairman of the Board.

Thank you.

Thank you, and thank you for listening, everyone.

Our earnings for the quarter were $0.12 versus $0.09.

Reported sales for the quarter, $65.1 million versus $17.1 million a year ago during the corresponding quarter.

The key number that I want to point out is income from Continuing Operations before provisions for income taxes, Discontinued Operations and losses on derivatives.

Our non-cash losses on derivatives was $2.671 million, versus a $980,000 loss a year ago.

In terms of how our plants are operating, One Earth, a plant we have majority control in, Gibson City, Illinois, is in my opinion one of the best plants in the United States through its vacant build.

Good ethanol market, good DDG market, good rail access, and good corn supply, and that plant continues to do very, very well.

And again, I reiterate, it's in my opinion one of the best in the industry.

Our challenge plant right now that we have control of is in Levelland, Texas.

It is a good ethanol market, good DDG market, but during certain times of the year, it's very difficult to get corn in this plant's case.

Sorghum -- we remain sorghum challenged in that plant.

With harvest coming on in the next month or so, we hope to put together a plan that will better take advantage of the harvest and allow us to do better next year.

But it has been a tough plant for us.

The 1800 and 7800 -- 78,000 derivative losses -- again, it's a non-cash charge.

It's related to interest rate swaps.

And as interest rates have come down, we have had to take a charge in that area.

But it's not cash related.

Should come back in the way of lower interest rates, or if interest rates go up, it should come back that way.

It's not a cash charge for us.

The plants we have minority interest, we made $1.83 million this year, versus $184,000 last year.

All of them are very similar, vacant build, have good rail, good ethanol markets, and they continue to do well.

We've added one new plant this quarter -- a minority interest in one new plant -- NuGen in South Dakota, Marion, South Dakota.

Again, it's a similar plant -- 100 million gallon vacant capacity, great corn supply, and we're using our expertise in selling the ethanol, selling the DDG to work to improve the margins in that plant.

We have great hopes on that plant in the next -- for the next year going forward, and we're already seeing what we feel is some improvement.

And again, it was a good plant, built right, built in the right place, and the plant we know very well.

Going forward, the industry is going through some interesting times.

We're in danger of losing the tax credit that goes to the refiners.

If that happens, then our customers will lose a little bit of the profits they make on the product.

Or I shouldn't say a little bit.

A lot of the profit they make on the product today.

Anything that hurts our customers' profitability, we worry about.

And although we've never received great credit for this blenders' credit, if it does go away, we're fearful that it will hurt our customers and hurt our market.

On the other side, the flip side, we're hopeful and expect a decision this -- during the fall, going up to E12 and E15.

If that happens, then it's our hope that demand for our product will expand and give us a chance to sell a little or give the market a little bit -- or make it a little bit bigger market, which should help demand, especially when the refiners can make money.

In terms of our cash right now, we have $74 million outside of the ethanol plants that can be used for anything we choose.

We're currently using it for stock buybacks.

We've used it -- we bought back 187,000 during the quarter, another 142,000 since the quarter, have 151,000 open to buy.

We've also used that money for acquisitions.

We used it for our purchase of NuGen.

Again, we look for acquisitions that allow for low risk on the cash side but high return to our shareholders.

We think we might have found that in NuGen, if we can make money.

We have the chance to leverage our investment into a large return on investment.

Also, with the weakening of ethanol stocks and ethanol and the public's perception of the ethanol industry, we think there might be a chance to have other opportunities and again, we're always looking for those other opportunities.

Outside of the ethanol field, again, if we found something that takes advantage of our expertise and we feel, in terms of controlling costs, in terms of running and building major plants, we've done very well.

If we can find other things in our area where we can use some of our expertise that offer a low-risk, high-return possibilities, we would be very interested in -- we're very interested in at least looking at those opportunities and potentially using some of our money to explore that.

In conclusion, the ethanol industry is going through some interesting short-term and challenging short-term times.

Crush spreads are not that bad right now.

We're making -- this quarter that we're in currently looks very similar to the last quarter.

Fourth quarter should be fine.

First quarter, I worry about next year, when the blenders' credit potentially goes away If there's no legislation to save it.

E12, E15 could be good for us, but again, all these uncertainties make for a difficult industry.

In the long term, we have some of the best plants in the industry, some of the best management in the industry.

A lot of our competition over the years has gone bankrupt.

We probably have been doing this now as long as anyone and feel comfortable in the industry.

I think we're well-positioned and well-capitalized to do extremely well over the long haul.

Thank you.

I'd now like to leave it open for questions.

Thank you.

(Operator Instructions)

Our first question is from the line of Bernard Rabinowitz with Morgan Stanley.

Please proceed with your question.

Yes.

Hi, Stuart.

Hi, Bernie.

How are you?

I'm good.

I know you can't really handicap what Congress is going to do, and I know there's a lot of uncertainty.

Anyway, with the election coming up.

But what's the buzz with regard to the two issues that you talked about -- the one, the tax benefit, and the other, the increase in ethanol minimums?

The first one, the blenders' credit, the buzz is it might get extended in a lesser amount, but that's probably the best we can hope for, and I don't count on it.

And the second, E12, E15, we thought it was going to get approved earlier in the year.

We see no reason why it won't get approved, but we have no guarantee.

It should have been approved last spring.

It wasn't.

So there's no guarantees it will be approved this fall, but we're led to believe that there's not -- but we're optimistic that it will take place.

Okay.

Which of the two is more important to REX's earnings?

Well, the blenders' credit, we never saw it.

It always seemed to -- our prices never were tied to what the end product sold for as gasoline in the market.

It's always been tied to the corn market.

On the other hand, ethanol now is selling for a little bit higher than wholesale gasoline, and for it to continue to sell at that higher price, I think our customers have to make some money.

If they don't have that blenders' credit it's going to hurt them, and even though legally they'll have a hard time cutting back on how much they buy because there's mandates from Congress that they have to buy our product.

You always hate to sell to someone not making money, and that would be the issue there.

Thank you.

Thanks, Bernie.

Thank you.

Our next question is from the line of Bill Jones with Singular Research.

Please proceed with your question.

Hi, Bill.

Hi, guys.

I was wondering if you could give a little more color, comment on the recent acquisition of NuGen plant and give us a little more feel for the profitability there versus the other facilities?

Try to.

We know that plant.

We were involved in its construction, sold the plant -- sold our share of the plant a few years ago, so we know it backwards and forward.

We think it's in a great location.

We think when we bought it earlier in the year, it was basically breakeven.

It had made a fairly good amount of money prior to the quarter we bought it, but the quarter we bought it, it was running a little bit less than we thought it could do.

And again, the industry was -- it was during the summer, right before the summer months, the industry goes up and down that time of year.

It's a seasonally bad time of year.

Since then, we worked -- Zafar Rizvi, who runs our ethanol division, has worked very hard in trying to improve their DDG pricing and their ethanol pricing and worked with the marketing Company that we have there.

And we think we have succeeded in doing significantly better there.

We're in the middle of a quarter, so I can't comment on exactly the bottom line profit and loss, except to say that it's moving closer and closer to looking like our other good plants.

It has -- the key thing that we've learned over the years for a good plant is they have a corn supply at the right price, and that plant does.

So, it's just a matter of execution from there and, again, we have the right people, we feel, doing that and it should move the next six, nine months, to being very similar to all our other plants, or 100 million gallon vacant plants.

The other thing that you should know is we bought 48% of that plant, and even though it shows a higher purchase price, our out-of-pocket at-risk money was, I believe, close to $8 million, somewhere in that number.

$9 million.

$9 million.

Excuse me.

Okay.

And you guys are authorized to--?

And that's for 48% -- that's for 47%, 48% of a plant, then.

If it gets to be like the other ones, the return on investment has a potential.

Again, it's not there yet but has a potential to be 60%, 70%, 80% plus on that money.

Great.

That's very helpful.

Now, you're authorized to repurchase only another 150,000 shares?

Yes.

I suspect that you'll probably see to get more authorization.

Our history has been when the share buybacks run out, we re-up the share buybacks.

But again, that's a Board decision, and I wouldn't speak for the Board, but our history over the years has been to always re -- at least when the stock price is at the level it is today, our history has been to re-up the share buyback.

And we certainly have the cash to do that should the Board decide to do that.

Great.

I think that answers my questions.

Thanks, Bill.

Thank you.

Thank you.

Our next question is from the line of Paul Resnik with REX American Resources.

Please proceed with your question.

It was Olympia Capital Markets Group.

Hi.

If you come work for us--?

You know, it's -- how is it out in Ohio?

Nice weather.

Nice weather.

Okay.

I notice the plants have generally been running around 90% -- as a group, 96% capacity.

Do you see improving the throughput and -- I mean, to or above a name plate at some point?

Part of the reason we're only running 96%, and again, we do -- there's always maintenance, but we can -- Texas, we just haven't had the corn supplier, sorghum supply in that case to run it.

The price of sorghum for them, last bit of sorghum to get up to capacity has just been prohibitive.

So, that's been one of the prohibiting factors.

And the other plants we're working -- we are working on trying to increase the capacity and get -- at least Gibson City, on trying to increase the capacity and get above that name plate, so we'll see what happens there.

It's been a very good plant.

Now, with regard to the derivative losses, which as you point out, kind of come back gradually in lower interest rates--.

They really don't come back, because it's not the interest rates it's still the interest rates in terms of a cash charge.

But they come back from a book perspective, not from a cash flow, because they never went out.

No.

Right.

When we look from a book's--?

Right.

Exactly.

Which, in my opinion -- for what it's worth, the derivative charge is ridiculous because no one could finance these plants at the rate that we did our swaps at today, not in a million years in this market.

But we still have to take a charge, because that's the rules.

Even though we have very attractive financing rates for an ethanol plant.

Okay.

But it's kind of hard to--?

No one could do it on a non-recourse the way we did it.

Sure.

Good point.

But it's generally pretty hard to predict quarter to quarter what these numbers are going to be, I guess?

It's impossible.

I can't do it.

I can tell you that.

Okay.

Live it every day, and every quarter we don't know what it's going to be until we check.

We could check it every day, but we don't know.

The bank pretty much gives us that number.

Okay.

Now, the -- your tax rate, a little hard to follow that.

Yes.

It's difficult because of the fact that we consolidate, book your tax rate and you're consolidating operations that you don't have 100% of.

We basically booked approximately a 42% tax rate on a year-to-date basis.

Okay.

But, I mean, quarter to quarter -- I mean, it looks a little screwy.

And that's another one we don't pay out 42%.

I don't know if you know, but we still have tax credits left that we use against that number from previous businesses.

Okay.

And this is a little tricky since not all your plants are using corn, but do you have a sense of how much corn you're using for a gallon of ethanol in your plants or how much corn you've used?

The One Earth plant has been converting at about a 2.8 ratio.

Levelland converts, has been converting at a little bit lower rate, and part of that has to do with the inconsistency of running that plant and slowing it down, et cetera, while we try to get milo, et cetera.

Right.

Okay.

Very good.

That's all I've got.

Thank you very much.

Thank you.

Our next question is from the line of Mike Neary with Neary Asset Management.

Please proceed with your question.

Hey, guys.

I have a couple questions.

Hi, Mike.

How are you?

I'm good.

I'm good, thanks.

What was depreciation and CapEx in the quarter?

Depreciation for the quarter, well, actually for the six months ended, it's $7.6 million, and for capital expenditures it's been $900,000 for the first six months.

Okay.

And how many bushels of corn were used in the quarter?

I don't have that right in front of me.

Like I said, we did convert at the One Earth plant at a 2.8.

If you want to hold on, I can get you that amount of corn that was consumed.

Sure.

And Stuart, you mentioned on the NuGen plant your out-of-pocket, and then you have an additional earn-out.

How does the earn-out work, roughly?

Roughly, they get the first amount of earnings, I think the first $4 million, something of that nature, and then it gets split down the way.

And Doug can explain it a little better than me.

But they get the first earnings and then we -- then the split comes in and we book that.

We'll still report it, though, because we're booking that as purchase price.

We'll still report our share of the earnings.

Okay.

They get the first $6.5 million of our earnings that we otherwise would have received will go towards them.

They get 100% of the first earnings?

That's correct.

Okay.

Okay.

And then--?

But we will still report that, I believe.

Yes, that's correct.

Because we are booking that.

It will still show -- on a cash basis they get it, but it will still show as earnings to us, Mike, because we are counting that as purchase price.

Okay.

Okay.

And then it looked like you sold two stores in the quarter and you got two new leases.

Is that correct?

Yes.

Those two leases are actually temporary leases where we put some Halloween stores into a couple of our stores.

Okay.

So, that will just be a short-term lease.

Okay.

We -- the amount of corn that was consumed at the One Earth plant was about 9.4 million bushels for the quarter.

Okay.

Just for One Earth, or that's total Company?

That's the One Earth plant.

Okay.

You don't have a total bushels used in the quarter, do you, for the whole Company?

I do not.

Okay.

All right.

I'll just wait for that.

And then in the stores you've been selling, have you generally been selling them around book value?

Lately they've been a little below book value.

Last year, they were above book value.

But yes, I'd say that's a fair statement over the period of time.

We put under contract our -- one of our warehouses -- so if that goes, that will be a large sale for us, which we're looking forward to.

Okay.

Great.

And then deferred taxes -- as I recall, you have some cash coming to you still for deferred taxes.

Is that accurate?

Yes.

For the rest of this year?

Yes, we -- early in the year, we received a refund from the 131-09 return.

We have not filed our 131-10 federal tax return yet, and we expect to get a refund when we file that.

Okay.

And that would be later this year?

Yes.

But trends like last year, I think we received that like in January or February.

Okay.

And how much do you anticipate that would be?

I don't have the number in front of me.

As I recall, it's about $5 million.

Okay.

Mike, going back to your other question, the total between One Earth and Levelland, that was ground was 12.3 million bushels and part of that being sorghum and part being corn.

Okay.

Great.

And--?

So, one other thing on your first question too, Mike, you mentioned that -- asked the question of whether we're selling the real estate above or below book value.

I answered that part of it, but we also continue to have our service policy income coming in below the line.

Right.

Which accounts for the discontinued income, a good part of it.

Got you.

Got you.

Okay.

And I would just like to say thank you very much for the share buybacks, and I hope you guys keep doing them.

I think they're a great use of our capital, so thank you very much.

Thanks, Mike.

Appreciate it very much.

Thank you.

Our next question is from the line of Arnold Brief with Goldsmith & Harris.

Please proceed with your question.

A few odds and ends.

Hi, Arnold.

Hi.

Good morning.

The 15% ethanol in cars -- I'm trying to remember, but wasn't there some resistance from that from the automobile manufacturers because of damage it might do to the cars?

Could you discuss that issue, number one.

Number two, what's your feel on the outlook for corn prices in general?

And then number three, I get the impression that Texas is losing money.

Could you give us some idea of the magnitude, if I'm right, with the idea being that if you could flip that around next year, it would give us some idea of how much turn that impact would have.

Okay.

The first question on the -- the biggest opposition that I can see is coming from the boating industry and the recreational vehicle industry.

Automobile industry I think would be -- there's been some pushback, but it hasn't been extreme.

They're just worried about if something does happen, are they going to be responsible for the engines?

But there's not been anything that I've seen that says anything will happen to their engines, but it's just natural caution from them.

But the boating industry certainly had pushed back and they don't -- the boats don't take E10 that great, and they have separate pumps.

I don't see why it should make that much difference, as long as they -- but there is some pushback there.

As far as what's happened, I believe there have been exhaustive studies on cars, and so far I've seen nothing that would make -- that would prohibit or that would -- the only thing I've seen is that ethanol makes the air cleaner and for a long time was making gas a lot less expensive.

On the Texas plant, it was -- for the year, it's been marginally profitable.

It's made a little money.

For its current -- for its year, which I believe starts in -- their fiscal year, I believe, starts in October.

Stuart, I'll answer the question.

Okay.

Go ahead.

For the first six months, they've actually -- the total loss for that plant's been like $3.8 million.

Started off the year making a little bit of money, but as the year has gone on, it's been a struggle there, with the inability to source milo at an affordable price.

Okay.

And, again, that's, it's -- you should mention that was offset on the harvest side by profits, Doug, for the -- at the end of our fiscal last year.

Yes.

At the harvest of last fall, the plant was profitable at that point.

But so far this year, it has operated at a loss for the first six months.

So you would anticipate it being profitable again once the harvest comes in?

That's what we're anticipating.

Outlook for corn as you see it?

Corn, as I see it -- it's so volatile right now, it's totally dependent on things that are totally out of our control.

Wheat in Russia causes the corn market to go up.

There won't be any more ethanol plants coming on to cause the corn market to go up.

If some ethanol plants go out of service, then the corn market might come down, but it's, we're such a small part of the overall market, it's really hard.

The future market says that corn is going to continue to increase in price, but we'll see.

Do you take a position at all?

Some of our plants do.

Not the one -- some of our -- our smallest partnership, Big River, does take a position.

Do you have any feel for what the--?

We don't at this time, but that would be part of our strategy for Texas, possibly.

Okay.

Do you anticipate -- excuse me.

Do you have any feel for what the percentage of capacity the industry is operating at?

You said you were 96%.

I don't.

Doug, do you know the answer to that?

No.

I don't know right off the top of my head, no.

Okay.

Thank you.

Thanks, Arnold.

Thank you.

We have a follow-up question from the line of Bill Jones with Singular Research.

Please proceed with your follow-up.

Hi, guys.

Just a technical follow-up for modeling purposes.

There was a small charge for real estate, and I was -- just want to be clear where that flows through on the income statement?

The non-cash?

It comes through cost of goods sold.

Okay.

Fair enough.

And would you expect -- I guess you said that you're selling those for close to book, so I would suppose that we wouldn't -- we wouldn't expect more of those types of charges?

I mean, in general, overall, no, but you have to do things by location, so you could still end up with a charge at individual locations.

Small one here or there, and you could also have gains when you sell.

Right.

Yes.

That's correct.

Okay.

Fair enough.

I think that -- so generally speaking, the book value is -- probably approximates the fair value?

On an overall level, I would believe that.

But again, on an individual basis, it could vary.

Okay.

Thank you.

I believe the industry, to answer the previous question, is operating, I think, around a 90% of capacity.

Thank you.

Our next question is a follow-up from the line of Arnold Brief with Goldsmith & Harris.

Please proceed with your follow-up.

Yes.

I just lost it.

Oh, yes.

Could you give us some idea, because the capital expenditures in the six months were low, but you do run maintenance periodically.

Could you give us some idea of -- I don't know what that schedule is -- what your capital expenditures will be for this year and what you anticipate them for next year, along with depreciation this year and next year?

The one capital expenditure we do expect is to have about $5 million.

We're building some storage at the One Earth facility.

We expect that to be about $5 million.

As far as maintenance on these plants, like that shutdown, the majority of that just gets expensed.

So beyond that, I don't really have much.

As far as depreciation, I believe it would run relatively consistent with what we've seen it run to date this year.

So capital expenditure is about $5 million this year, is that what you said on that?

Yes, that's correct.

Next year do you have a number?

I do not.

The only item I know of specifically is the $5 million that's planned outside of the other things would be more maintenance, and certain of those would be capitalized, but I don't have that available right now.

Thank you.

Thank you.

There are no further questions at this time.

Mr.

Rose, I will turn the conference back over to you to continue with your presentation or closing remarks.

Okay.

Again, I would like to thank everyone for listening today and appreciate very much you being on the call.

And, again, to reiterate what I said earlier, the ethanol industry needs some certainty in the short term, but over the long term it's taken a lot, a lot of foreign oil out of the market and replaced it with ethanol.

And we're very, very optimistic for ethanol over the long haul.

Thank you for listening.

Bye.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation, and we ask that you disconnect your lines.

Thank you.