REX American Resources Corp (REX) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the REX American Resources Corporation 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 Doug Bruggerman.

Please go ahead.

Good morning and thank you for joining REX American Resources fiscal 2011 second-quarter conference call.

We'll get to our presentation and comments shortly as well as your Q&A 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 risks and uncertainties associated with 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.

With this, I'd like to turn the call now over to Stuart Rose, Chairman and Chief Executive Officer of REX American Resources.

Thanks, Doug, and I would like to thank everyone for listening today.

Earnings per share for the quarter we're happy to announce rose 108% to $0.25 from $0.12 a year ago.

Sales rose 13.5% basically reflecting the higher ethanol price and distiller grain prices.

In terms of contributions to profits, we had $2.9 million that came from a final payment of a sale of a synthetic fuel facility in Gillette, Wyoming.

That was a contingent payment waiting on final audit.

The final audit is finished, so we received $2.9 million there.

We also benefited from almost $3.8 million in the profits from our unconsolidated ethanol facilities.

Going against these increases were the real estate segment where we reported approximately a $1.3 million loss.

The bulk of that loss was a $1.2 million write-down of our [needmore] warehouse.

Reflecting the lack of offers to purchase our warehouse, we have been able to lease a good part of the warehouse, so it's not a cash drain, but we felt taking this charge more accurately reflects the current value of the warehouse in the current real estate market.

We also had a $0.3 million loss in our consolidated operations primarily caused from a maintenance shutdown and three subsequent power outages to one of our plants, the One Earth facility.

Overall income increased from $1.2 million in quarter two of 2010 to $3.1 million in quarter two of 2011.

Cash has increased to $96.4 million including $84.2 million at the parent level.

Some of this cash last quarter was used to repurchase shares.

We bought back 163,000 -- almost 163,000 shares in the quarter.

Going forward we plan to use the cash to continue to repurchase shares.

We have almost 276,000 shares available on our last authorized buyback from the Board.

We continue to think this is a great use of cash.

We have increasing earnings.

We have a company that is selling below book value and we look at repurchasing shares in our Company.

It's a great way of both lowering our share count and increasing the earnings per that go to our individual shareholders.

In terms of other ways that we're looking to use cash, we're continuing to look to increase our percentage ownership in some of our plants.

We are working on things that could do that, although nothing is firmed up as of yet.

We are also looking to increase production wherever possible just by tinkering and doing little things that can increase production over nameplate capacity and in most cases, most months we do run over nameplate capacity.

Also looking to enter the corn oil business, and are working on that.

That's a profitable byproduct of our DDGs and that would increase earnings per share next year should we enter that business.

Other things and other uses of cash, are exploring opportunities in other industrial businesses where we can leverage our commodities expertise or our biofuels expertise and we look at that on a continuing basis although we have nothing firm at this time.

Going forward in the ethanol business, all plants are currently doing well.

The One Earth facility that had a little bit of a blip last quarter is now back on track and made approximately $1.8 million in the month of July.

They continued to do well in the month of August and that should go back to being one of our most profitable ethanol plants like it always has been in the past.

For all our plants, corn is currently tight right now.

Again we had the foresight to have farmer partners in all our plants, so we think we're going to come out better in this period of tight corn supply than our competition.

But it is tight.

The new crops haven't come in yet, the old crops are running out.

So we think we'll be fine, but maybe some of our competition won't be fine.

We are though having to pay a little bit more for the corn than we had to pay in the past and that is something that could hurt our margins a little bit.

On the other side of the coin, crush spreads have expanded over the last quarter, and so the industry crush margins have gone up.

So we are benefiting from that.

Again we think we did better than our competition relative to corn.

In terms of the fourth quarter, we should do -- we expect to do and hope to do extremely well.

The [$0.40] blenders credit will still be in place.

That'll be the last quarter it's in place.

We expect some of our customers, refiners to buy more product really than they have in the past.

It should increase prices and it should increase margins.

That could come back against us in the first quarter of next year when there is no blenders credit, but we are still hopeful and optimistic about next year because of the mandate which requires 13.5 -- the government mandate to purchase ethanol which requires 13.2 million gallons to be purchased next year versus 12.6 this year.

And with a lot of the destination plants going off line right now, the destination corn plants going off line right now, should be less capacity or we expect there to be less capacity chasing this 13.2 million and that in our opinion keeps us optimistic for next year with the opinion that less capacity and more demand should drive up prices.

Overall, REX has invested in state-of-the-art 100 million gallon ethanol plants.

We are the only public company we know that is invested in as many as we have and that strategy appears to be paying off.

We're showing good profits in a quarter that for the industry was a very, very difficult quarter.

The next quarter and end of the year quarter should for us be even better.

And again as long as we keep outperforming the industry, as long as we have better corn access and better plants, we expect to continue to do very, very well.

I will now leave it open for questions.

(Operator Instructions) Bill Jones, Singular Research.

You'd mentioned there was a couple retail stores that were sold in the quarter.

Do you know what the gain was on that?

It was less than $100,000 combined.

It was a minimal gain, Bill.

Okay, and then excluding the outage at One Earth, is it reasonable to say that that plant, the gross margin there and the performance there is still similar to the other plants?

Historically that plant has done as well or actually better than most of the other plants.

So -- and I think it's right back to doing that now.

It had like we said a good July, it's having a great August.

It's a great plant and to me it's the jewel of our Company and it will continue to be that.

Great, so the production there was 23.6 million in the quarter?

Correct, right around there.

And I think you said the estimated loss was $0.3 million?

No, it's for all consolidated operations.

Okay, gotcha.

I think that's all I have for right now.

Very good.

Mike Neary, Neary Asset Management.

I just had a couple of quick questions.

What was CapEx and depreciation in the quarter?

Depreciation was about $5.5 million and CapEx about $600,000 -- well, that's for the six months.

It's been relatively consistent for the year (multiple speakers)

These plants are generating a lot of cash, a lot of that cash is being used to pay down debt at the plant level.

But they're generating far more cash than reported earnings obviously.

Do you have a sense yet it terms of -- you'd mentioned tweaking your plants, you had talked about these projects in the past.

Are there any that you're going forward with?

Can you give us a sense of (multiple speakers)

Some of them already have the corn oil.

Patriot has the corn oil.

Big River has the corn oil.

They are showing increased profits because of that and we hope to -- we're just currently negotiating contracts for the other plants to do the same thing.

One of them [parts that is in short supply] we've actually already ordered and I think it's already in.

So once we finish negotiating the contracts with the suppliers, we should be able to move real quickly on it.

So do you have a sense in terms of CapEx for the rest of the year?

I would say it's -- these are not big expensive projects.

Assuming we don't spend money buying -- and I don't know -- this wouldn't really be CapEx.

But assuming we don't spend money buying a bigger position in some of these plants which I mentioned we were working on, then it would probably be in the less than $5 million range.

Okay, so pretty minimal.

Okay, and then how many bushels did you guys use in the quarter?

Were they pretty much close to their historical efficiency?

Yes, One Earth's efficiency was a little bit down because of being offline at times and things like that, but they were in general between 2.7 and 2.8 was the conversion.

Okay, and then hedging the past, you guys have always been -- have you changed your strategy there at all?

Or are you still doing pretty much the same things?

We only hedge -- Big River hedges a fair amount.

That's the one we own 10%.

But the ones we own a bigger percent, we try our best -- our hedging really is taking both sides of a transaction the purchase of corn and the sale of the ethanol.

And when we can do that and lock in a good margin, we go for it.

Generally we can only do it a month or two in advance.

And that strategy has really paid off for us.

Other people who have hedged much further than that usually lose opportunities in the fourth quarter of the year because they've already locked in a smaller profit than they can get.

In first quarter of the year it's really hard to hedge anyway.

It's almost impossible because the commodity situation -- the spot market is so much higher than the futures market.

So when you do hedge, it's almost always balanced on both sides?

We try our best.

It's never going to be perfect but that is our goal, to try our best to balance on both sides.

Once in a while we'll have a little more corn than we will ethanol sales, and that is just the nature of -- the corn usually gets hedged first.

Okay, and when you look at doing things either other industrial opportunities or increasing your ownership stake in the plants, are you noticing any changes in terms of people's valuation expectations or can you just give some kind of sense of the level of opportunities out there versus (multiple speakers)

We absolutely think we have great plants and we're trying our hardest to increase our percentage ownership.

In terms of valuations, it's an oddball industry because every month -- it's very hard to plan year to year in this industry, so I don't think valuations are people's expectations of -- even though our plants are very profitable, I don't know that people's expectations have changed greatly on what we can buy this year should that opportunity come up.

(Operator Instructions) Richard Dearnly, Longport Partners.

To follow up on that last question, as you pay down debt at the plant level, at what point does the debt get to a comfortable level and then the excess cash flow really becomes excess?

A lot of the -- again the comfortable level in most cases is not our choice.

That's designated by loan agreements.

Those loan agreements are mostly five-year agreements.

We are allowed to pull out about 35% of that of the cash but a good part of that is used to pay taxes.

So it's not like we aren't getting any cash from these plants but the loan agreements are such until we refinance them which -- or until we go -- we would have to modify the loan agreements and they last for another two years or so before we can see significant cash go to the parent company.

And as you know, the parent company has significant cash anyway.

So it's -- paying down these loans is not the worst use of capital considering our cash position.

We are not earning anything on our cash.

(multiple speakers) the other thing that we are using the cash for obviously is to buy -- and this is another answer to Mike's question.

We're still able to buy our shares at roughly two-thirds of book value, so we're able to basically purchase plants in our opinion -- good plants, great plants, the best plants in the industry.

When we do buy shares, we're purchasing them for two-thirds of their book value which to me is a very good purchase.

Right, and then in terms of DDGs, is there now -- is there some established relationship or evolving relationship between DDG pricing and corn or --?

(multiple speakers) it always is tied to the corn market.

It's not a perfect match but when corn goes up, DDG is basically used as a cattle feed and the farmers love it.

It's a high-protein cattle feed.

And it's a lot cheaper than corn.

It is cheaper, yes.

They would argue it's not a lot, the cattle people, but yes, it is cheaper.

It's definitely higher protein and less fat which for some people is good, some people it's not good.

I see, and are you familiar with Gevo's process of repurposing ethanol plants to make isobutanol?

I am but I don't know -- I couldn't comment on it.

I've never really had a chance to see their pilot plant.

But again if they are successful -- and there's a number of other people besides them that would be great for us and the beauty of Gevo is they would use corn-based -- they could actually convert corn ethanol plants into -- and basically give another product besides ethanol for the corn ethanol plants.

So we hope they are successful.

It would be great if they are successful, but I can't tell you whether they will be or not.

If ethanol producers actually converted plants, would that be part and parcel of the government canning their -- the 13 billion gallons -- or whatever it is that the future, the requirement to use ethanol?

I don't know the answer to that.

There would not presumptively be enough ethanol to keep that (multiple speakers)

At the moment Gevo's numbers are so low, the question isn't really important.

But it would be great if that is the case.

But I can't tell you the answer to that.

Would be great if they were buying a lot of ethanol or converting a lot of plants and the mandate was still there that regular ethanol had to be purchased, but I don't know the answer to that at all.

Right, okay.

Thank you.

Mr.

Bruggerman, there are no further questions from the phones at this time.

I will now turn the call back over to you.

This is Stuart Rose again.

Just wanted to thank everyone for listening and again our strategy of having 100 million gallon Fagen ICM plants, we're very proud of it; farmer partnered and very excited about the next two quarters.

It should be as good as it has been for us for a while and we're again looking forward to it.

Thank you for listening.

Bye.

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

Thank you for your participation and ask that you please disconnect your lines.