REX American Resources Corp (REX) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the REX American Resources fourth-quarter 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 Bruggerman, Chief Financial Officer.

Please go ahead, sir.

Good morning, and thank you for joining the REX American Resources fiscal 2010 fourth-quarter conference call.

We'll get to our presentation and comments momentarily, as well as your questions and answers, 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 would now like to turn the call over to Stuart Rose, Chief Executive Officer.

Thank you, Doug.

Fourth-quarter revenue was up for the quarter, 21.8%.

We had a loss in the quarter of $3.6 million, or $0.42 a share, mostly related to an $11.2 million impairment charge that was versus a profit of $7.3 million, or 75% per share in the fourth quarter last year.

Without the impairment charge, earnings would have been approximately $0.066, or $0.70 per share.

For the year, our revenues grew a little over 77%.

Net income was $5.1 million, and that included $16.3 million in impairment charges at our Levelland plant, which I'll talk about in a minute.

Cash at year-end was $91 million and $72.7 million was at the parent level.

Cash usage for the year included purchasing a 49% stake in a plant in South Dakota called NuGen.

That was $9.2 million, and we also repurchased stock, $8.2 million, had capital expenditures at the plant level, roughly $6 million, and paid down debt of approximately $24 million at the plant level.

Impairment charges were taken, as I mentioned earlier, related to our Levelland, Texas plant.

These charges were $9.2 million.

This plant is currently not operating.

Our biggest problem in that market was the inability to buy grain at prices that allowed for a profitable price unit.

It was in a corn importing state.

It just did not work out for us.

Farmers, because of the high prices of cotton, started planting cotton instead of sorghum, and we were not able to buy our sorghum or corn at the prices necessary for us to run a profitable plant.

Also, the plant was 40 million gallons, which was outside of our typical plant, which is -- in fact all the others, are approximately 100 million nameplate plants.

So with 40 million gallon plant, high sorghum prices, just was not efficient.

The third problem was we went to Texas expecting $3 million from the State of Texas.

It was passed and promised by Texas legislation, and that was the incentive to come to Texas.

When it came time to fund that $3 million a year, they decided, even though the law was on the books, that they would not fund it.

Consequently, we never received a cent of the $3 million per year that we expected to receive in Texas.

By writing off this investment, it really allows us now to spend more time concentrating on our operating plants, making money.

There will be no more losses from our Levelland plant, unless the plant returns to profitability.

We lost last year $5.9 million at the plant level at that plant.

REX had a $1.6 million after-tax charge at the Levelland plant, in addition to the $11.2 million after-tax impairment charge.

Those charges, going forward during the next year, will not appear on our income statement.

The only way we'll ever take a loss again at Levelland is if we have profits going forward to take that loss again.

So, again, we've taken care of what was previously by far our biggest problem.

Should the plant return to profitability, like I said earlier, we'll start booking earnings again.

Should the plant be sold at a price above the bank debt that would come into the Company as earnings, but again, neither of these things are expected, and we've just taken the hardest most difficult route, which is to just write off the investment in the plant.

Income from all our other plants last year was really quite good.

$16.3 million before the impairment charge is what we made.

At these plants, if I take out Levelland completely, including the losses at Levelland, we made $17.9 million from as a Company.

In terms of what we made pretax level, it was approximately $29 million, using a tax rate of 39%.

Net worth for the year was approximately $269 million, almost $270 million.

About $25 a share.

Our stock now consists, and our network now consists primarily of cash and very profitable ethanol plants, with this write-off of Levelland.

Going forward, all our plants left with investments on our books are profitable.

All are roughly 100 million gallon nameplate Fagen ICM plants.

We consider this to be the current gold standard in the industry.

All our plants are located in the corn belt, where corn can be obtained at favorable prices.

All have good ethanol markets, and at least an adequate DDG market, and together, when you put all this together, the six plants we're still invested in, we have the most uniform plants in the business, and the potential for the best operating margins in the business, among all the public ethanol companies.

REX, for the first two months of this year, in the plants that we are invested in, showing very good profits during a time when the industry has had a fairly difficult time.

Our plants are doing well during the first two months so far, which are not the numbers we just released.

In terms of the industry, and again, when I say our plants, that's plants we're currently invested in.

In terms of the industry, the industry is still being impacted by what we call low crush spreads, which is caused by corn prices rising faster than the price of ethanol.

E-15 has been approved for some cars, but it has not had a significant impact yet on the industry.

The $0.50 blender credit has been extended another year.

We expect that to help us toward the end of the year, similar to what it did last year towards the end of the year.

Ethanol purchasing mandates have continued, and they have increased this year, so the refiners do have to buy more ethanol from the industry, and DDG prices have increased significantly.

The price of corn has increased during the first quarter.

This increase in DDG, which is a byproduct from ethanol to feed cattle, has helped the industry significantly.

And again, that's one of the benefits of a higher corn price.

In terms of what we're planning to do with our cash, we, as I mentioned earlier, have $90 million in cash, $70 million at the parent level.

Still looking for opportunities in the ethanol business, bought 49% of NuGen, which is the plant in South Dakota, which, again, perfect fit for our company, 100 million gallon Fagen ICM ethanol plant, the gold standard, in my opinion, of ethanol plants, and that investment has shown a huge return during the last half of last year, and it's turned out to be a great investment for both us and our shareholders.

If we found another one like that, we would look to make an investment again in that type of plant.

We're also looking to increase production in our plants wherever possible, by tweaking, doing whatever little things it takes to go over the 100 million gallon nameplate plant.

The EPA has approved most of our plants to do that, so we have hopes to get our production over 100 million gallons in these plants.

We've also started up corn oil production in some of the plants we have investments in.

We're considering doing that in all of our plants.

We think that would be a profitable investment, and good use of shareholders' money.

We're also still, as I mentioned in earlier calls, looking at other investments in other industrial sectors which use our skills in plant locating, commodities, so forth, to possibly use our skills in other areas.

Again, for us to even consider anything like that, we would have to have a return on equity hurdle, or past our return on equity hurdle over 30%, using what we feel are conservative projections.

Again, we also plan to aggressively purchase shares.

As I mentioned earlier, we bought a lot of shares last year.

We feel we have the finest ethanol operation in the industry.

We have a very, very solid book value right now, approximately $25 a share, and at this point in time, I can't think of any better investment than using our cash to purchase shares.

We consider our stock to be one of the best values out there, especially with the book value as solid as it is today.

In conclusion, we made a very, very difficult decision to write off our Levelland investment this quarter.

The write-off frees up management now to concentrate on our profitable plants, gives management time to look for further opportunities to spend our time increasing shareholder value, and I am more optimistic than ever about our opportunity to bring returns to our shareholders.

Thank you for listening, and I'll now leave it open for questions.

Thank you.

(Operator Instructions).

One moment, please, for our first question.

Our first question comes from Buzz Zaino with Royce & Associates.

Please go ahead.

Good morning.

On the existing profitable plants, how do we determine what cash flow is there and does the parent Company see any of that?

Doug, do you want to answer that?

Yes.

Go ahead.

As far as -- in our cash flow, the only one we consolidate is One Earth at this point, so their numbers will be reflected in our cash flow.

Most of the plants do have debt on their books, and that debt places restrictions on their ability to pay dividends out.

For the last year we received dividends of about $5 million from all of our plants, and my estimation as they pay down their debt, there will be more ability in the future to pay dividends, but as of now they do have some restrictions.

All these plants have generated huge amounts of cash flow.

When I talk about net income, that again is after -- that is not cash flow, which is much, much greater than net income, when you take into account depreciation.

There has also been some talk in Congress about eliminating the credit for ethanol.

How do you deal with that?

Right now, I don't think they're going to eliminate it this year.

There's no possible way.

It's deadlocked.

That's all that's expected to extend to it this year.

I don't know that -- we never got that credit.

There's also talk in Congress of finding a way to get the ethanol producers some of that credit.

That would be a huge positive, but we don't count on either thing happening.

As far as the way we run our business, we run it expecting the credit to continue through this year.

Because of that, we expect a very good second half of the year, but we have no clue of what's going to happen next year, whether anything will happen, which is a good -- whether nothing will happen, which is a good possibility, or whether we'll get some of the credit or whether the refiners will get some of the credit.

We have not gotten a great benefit from the refiners getting the credit.

They seem to have figured a way to, no matter how much they're making, to always keep our industry very tightly priced, to what we call the crush spread, the price of corn, if the corn goes up, that's what they pay.

If the corn goes down, they pay less, and it's irrelevant what the price of oil is, what they're getting on their crush spread, their $0.50, pardon me, $0.45, et cetera.

It's just been tied to the price of corn.

Thank you very much.

Thank you.

Thank you.

Our next question comes from William Jones with Singular Research.

Please go ahead.

Hi.

I was going to ask, it looks like the crush spread was about $0.27, including Levelland.

Is that correct, the realized spread?

Right.

It's for One Earth and Levelland combined.

Given that that's going to be de-consolidated, can you break out for the quarter, would you have that breakout what it would have been without?

I do not have that breakout.

Obviously on a go-forward basis, it will be out there like that.

Okay.

It was certainly higher, Bill.

Right, right, that's I guess what I'm thinking, is it certainly would be higher.

Okay.

Fair enough.

Now, you talked about, there had been some chatter about the repeal of -- there was some talk that they wanted to repeal immediately the blenders credit, and I guess you said that's unlikely.

What about the mandates?

Is there any risk in there?

Obviously the mandates go up every year, but is there any risk --

I've never heard anyone saying anything about it, and it would be -- with the price of oil today, to take 12 -- to get rid of the mandates, refiners would prefer to sell their oil any day of the week.

Most of them are vertically integrated, would prefer any day of the week to buy their own oil and sell it at $100 and something a barrel.

So we're really the only thing -- the only alternative energy product that cuts right into the use of foreign oil, and for them to repeal that in these days, in these times, and risk taking that sharp spike in gasoline prices in my mind would be crazy.

Right.

it would increase the demand for oil in the United States by 12 billion gallons, and it would be, in my mind, a complete disaster, and I have not heard talk of that.

That's pretty good.

Until 2022, right?

Yes.

Again, I think if it wasn't for that, no telling where oil prices would be today.

Okay.

I think that's my only questions for now.

Thanks.

Thanks, Bill.

Thank you.

Our next question comes from Mike Neary with Neary Asset Management.

Please go ahead.

Hi, I had a couple questions.

So Levelland is now zero on our balance sheet, is that correct?

Correct.

Absolutely zero.

And so we should have no going-forward cash losses from Levelland unless we restart the facility.

Restart it, and even if we restart it and have losses, and Levelland has losses, we will not have losses.

If there are profits that we make on the restart, then potentially those profits could get wiped out by future losses down the road, and that's the only way we could have losses.

Okay.

Unless we further invested into the plant, which right now, we would not contemplate doing.

Okay.

And then corporate, what's your go-forward corporate expense for the next year, and also real estate?

Barring any sales, what do those two divisions lose roughly annually?

The run rate really shouldn't change too much from where it's at right now.

We do have like what a real estate segment loss was and our corporate expense for the fourth quarter, the real estate segment was a loss of $440,000.

The corporate, $645,000.

I'm hoping that real estate will improve as we're able to lease out or get rid of them through a sale.

The biggest thing running through there right now is the depreciation of those assets as well as the real estate taxes.

What was depreciation total for the company for the quarter?

I don't have the quarterly number in front of me, but for the year, our depreciation was about -- depreciation and amortization was about $17.9 million.

I will tell you I think about $5.5 million to $6 million of that was from Levelland.

So it should be that much lower next year, roughly?

Correct.

Okay.

And then CapEx for 2011, can you just talk again about what your thoughts and plans are with that?

The first thing with our stock where it is right now, the immediate use, we feel there's no better -- and I mentioned it earlier, we have a very solid book value, even during the low crush period that we have now, the plants we're investing in, they're very profitable.

We think the first thing is to aggressively try to buy back some shares if we can.

The other thing that we're going to work on, looking for new opportunities, if they come across like NuGen and the ethanol business where we can make a large return on the business we know very well, so we're looking at putting corn oil in all our plants.

It's something that some of our plants that we have minority interest, have put in corn oil.

They've been successful, so we're going to look at it at all of our plants.

We're also looking to increase the capacity in our plants if we can, through tweaking.

The EPA will allow us to go more than 100 million gallons, and so we're working at trying to do that in our existing profitable plants.

We also continue, but have not found anything that meets our criteria to look at industrial opportunities that would use our abilities in building plants, locating plants, working with commodities.

We have looked at other opportunities, but as of yet, have not pulled the trigger on any of them, but we continue to look at that.

Again, the biggest use that I can see of our cash would be increasing our ethanol capacity, our ethanol profitability, number one.

And number two, buying back shares.

And what would -- do you have a sense yet of, number one yet in terms of cost?

Mike, I meant to say the other thing, we have to do, and will do is continue to pay down our debt at the existing plant level.

Right, right.

Do you have a sense yet of what number one would be, how much would you spend on increasing capacity and profitability at your plants?

We aren't ready to announce that.

We don't have those final numbers yet.

Okay.

That I would feel comfortable telling at this time.

But we are working on it.

And then the deferred tax that's left on our balance sheet, do we get any more refunds on that, or is that just dependent on future profitability?

At this point it's future profitability.

With the accelerated depreciation that we have taken, we actually have an NOL for federal purposes at this point, so we did receive a refund after January 31, related to our previous tax year, January 31, 2010, but beyond that, we need to generate taxable income in order to use these tax credits.

How much was that refund?

It's around $6 million.

$6 million we got after this balance sheet?

Actually, it was around $7 million.

In terms of Levelland, let me just say that I know it was a hard decision, and I'm sure it was a hard decision, just like it was a hard decision to get out of the electronics business.

And you made it.

And as a shareholder, I really appreciate it.

I appreciate you taking actions that you need to, in to order to run the business properly.

Thank you very much.

We appreciate you saying that.

Thank you.

What I would like to do, if I could, I would like to circle back to the question Bill Jones asked earlier.

For the fourth quarter, the One Earth crush spread was about $0.27.

For the year, it was about $0.34.

It's such a large portion of the overall capacity with us, consolidating One Earth and Levelland, it really isn't much higher than what you would see there because it dominates those dynamics anyhow.

Thank you.

(Operator Instructions).

Our next question comes from Bernard Rabinowitz with Morgan Stanley Smith Barney.

Please go ahead.

Well, actually, it's not a question.

The previous person mentioned something, but in view of Best Buy's problems recently, and what seems to be an ongoing issue for the electronics industry and retail in general, I just want to say as a shareholder and somebody who represents a number of shareholders, we do appreciate that decision, getting out of the electronics business.

Thank you, Bernie.

I appreciate hearing that very much.

Yes, thank you.

Thank you.

And the next question comes from [Bruce Goldsmith], Private Investor.

Please go ahead.

Hello, Stuart.

Hi, Bruce.

How are you doing?

Good.

Yes, I want to reiterate, too, that was a good move to get out of the electronics.

You and I go way back.

Yes, we do.

However, I don't want to play would have, could have, should have, 20/20 hindsight, but given that the past is prologue often times, what if you had liquidated the Company instead of getting into ethanol?

How would shareholders have fared?

They would have fared a lot better.

That's a good question.

That's a fair point, isn't it.

Would they have fared better as of today?

Would they have fared better, I'm not sure because we've used a lot of money to buy back shares at well below book value.

Not well below market prices, though.

Let me finish my answer, then you can -- it's fine.

But we've been able to buy and continue to buy shares.

We can't control the price of the stock on any given day.

All we can do is react to it, Bruce.

Right now, yes, you could say we could have liquidated and gotten book value for our shareholders, but the chance to buy it so far below for our shareholders, it's in the always going to trade at this level, we made some very hard decisions.

If we keep showing -- if we keep showing very good ethanol profits, all our debt will be paid off very shortly, and these plants are cash flowing like crazy.

The plants will be all paid for.

We'll still have that amount of cash.

We're returning a great return on investment on the existing plants that we're still investing on, and there's no guarantee that will happen in the future.

But again, if all those things happen, yes, on a snapshot, what you're saying is 100% right, but with that snapshot, it's created great opportunity for us, and that's what I have to deal with today.

I can't look back and say would have, could have, should have, didn't, but I'm well prepared to do that, we've made the hard decisions to do that, and what the stock does, we can only react to it, we can't price our own stock.

Thank you.

And Mr.

Rose, there are no further questions at this time.

I will now turn the conference back to you.

Please continue with your presentation or closing remarks.

Okay, thank you very much, and again thank everyone for listening, and again I think we're, as I said earlier, we're in the best position we've been in a long time.

Our Company is better positioned now to return shareholder value than it has been in a long, long time.

We're going to do whatever is in our power to make that happen.

Again, I would like to thank everyone for listening, and the support that you've given us, and all the management over the years.

Thank you.

Bye.

Thank you.

Ladies and gentlemen, that concludes our conference call for today.

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

Have a good day.