REX American Resources Corp (REX) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources Corporation third quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead, sir.

Thank you, thank you for joining the call. Good morning and thanks for joining the REX American Resources fiscal 2010 third quarter conference call. We'll get to our presentation and comments momentarily, as well as your Q&A session, but first I'll review the Safe Harbor disclosure.

In addition to historical facts and statements of current conditions, today's conference call contains forward-looking statements that involve risks 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 risks and uncertainties associated with the forward-looking statements are described in today's news announcement and the Company's filings with the Securities and Exchange Commission, including the Company's report on Form 10-K and Form 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements. I'd now like to turn the call over to Stuart Rose, Chief Executive Officer.

Thank you, Doug and thank you, everyone, for listening.

For the quarter we had reported net sales of $70.3 million, versus $61.7 million last year. Pre-tax income on continuing operations of $6.9 million, as opposed to $3.8 million during the same quarter last year. After-tax income $4.4 million, for our third quarter versus $2.7 million last year. Earnings per share on a continuing basis of $0.36 versus $0.17 last year. Total earnings per share including discontinued of $0.45 versus $0.25. In terms of our performance, all of the plants did very well in our opinion, with the exception of Levelland, which reported a pre-tax loss when consolidated on our statement of approximately $1.2 million.

Gains were due to us doing a little bit higher than the industry for our consolidated operation in terms of crushed spread. Crushed spread is a margin that you typically obtain selling ethanol versus the cost of corn. Going forward, we have some concerns about the industry. As you know, or as a lot of people might know or might not know, our $0.45 lender's credit that our customers received is being debated as we speak. The latest we heard is Senator Grassley expects it to be in the final bill related to the tax extension bill. If that does get in, or if some form of that gets in, that will alleviate one of our big concerns but we're always at risk for legislative concerns.

We're also worried about the Levelland plant based on the projection that plant has given us. We're currently in compliance with our GE loan agreement. We were in default of that agreement last quarter. We received a waiver. But if there is any significant change in their projections to the downside could cause it to default again. Should a default occur and should GE not waive that default, then we're in danger of having to take an impairment charge on that particular plant.

The other thing that we're concerned about now is a lot of people, because of the $0.45, have bought a lot more ethanol probably than they would have otherwise. And crushed spreads now are starting to deteriorate. Yesterday it was only $0.07 by the calculation we do, versus prior months between $0.21 and $0.46. We think this is temporary. And probably based on the fact that people have bought a lot in anticipation to cover themselves one way or another based on the $0.45 lender's credit. But again it's a worry that we have currently.

On the positive side, as I said earlier, we have high hopes that ethanol will be in the current tax bill. We've seen reports that Grassley said he expects it in the bill. That alleviates probably our biggest worry today for our overall operation. Also on the positive side, the mandate requires refiners to purchase approximately 13 billion gallons of ethanol. Some of the weaker plants drop off. All of our plants except Levelland are extremely strong plants. We would expect them to get a bigger piece of that pie. Another positive for us is E-15 got approved in some form recently, and we hope and expect that it will get approved and for more cars. If that happens and if it ever gets approved for all cars that could be a huge benefit to the industry.

Last thing that we have going for us, three of our plants, the one in Marion, the one in Gibson City and Patriot plants have all been approved to increase production by the EPA or allowed to increase production. So we, again, have the chance of those very profitable plants to produce more out of those plants over the coming years. And again that's involved in very, very good plants and contributed large amounts of profit to our company. And it would give us a chance to do better.

In terms of real estate, we sold during the quarter one distribution center and five stores. We're gradually liquidating or leasing all of our stores. We're now down to one distribution center and that is approximately 55% leased. We have nine stores leased. And we're down to 25 stores that either need to be sold or leased, and we're working diligently on those and hope to just continue gradually reducing that number to a point where it no longer is a loss on our income statement. On the flip side of that, our discontinued retail service policies and discontinued, when we do sell a property, gains that come from that have pretty much offset losses related to the real estate that show up on the income statement. So we feel pretty good that our leaving retailers but done in the most positive way possible that we could do for our shareholders.

In terms of cash, we reported $87 million. Some of that is consolidated cash with the ethanol plants. $73.4 million of the $87 million is discretionary. We -- all of our ethanol debt is nonrecourse. Each plant stands on its own. And so the debt that you see on the balance sheet is not necessarily corporate debt, it's plant debt. And which allows us the $73.4 million that I'm talking about to be free and clear to do what we choose. We expect this year to use some of it to buy back stock. We bought back 225,387 shares in the quarter. Our Board authorized us to buy another 500,000 shares so we currently have the ability to buy back 568,044 shares.

Also I mentioned earlier, looking at ways, assuming that the industry stays profitable and viable, which we feel very confident it will, we're looking at ways to expand our profitable plants. We also bought a plant during the year, NuGen, 48% of a plant. We're always actively looking at those type of investments that yield a large return on investment to our shareholders and to date that plant has done exceptionally well in terms of both operation and return on an investment for our investment. The other thing that we're looking for and continue to look for is other industrial operations that can use our skills, and we developed a lot of skills, one in building an efficient plant, another in running an efficient plant, another in managing a commodities-based operation. We are looking into other industries where we might be able to put these skills to use. At this point I'll now open the forum for questions. Thank you.

Thank you. (Operator Instructions) And our first question comes from Paul Resnik with Olympia Capital Markets. Please go ahead.

Good morning.

Hi, Paul, how are you?

Okay. And let's hope Senator Grassley knows of what he speaks.

Let's hope so, is right. And we have learned a long time ago, until it's actually written, signed and sealed, that nothing counts, so.

Absolutely. Levelland, could you -- first of all, your investment there is what $16.5 million equity and $8.8 million debt?

Yes. And I believe that's what -- that was our investment, some of has been written down with the losses, so maybe Doug can go over that with you.

Okay, that would be helpful. So, I would like to know exactly what the exposure is. And secondly, could you explain what the operational issues are at Levelland?

Sure. Doug, do you want to go over the debt and I'll go over the operation with you.

Yes. We initially invested $16.5 million and $9 million there. With the losses, I believe ultimately our equities probably been written down about $5 million. So that would result in approximately maybe a pre-tax of $20 million exposure less. Both consolidating it, it could come through in different phases. So I think that's the ultimate number. But we would -- I need to do more work on it.

Okay. In the neighborhood of $20 million?

And that's pre-tax with tax affected. And we hate to talk worst case but we want to -- it hasn't done well in the past, although we think we've done some things to make it -- that could do allow it to do better in our projections that we have received show it can do better. We prefer to be conservative.

Sure.

Currently we're --(inaudible) what has gone on wrong there, it's mostly one big problem and if we could ever solve that one, we'd be fine. There has been a, for whatever reason, an inability for that plant to buy sorghum currently at a price that allowed -- well, there is two reasons. One, it's too small a plant to compete with the 100 million-gallon plants. It's a 40 million-gallon plant and to run it efficiently and because of that and the economy, it has a higher break-even level. That's the first problem. But that isn't - we knew that going in. The bigger issue is sorghum has been very tough to get available. Cotton prices have risen through the roof and the farmer in that area for whatever reason planted a lot of cotton and we're having to scramble to get the sorghum at prices that allow us to make money. The sorghum, though, on the flip side, we're hoping will allow us a product, and we're going for approval now, that can be sold into the California ethanol market. The Iowa corn ethanol plants we understand will not be allowed to sell into the California market.

So if that happens, and of course if the blenders credit gets extended, we are optimistic that things could rapidly get better in that plant. But if that doesn't happen, or if it doesn't get approved and if we have to keep scrambling for sorghum we're going to fight it as best we can. That's all we can do. Now the other plants are -- and this plant is also part owned by the sorghum co-op and that helps a lot. Although other plants have farmers that are partners but there is much, much more grain in the area to support those plants. And the basis that we can buy the corn is at such a level that we can make pretty good money in the other plant. And this one, it's been an issue.

Okay. Do you have a number or are you willing to provide a number for any additional stock purchases you've made in the fourth quarter, fourth fiscal quarter?

Paul, we have not been active since October. We've not bought anything in the current quarter.

Not active since October. Okay. And the -- so the -- your 10-Q isn't out yet. Do you have an actual up to date current shares outstanding?

We'll file that tomorrow.

Tomorrow?

Yes. I don't have it in front of me right now.

Okay. And lastly, as far as gallons produced per bushel of corn, do you have a figure for that? 2.7% something?

Yes, our conversion between the two plants that we consolidate was about 2.75%.

2.75%. Okay. That's all I have this morning.

Very good. Thank you. Next question, please.

Thank you. (Operator Instructions) And our next question comes from Bill Jones with Singular Research. Please go ahead.

Hi, Bill.

Hi. Good quarter.

Thank you.

I want to ask you, do you have the realized crush spread in the quarter and how that compares to -- is that in line with the market rates or better?

Our crushed spread was about -- if you hold on a second I'll give that.

I believe it's $0.35. And the market that I am looking at was $0.26 in September, $0.34 in August, and $0.25 in July. So correct me if I'm wrong on any of these numbers, Doug, but that's the numbers I have.

Wow, so you were quite a bit ahead of the --

Considerably better than the industry.

And that's just the efficiency of the plants?

And being able in the one plant to buy the raw material at a level that gave us -- and three things. One, we could sell the ethanol a little better because we get a lot of selling on the spot markets, the CBOT crushed spread is based on the future market, the spot market was higher. Secondly, we were able, because it was harvest time, to get corn okay, in many cases below CBOT. So if you put that together you work on a little higher crushed spread. We're not that tied to CBOT. We're much more tied to the spot market. And the spot market doesn't necessarily -- we do not like to -- a lot of the other players have gone bankrupt by doing too much with futures. We try to match our corn purchases as close as we it to our ethanol sales and it's never perfect, but we do the best we can. So we're more -- our crushed spread is related to the spot market and not necessarily the futures market. We do very little hedging except for a partnership we're in and basically that's it, except for one of the partnerships where we only own 10% of it.

I see.

Stuart, it's $0.35 assumed at 2.8% conversion. At 2.75% conversion, our crushed spread was $0.325. And going back to the previous question, our shares outstanding are 9.49 million, approximately.

Okay. Great.

And the other thing that -- anyway, go ahead.

I'm sorry, you had mentioned Senator Grassley and the $0.45 extension, or the tax credit, is the talk for $0.45 because the last I heard it could have possibly been reduced?

All I read was that it's in the bill. He did not say it was $0.45, $0.36. There are people in our own industry that do not even want this because they think since we do not get it, our customers get it, that we should get other things instead of this. My feeling is if our customers get it, for our customers to enthusiastically welcome our product they at least have to make some money on the product. There is a mandate that forces us to buy our product but they should make money in this particular -- I always believed this -- this is good for our country to put this in.

It's actually, in my opinion, and in some studies, a net money maker for the government because the farmers are making so much more money and paying so much more income tax that in reality this is just -- this is something that not only gets us off foreign oil but also produces revenue through higher income tax where previously we were paying farmers not to plant or paying farmers subsidies in places that they are now paying income -- I wouldn't say in place of it, but they are now paying income tax into the government. It's a very small amount of money for a very large benefit.

Right. But as you had mentioned, even if it's not approved, if the demand were to fall temporarily with the mandates, you would think that's just a temporary phenomenon because they still have to buy as much, blend as much ethanol or more ethanol next year than they did this year?

Yes. And that's right. But again, that's not the preferable -- it's not preferable to have our customer -- they still do not have to buy -- right now they are buying product at a price that allows us as a company to make a pretty good profit if we have, as you can see for a number of quarters now, if everyone starts losing money, everyone starts pushing hard and it just is preferable not to have that. On the other hand, like I said, some of the weaker plants are definitely going to fall by the wayside and with the exception of Levelland we have very, very strong plants that are survivors and there'll be less competition selling the ethanol and that's a good thing for us.

And you're feeling good on the E-15 for 2001 and 2006 in January?

I'm not feeling good about anything until it gets done. It should have been done long ago. I have hopes for it, but I don't -- we do not -- even if they put the E-15 in, they still have to put it into the gas tax and that's -- and there's no big multinational oil company that I've seen that has announced they'll have all of their gas stations pump E-15. Like most of them now pump E-10.

Right. Now forgive me if I missed it but you mentioned something about your plants have the potential to increase capacity? Is that what you had said?

Yes, I did say that.

And that would be --

And again if the industry is stable I'm sure that will -- and those are our 300 million gallon, really good plants. I'm sure if the industry is stable we're going to -- without saying it's a definite, it sure makes a lot of sense to increase capacity. And it won't be that expensive. I don't know how much, but it won't be that much to increase it.

But you would take it above the 100-gallon capacity.

They can increase up to -- one of them up to 135 million gallons and the other to 225 million gallons.

Great, great.

That would be huge incremental increase, if things stay the way they are now, huge incremental profits in those plants.

Right, right. And you had mentioned you sold a distribution center. How much was received for that or was there a gain?

Bill, it was almost a break-even. There is a loss of less than $100,000 on it. The sale price was about $1.8 million.

Okay. Thank you. That's all I have for now. Thanks again.

Great. Thank you.

Thank you. Our next question comes from Arnold Brief with Goldsmith and Harris. Please go ahead.

Hi, Arnold.

Good morning. Could you just repeat that sale price on the DC. I didn't get it. And then I have another question.

About $1.8 million.

$1.8 million. I should know the answer to this, I can get it from the 10-K I guess, but could you reveal your options at this point, what is, the initiative --

We got 732,000 options remaining outstanding as an average exercise price of $10.19.

Okay. Thank you. And finally, most of my other questions have been answered. Could you review where you think cellulose, the development of ethanol from cellulose product is at this point in time, how many years down the road is your best guest and can these plants be converted if that product evolves in that direction?

There is no one that I know that is making efficient cellulose ethanol now. It's all being supplemented either by the Company now or by the government. But there are a number of people out there trying to do it. Especially that's compatible with the current ethanol plants. And my feeling is that there is going to be a combination of cellulosic ethanol in our plants combined with more efficient crops and more efficient corn and that's going on all of the time. Higher -- better crops that create more ethanol -- where the yields get better in the plants also over time. Higher starch and corn.

So eventually you'll see the industry using both raw materials?

I think so. But it's going to be -- but we're talking so far out, it's --

It doesn't matter.

From an investment standpoint, I would not encourage anyone to buy our plants today based on the fact that someone may come up with something that is economically efficient somewhere down the road. There is just no guarantees.

Finally --

And again, this is the one industry in alternative energy that actually is making -- is profitable and actually works today. And people can argue that, well that's because of the $0.45 blenders credit but I argue back, that yes, the government pays that but they also get much more from that back between income taxes and less farm subsidies and also not paying -- as time goes on they'll have to pay less and less to farmers to not grow crops. Right now a large percentage of our farm land is lying dormant and farmers are being paid not to grow when as soon as they get that land out of the farm bank, they're going to immediately start growing crops because they can make money today.

Could you give us -- finally, last, going back to the option question, could you give us some indication of whether or not management has any plans to ask for further options?

No, we've no longer -- (inaudible). We no longer issue options and we have no plans to issue options.

Okay. Thank you.

Thank you. The next question comes from Richard Dearnly with Longport Partners. Please go ahead.

Good morning. The NuGen plants, what are the profitability thresholds that would cause you to fund the extra $6.5 million and then if you did that, would that take you over 50%?

That does not change -- that doesn't change -- that particular payment would not change our ownership. That is to be funded based upon distributions from the plant to the investors so our initial distributions, we would pass along to -- that would be our consideration.

I see.

But we do have an opportunity to expand our ownership from 48% to 51% and that would require an additional payment to do that.

That's at our option.

Is that an anytime option?

Yes.

And was NuGen profitable in the quarter?

Yes, it was.

And is there any reason not to increase your ownership there?

There is some reasons that the plant would prefer, the co-op would prefer and they're doing very well for a lot of reasons just to stay -- to keep our (inaudible).

Politically speaking?

Yes, there is a lot of complicated reasons but we have the right to do it. But for political reasons, for financial reasons, a number of reasons we choose not to. And things are going really well there. We are very happy with people running it and we work real well with them. There's no real reason to do it at this time.

And then on -- as the 732,000 remaining options, when they are finally exercised, would it be -- basically over the last four or five years, you kept the share count flat by buying back the loosely five million shares of incentive that was given five years ago. After that is finally bought back and not diluting the share base, would the plan be to continue to keep buying back stock or --

We've always bought back stock because, not for that reason, but because we consider the stock to be inexpensive based on the money we make in book value of the shares that are out there. We have always been historically a very profitable company and for whatever reason the market has chosen to value our shares at two-thirds of book and if they're going to value it at that price or lower and we keep making money like we're making, we certainly look at that as a good use of our cash. As we buy back shares, it increases the earnings per share. Those option, by the way, are not free. Those options are at -- that are at there are at a strike price of about I think --

It's $10.19 on average, Stuart.

$8.19 on average

$10.19

So they're not a significant dilution on anything at this point in time. That's why we buy back stock, is the point I'm trying to make.

Yes. Okay. Thank you.

Thank you.

Thank you. And the next question comes from Buzz Zaino with Royce and Associates. Please go ahead.

Good morning. Looking at the debt level at year end or last fiscal year you had $120 million in debt and now it's -- let me get that number -- $103 million. $124 million down to $103 million, is that strictly the plants using the cash flow to pay down the debt?

Yes. For the most part it's just scheduled repayments on their borrowings.

So that you would expect to continue with that sort of a rate? That's roughly $20 million over nine months?

Yes, I can't remember now off the top of my head whether they've made any accelerated payments or not.

Sometimes it's might be tied just to line of credit -- debted on the line of credit at a particular time.

Okay.

But we do try to -- a good use of the Company's -- each individual plant makes their own decisions and the ones that have been making real good money do have some options when it comes to paying down debt, should they choose.

Okay. The industry seems to be consolidated into larger holders. Do they have any advantage over you?

We think we outperform -- we think we're as well run as any of them. We are pretty much. If you put all of our plants together, we're one of the top six or seven companies in the industry. So I can see none that they have -- I don't see any advantages and sometimes there are disadvantages that they can't move as quickly as our people do on the spot market and to us that's a big advantage we have operating each plant separately and sharing information.

Good. Okay. Thank you very much.

Thank you.

Thank you. And our next question is a follow-up question from Bill Jones with Singular Research. Please go ahead.

A follow-up --

Hi, Bill.

Hi. I wanted to follow-up on the NuGen. You mentioned you are pleased with the progress there since you've made that investment. Would you say that that's comparable now to the other plants and maybe you can give us some color on that progress there?

I don't think it's quite up to Gibson City plant or Patriot, but it's getting there. And it's doing really well. So in terms of progress, the purchase of corn in that market or the corn prices have been at a level we could make money. It's a more challenged DBT market which is one of the products that -- one of the byproducts that feeds cattle and that type of thing, feeds poultry and farm animals. It's a little bit tougher market for that. But we're getting our hands around that and we expect it to continue to do well. And again, our investment in that was significantly less for the amount of equity that we have in the other plants that we turn on investment -- the return on equity I think will be -- we have high hopes it will be the best of all of them.

Right. But that -- when you got involved there that was an underperforming plant. Would you say that?

No, I would not say it was underperforming. We just saw where we thought we could do better with it. It was underperforming maybe relative to our Gibson City plant, but to the industry it's hard to know whether it was underperforming. It's hard to gauge where the industry is.

Okay.

But I get a lot of people are -- this industry is all over the map. But we always thought it was a good plant. It was not a plant that was a distress sale or anything of that nature.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Mike Neary with Neary Asset Management. Please go ahead.

Hi. I just had a couple of questions here.

Hi, Mike.

Doug, what were the bushels used in the quarter?

The bushels ground for the two plants that we consolidate was about 12.4 million.

Okay. And then depreciation and CapEx, I know those will be in the queue but if you have them, that would be great.

Depreciation for the nine months was $12.8 million.

Okay.

Capital expenditure about $3.8 million.

Okay. And when you talk about going forward, CapEx, what does a base level look like and if you were to expand these plants, what type of numbers are we talking about?

Well the only planned expenditure I'm aware of is we are building some silos at the plant in One Earth which, that's $2 million of additional money, but other than that to my knowledge it is whatever planned maintenance they need to have, et cetera. The expansion that Stuart is referring to is -- I don't think it would not take --

We do not have the estimate on that, yet, Mike. We don't know exactly.

Okay.

We have to get approval before we could even consider it. So I do not -- unless -- I don't have that number.

And when you say approval, what approval specifically? What do you mean you had to get approval to expand --

We needed air quality -- EPA air quality approval.

Okay.

I believe it's air quality, but the EPA, you can't just produce without getting their approval.

Okay. And in the CapEx we did this year, was there anything unusual in terms of additional CapEx for Levelland or is that a pretty good maintenance level going forward, do you think?

I would say it's probably a pretty decent representative of what the future would be. Just from maintenance perspective.

Okay. Great. Thanks.

Thank you, Mike.

Thank you. The next question is a follow-up from Paul Resnik with Olympia Capital Markets. Please go ahead.

Now one question I had is about the wet distiller's grain market. Where average prices went significantly down year-over-year where you have a general rising trend for dry distiller grains and corn, and feed in general. Could you give me a little color on what is happening there?

Well, on wet distiller grains, that's strictly related to the Levelland plant and wet distiller's grain has to be sold quickly and we -- in that market, you get whatever the market rate is and that's what it was for that quarter. And it's only a very, very small amount, very, very small percent, if you look at our overall company, of all of the plants of the distiller grain that is sold, in that particular period of time it was all supply and demand. There wasn't -- there is no futures market or anything like that for wet distiller's grain. You just get whatever the current market is and that's what it was at that time.

You would view that as a local issue?

It is a local issue.

We are working to try to move that number up.

But you're 100% right that it needs to be moved up.

Okay. Thank you.

Thank you.

Thank you. And there are no further questions at this time. I'll turn the conference back to you.

Well thank you. I'd like to thank everyone for listening and I appreciate very much your support. Thank you. Bye.

Thank you, ladies and gentlemen. That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.