REX American Resources Corp (REX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Rex American Resources Corp fiscal 2011 third-quarter earnings 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, the Company's Chief Financial Officer.

Please go ahead, sir.

Good morning, and thank you for joining Rex American Resources fiscal 2011 third-quarter earnings 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 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 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 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, Chairman of the Board.

Thanks, Doug.

I would like to thank everyone for listening today.

The third quarter that we have just completed validated Rex's strategy of having the very best ethanol plants in the United States.

Our plants are virtually all Fagen ICM plants, 100 million-gallon capacity.

They are located in the corn belt, they have good DDG markets for the byproducts, good rail, good natural gas.

Again, we consider our plants to be among the premier facilities in the United States.

Very consistent, and again, Fagen ICM technology has proven itself out to be the best among the technologies we know and the results speak for themselves.

In terms of the results, quarter three net income, $6.5 million this year versus $4.3 million last year.

Earnings per share were $0.70 a share versus $0.44 a share last year, that's up 59%.

Earnings from continuing operations were up 67%, $11.9 million this year versus $7.1 million last year.

The increases came from basically two things, more ethanol earnings and not having to go against our comparisons with the written-off Levelland/Hockley plant in Texas.

A large part of our increase in earnings came from our 48% investment in NuGen.

NuGen operates in Marion, South Dakota.

NuGen's earnings for the quarter were approximately $6.1 million pre-tax, and we were able to bring in roughly 48% of these earnings into our unconsolidated earnings.

November 1, we purchased an additional 50% of NuGen, which will allow us to consolidate NuGen's earnings with our majority-controlled or majority-owned ethanol plant One Earth.

It will allow us to report 98% of those earnings versus 48% of the earnings, and again, NuGen is an extremely well-run, great plant, a great part of the country, with great technology and so forth.

Earnings over the previous 12 months for NuGen -- 12 months ended July 31 were $24.3 million, earnings for the three-month period after that for NuGen were $6.1 million and going forward, we'll be able to consolidate 98% of those earnings.

The price we paid for the additional 50% of NuGen was $12.7 million.

We also made a capital contribution to reduce debt of $7 million.

So total capital money spent by Rex was about $20 million.

And again, this will allow us to consolidate virtually all of NuGen's earnings.

With Rex's purchase of NuGen, our ethanol capacity increased roughly 30% from 169 million gallons to 219 million gallons.

This is Rex's share of the equity in the six plants.

Again, this is name plate production.

Actual production at this current time is significant, especially at NuGen, significantly more than the name plate capacity.

During the quarter, we also -- while we were buying and working on buying NuGen, we also repurchased over 10% of our shares, 1,057,696 shares, bringing our share count down to roughly 8.3 million shares.

Again, between that and what we bought since the end of the quarter brings our share count down to roughly 8.3 million shares.

Full effects of the share repurchase, what we found on our fourth-quarter earnings per share and future earnings per share, and again, we looked and have been fortunate enough to buy our shares at a price that's below book, at what now is an extremely low P/E ratio.

So every time we buy shares, we have the ability to increase our earnings per share and increase our book value per share.

We're currently buying our shares at roughly two-thirds of book.

Going forward, Rex looks to increase their earnings.

First of all, the consolidation of this plant and the increasing gallons will -- if the plant keeps doing as well as before, will significantly increase our earnings.

Second, we're looking to buy bigger stakes or try to buy bigger stakes in the other ethanol plants, and other ethanol plants that we don't own 100% of, similar to what we just did in NuGen, if possible.

We're also putting in corn oil facilities in NuGen and One Earth, which should increase our profitability in those two plants.

We would also like, if possible, and are looking continuously to try and buy other ethanol plants, if the price is right.

We also continue to buy our own shares.

We have a buyback going on right now.

Again, we can buy our own shares at roughly two-thirds of book value, and at a very, very low price-earnings ratio.

We continue to think that's an excellent use of our capital.

We have looked at other biofuel opportunities and other industrial opportunities, but to date, we've found nothing better than buying our own stock and buying our own ethanol plants, or buying bigger positions in our own ethanol plants, but we do continue to look at these other opportunities.

They may or may not come up over the next year.

In terms of the industry, we're very optimistic for the fourth quarter.

Crush margins are very, very good right now.

They have risen significantly over the previous nine months of this year.

Part of this increase may be due to the expiration of the $0.45 credit, or $0.45 per gallon that our customers currently are receiving.

That ends at the end of this year and that has helped our customers a little bit.

None of that has gone into our pocket.

It's our feeling that our customers are passing that on to the consumer.

More important, and what's important to our industry and to us, is the mandate requirement.

Currently the industry is required to basically buy over 12 million gallons of our product and that mandate will go up next year, and roughly keep supply and demand in balance.

In terms of our industry, I don't think enough is said about our industry and the importance of the ethanol industry to our country.

It's helped us to reduce our balance of trade, in large part of the decline in the foreign imports of oil.

It has allowed us -- it's allowed farmers to become profitable without price supports, without government handouts, so to speak, on their own, to become -- all of a sudden their land and their work has become very profitable in itself.

We've reduced our deficit as a farmer -- our industry to farmers and ethanol producers, and all the ancillary services.

We've paid income taxes related to this business.

I think we're probably the biggest part of keeping the farm states out of recession.

The other thing that we've done which isn't recognized by many people, is we've created basically our -- increased significantly a large livestock food, DDG.

The proteins from our ethanol become a food -- become a by-product.

We only use the starch.

Those proteins are sold to the livestock industry, and again, it's something that, in terms of our industry, we get very little credit for.

Most politicians today recognize the importance of our industry.

We expect the mandate to continue and that mandate grows over the next few years, and no matter who is in the White House, we think ethanol, because of the importance to the country, will continue to be supported by Washington, whoever is in control.

In conclusion, we are a rapidly growing company.

We just increased our gallons by 30%.

We're adding, we're adding corn oil to increase our profitability.

We have state-of-the-art 100 million-gallon Fagen ICM plants located in the heart of the corn belt.

With all these factors, with an expanding crush spread on our industry, we had good earnings per share last quarter, but more importantly, we have the potential right now for our earnings per share to explode going forward, and that's exactly what we're seeing in the fourth quarter, the current quarter that's going on right now.

I would now like to leave the forum open for questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Richard Dearnly with Longport Partners.

Please go ahead.

Two NuGen questions.

Is the going price for interest in maybe not the whole plant, but interest in ethanol plants $0.25 a gallon these days?

That $0.25 a gallon isn't accurate exactly, because there's different levels of debt on every plant, so we have certainly paid more than $0.25 a gallon because that plant, when we bought it, had roughly $0.55 per gallon of debt on it.

Is that the going price for ethanol plants?

Most ethanol plants aren't up for sale.

Again, the ones we've seen mostly have sold for, they've sold for all sorts of different prices.

In this case, we might have gotten an attractive price, because first of all, we've been good customers.

We work well with them, with our farmer partners in this operation, they like it that it's in our hands.

They are very concerned about the corn, and they want to make sure we keep buying and they want to put it in friendly hands for the corn supply.

We also hit the ability to take this plant to over 51%.

It limited the amount of people that -- very few people are interested in the minority position.

Yes, right.

So we had already had the controlling position.

I would think that this was -- I don't think going forward, I don't know what the price will be going forward, but if the earnings keep staying where they are, we're hopeful that we made a very attractive purchase.

Would the, if we tossed in the $0.55 a gallon of debt, would the price have been $0.80 a gallon?

It would be $0.55 plus, give or take.

Give or take, okay.

And the equity in unconsolidated lines was up $2.6 million, and you said 48% of NuGen was within the quarter.

That would be $2.9 million.

Would the rest of the unconsolidated down $300,000?

No, we probably have a little bit of a mixed bag there.

We report earnings on a one-month lag, so the earnings that they reported was -- what we reported was through September 30, and the number that we talked about was through October 31, because that's their calendar quarter-end.

There was also -- contribution from NuGen was about $2.7 million.

Big River, about $1.6 million, and Patriot, $2 million.

Okay.

And then, in the repurchases so far this year of about $18 million, if, instead of buying back stock, you paid that out of the dividend, you could pay down, roughly speaking, $2 a share, has the Board considered, would the shareholders be better off if you paid out the money and kept the share count flat, now that the five-year ago option dilution has stopped?

Well, to answer your question, the Board has looked at it and the Board's position, and it looks at it continually, but in the past, we've always felt that it's better if you're going to pay out money to buy in the shares, which allows you for the current shareholders to reduce earnings -- excuse me, as you earn money, to increase earnings per share, because there's less shares, to also increase your book value per share, which we consider an important metric in looking at our company.

The replacement value of these plants is probably $200 million each plant and you can figure that out.

We actually have them on the books now for considerably less than that.

In terms of a dividend, we could pay out a one-time dividend, but if someone really needs the cash and they could sell 6%, 10%, they can sell 10% of their stock.

The other thing that we're doing that's healthy by buying in shares is supporting the rest of our shareholders.

If we weren't buying it in the shares, those shares, it's not like they wouldn't be sold.

They could potentially be sold at much lower prices, so we have chosen to go this way.

That doesn't mean that we'll forever go this way.

Once the debt's paid off, and it could be paid off if we keep earning the type of earnings we're earning in this quarter, could be paid off in the next two to three years.

There would be so much cash flow coming in, I can't tell you what the Board will do at that time.

But our decisions to date, since we can't do everything, were to go with the share buyback.

Our next question comes from the line of William Jones with Singular Research.

Please go ahead.

Great quarter, and I have a follow-up question on the NuGen.

How much of the $12.7 million was contingent consideration for the original 48%?

It's roughly $3 million.

Give or take right around $3 million.

Okay, and then, so we'll consolidate 200 million name plate capacity now of the 219 million owned versus the 100 million, or the 169 million prior, correct?

Correct.

Okay.

So in a way, that's--

If you consolidate 219 million, Bill, some of it stays unconsolidated.

Right.

What I'm saying, we'll consolidate 200 million of the 219 million?

Roughly, yes, we'll be consolidating 200 million gallons, and we'll have a minority position that might not have been there for minority positions.

For anyone that, for anyone that knows us, we are talking name plate.

Other people who try to make a big deal out of gallons of production talk about actual production, the industry actual production on Fagen ICM plants is typically about 10% more than name plate.

We could care less.

We're much more concerned about profitable production, not how much production, and in that metric, we think our numbers, again, and our plants, are second to none.

Go ahead, Bill.

Yes.

We'll get two months of NuGen in Q4.

Yes, we'll start consolidating November 1, so, yes, that's--

If we shorten our year end to January 31, the NuGen year into January 31, I believe we will actually have three months in there, Bill.

Okay.

For modeling, that plant is very similar to the One Earth?

Yes, it's very similar and it should be very easy to model, if you just look at One Earth, that's correct.

Given the trailing 12 months.

The trailing three months for the quarter.

Right.

Okay.

And then looking forward, do you expect to continue to be as aggressive on the share repurchases or look more for acquisitions?

No, I think those were opportunistic repurchases this quarter.

Generally the share repurchases, we don't see them anywhere near this type of volume.

There was one seller out there that allowed us to buy much more than we normally buy.

If you go back to the previous quarters before that, I would expect the share purchases to be in that level, not this quarter's purchases.

Okay, and there was a gain on disposal of assets, a small gain.

Did you sell some real estate?

Yes, during the quarter, we disposed of three retail locations.

That's correct.

Bill, those are also slowly coming down and the real estate, the stranded real estate that we have left is becoming almost insignificant.

Okay.

Well, again, great quarter.

I think that's all the questions I had.

The production was 25.7 million gallons consolidated?

Yep, sounds about right.

Okay.

All right.

I think that's all I have for now.

Thank you very much.

(Operator Instructions).

Our next question comes from the line of Robert Littlehale with JPMorgan.

Please go ahead.

Good morning.

Could you shed some light on your thoughts as it relates to E-15?

E-15, for some reason the government has -- in my opinion, has done the industry very, very -- I think they tried to do something to help the industry, but it was ineffective, because they didn't allow it to be for all cars and since it's not for all cars, there's very few pumps that pump E-15, because most pumps don't have the capacity to pump E-10 and E-15, so because of that, it's done very little to help the industry.

If somewhere down the road, the government allows all cars to run on E-15, and we firmly believe that all cars should be able to run on E-15, it would then -- there would be no changes needed at the pumps and it would be a great benefit to our industry.

But at the moment, we didn't have any -- we don't think E-15 has helped in any great way.

And industry-wide, just in terms of capacity currently, is it stable, is it gone down?

What's the trend currently, just industry-wide?

Well, right now, this quarter the industry's extremely profitable.

So it's staying very -- plants that are open, bad ones are treading water.

The good ones are making great money, like ours.

And industry capacity, though, over the year, a lot of, a lot of the plants that were not in the corn belt are not in operation, and we think it's doubtful that they will get back in operation.

This industry really works best in the corn belt, but -- and with the mandate going, we think there's actually a good chance that supply and demand will be in balance.

Actually the industry is now exporting some ethanol and that's a very good sign for the industry.

Gentlemen, we appear to have no further questions at this time.

I would now turn the call back to you to continue with the closing remarks.

Thank you.

Well, again, I would like to thank everyone for listening.

We're continuing to do what we think is right, which is buying shares, increase capacity.

Our industry is profitable.

We should be this quarter extremely profitable, and we'll look forward to reporting those numbers when our audit is completed at year-end.

Thank you very much for listening, and we appreciate your taking the time.

Bye.

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

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