REX American Resources Corp (REX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the REX American Resources Corporation second-quarter results 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 Mr. Doug Bruggeman, Chief Financial Officer of REX American Resources Corporation.

Please go ahead sir.

Good morning and thank you for joining REX American Resources' fiscal 2012 second-quarter conference call.

We'll get to our presentation and comments momentarily as well as your Q&A.

But first I will 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 differ 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 report on Form 10-K and 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, Chairman of the Board.

Thank you Doug.

I'd like to thank everyone for listening.

Quarter 2 sales were a little over $107 million versus about $74 million the year before during Quarter 2, the biggest difference being the consolidation of the NuGen plant, which we now own about 99% of.

During the quarter, again, we were the only profitable public ethanol plant that I know of -- or public ethanol company that I know of in the United States.

Earnings were about $800,000 this year versus $2.3 million last year, earnings per share $0.10 this year versus $0.25 last year.

Earnings in our Company and the whole industry was affected by significantly lower crush spread, mostly caused by rising corn prices.

A crush spread crush spread is the difference between the price of corn and the price of ethanol, and corn rows hit a much quicker rate than ethanol did compared to last year.

It was offset -- higher corn prices allowed us to get a higher price for our dried distillers grain which is a food product that is a byproduct from ethanol used for livestock.

And also our corn extraction business -- corn oil extraction business also brought a third revenue source to our Company and offset some of the negative crush spread that occurred during the quarter.

We bought back 158,000 shares since the last quarter, currently have about 8.2 million shares outstanding, have active buyback and still have about 0.5 million shares authorized on that buyback.

We had some small real estate losses which were offset, virtually all offset by some real estate gains on the sale of -- we sold two properties on the sale of one of the properties and also bringing in extended service policies from a prior business.

Currently, we have about $64 million in cash and $48 million of that cash is at the parent level.

Between our cash level and the fact that our plants are certainly among the best in the industry, we feel even, with the crush spreads where they are today, and even if they get a little worse, we will be in fine shape and maybe even better shape if some of our competitors go out of business.

We also have the cash to continue the buyback program, which of course, as we make money, allows the earnings per share to increase for the remaining shareholders.

In terms of our industry, we are up against some pretty tough opposition, mostly from oil companies and livestock people.

So, I wanted to take a couple of minutes to talk about the industry, and say a few points that really don't get across very well to most people.

And we will make a better effort ourselves to get these points across.

First is that we are the only alternative energy product that works -- that actually works.

Billions and billions have been spent on it -- that works as a replacement for gasoline.

Billions and billions have been spent on alternative energy products -- wind, solar replace coal.

This one is a direct replacement of basically oil that's used in gasoline.

It's an American-made product.

We do use natural gas but that's American.

The corn is American.

Ethanol has done a lot to improve the profitability of our farmers or our farm states.

We've improved the balance of trade.

We are not importing billions -- actually, the industry made last year over 12 billion gallons of gasoline.

That 12 billion would've had to have been imported if it wasn't for ethanol.

Ethanol is a product that, as far as national security, if that 12 billion was bought on the open market, certain countries that don't have our best interest in mind would certainly be getting more dollars for their product.

Ethanol has reduced transportation costs.

We sell our product at lower prices than gasoline.

If it wasn't for ethanol gasoline prices would be higher, and certainly much higher if we had to import that much oil.

Gasoline prices are very big part of the food price, so gasoline prices increasing would increase the price of food, so in our minds, it's a myth to say that pulling ethanol out of the market would actually reduce food prices.

Also something that people don't get, I wish our industry did a better job of saying it, but we save a large part of the proteins in the higher-value food price, food product of corn and that is used as the livestock fill that's called distillers grain.

And again, we save that.

It's an important -- it's an important revenue stream for us and it is used as cattle feed.

Going forward, ethanol has become more and more profitable for the refineries to blend as the crush spread has gotten worse and as oil prices have gone up, especially in the last week or so.

With the refinery closing in Brazil and with our products -- our problems with the hurricane in the United States, the spread between ethanol and oil has gotten greater and our spread between ethanol and wholesale gasoline has gotten greater.

And that gives ethanol -- that makes it more profitable for our customers.

It should make a market for our product no matter what the government mandate is or what the government decides has to be bought next year.

We are also working and exploring exporting the product.

Again, our product will sell for less than wholesale gasoline in most countries.

And so we are looking into that.

We don't know if we will be able to directly do that or not, but it's something we are exploring.

Going forward, it's our hope that the industry stays the same, if it stays the same, and they don't change any of the mandate.

And the mandate is the amount of ethanol the oil companies -- the refineries are required to take from us.

If they don't change any of the mandate at all, we will be in great shape because there is a fair -- that will create a guaranteed market for our product.

If they do change the mandate, it's our feeling that it's most efficient company in the business, and with a very, very low debt level that we currently have, that we will continue to do fine, although certainly we'll do better or sleep easier if the mandate is -- if the mandate is continued.

And we think it's certainly in the best interest of the country to continue the mandate.

In terms of crush spreads and in terms of the drought, it is there.

Corn generally goes down during harvest season.

So far, corn has gone down a little bit but not what historically happens, so crush spreads are tough.

Competition is suffering worse and we are -- plants are closing down.

Every plant that closes down, that's good for our Company.

I'm talking to steel people.

I happen to be friends with people that used to run Nucor, and they never feared tough times because competition went by the wayside, they always came out stronger.

That's our feeling of what our Company will do going through what we're going through right now.

At this point, I'd like to leave it open for questions.

(Operator Instructions).

Bernard Rabinowitz, Morgan Stanley.

Nice job obviously under tough conditions.

My question is, with the election coming up, there are various scenarios -- the President is reelected; the House and the Senate stay the same, or the House -- or the Senate becomes Republican, or -- and possibly all three become Republican.

What, if anything, should we think about in terms of what the election might mean in terms of ethanol?

I don't think it's a Republican or Democrat question.

The Obama administration has been supportive to the ethanol -- has supported the ethanol mandate to date, and Romney has announced -- has announced his support to the ethanol mandate.

It's almost comes down to the farm-producing states versus the oil-producing states and the livestock-producing states.

And I think the livestock producers are in -- I understand where the oil companies are coming from.

I don't understand the livestock producers because, again, we have a byproduct that feeds them and also higher transportation costs would hurt them every bit as much as lower corn, in my opinion, as much as lower corn prices would help them.

But the auto companies prefer to sell their product -- prefer to import the product that they own from other countries.

And that's really been a big issue, and we fight that every day in those states that are oil-producing states certainly support their constituents like our farm states support us.

So, we'll see what happens.

Okay, thank you.

Owen [Kubick], [29 Stores Investing].

Good morning Stuart.

You need to work on your rain dance, I am afraid.

I think we might get some rain with this hurricane, but I'm afraid it's a little too little too late.

Too little too late.

I see that Big River is in the process of switching over to isobutanol.

And I was wondering if you could discuss that product and how that plays into the future of REX American.

Big River is exploring it, as is everyone.

I don't know if they have committed to switch over.

I don't believe they have.

It's a higher-quality ethanol product.

It's made from corn; it can be made out of our plants.

We think it's very exciting but, again, we are not pioneers.

They are testing it out.

A company called Gevo is working on it.

And if it works, it will be great because it will give us another market for our product, or it will give someone -- they'll take out some of the capacity out of the ethanol business.

So we'll see.

It's a long way off.

But Big River is a company we are invested in.

They are working with them.

We know other people that are working with them.

And through Big River we are actually working with them, so we'll see what happens.

[Buzz Zaino], [Broyce] and Associates.

Good morning.

Maybe we could talk a little about the cash.

How much of the cash that is sitting at the plant level could be upstream to corporate?

Is it needed to fund debt for those plants?

And of the remaining cash that you have, how much of that do you feel comfortable with buying back stock versus whatever opportunities there may be in the market that is distressed right now?

Let's go over the first question.

On the upstream of the cash, we could probably upstream some more if we chose to.

But one of our big advantages over our competition and why we do well and some of them aren't is we don't have a gun to our head from the banks, and we have a very powerful statement leaving the cash where it is.

And if things get bad, it's a good hedge and it's not using parent cash.

We did pay a dividend to ourselves last year, and we'll see how it goes this year.

But right now, that's a very, very strong lever in a very tough market, and maybe one of the reasons we are able to still make money and our competition right now is scared to death.

In terms of dividends, we certainly have the money for this buyback.

And there are certainly plants out there that we think will become available, good plants.

Whether we want to go deeper into the ethanol business or look at possibly other things with our cash, that's a board decision.

But that opportunity will certainly -- the Board will certainly, in my opinion, have that choice if things continue the way they are.

And we certainly have the money to, as we showed last year, if a great opportunity comes along, to take advantage of it.

Could you share with us what other areas you might be looking at currently, other than ethanol?

We look at a lot of things.

We don't have anything imminent.

I guess other things include other alternatives -- we were at one time in the synthetic fuel business.

We did very well in that.

If something like that came along, we would look at it.

Other alternative fuel businesses that maybe use our expertise in working with the refiners or use our expertise in built-in plants, that type of thing would be -- I would think we would want to stay somewhere in the alternative energy business, but that would be the type of thing that we look at.

Again, our ethanol business has been up, even this quarter was profitable, but for the last few years the plants, we haven't been extremely profitable and we haven't found anything better than the ethanol investments, like the one we made last year.

Great, thank you.

Mark Cohen, Westside Investment Management.

Hello Stuart.

Thanks for going through some of the political issues and some of the misconceptions.

I'd written this out yesterday.

And there's a few questions sort of associated with that, so to the extent that you could elaborate I would really appreciate it.

Sure.

In practical terms, irrespective of the mandate and the political noise, what are the social costs of replacing 13 billion gallons of oil with ethanol?

Is there a natural level of ethanol demand in the context that the refiners need the octane from the ethanol to --?

There is -- to hit the air quality standards that are required today, ethanol will always be there because they need it to -- there is a natural demand right there.

There's also a profit demand for refiners because they can buy it for less than gasoline that aren't owned by oil companies.

In terms of the disaster that would happen if ethanol was pulled out of the economy, I don't know -- I don't know how old you are, but Farm Aid wasn't that long ago where our farmers were starving.

Now they're able to make ends meet; they are not taking as much the government.

They are still paid in many cases not to farm land, which they would like; many of them would like to get that land out of the land bank and farm.

If we wanted more crops, all we would have to do is allow them to voluntarily pull their land out of the land bank and we would have more corn planted immediately.

The banks in these markets do well, the rest of the country is in Great Recession.

Ethanol I think is a primary reason the farm states aren't in the Great Recession.

The farm equipment people are doing well, It goes all the way through the economy and unfortunately a small industry seems to be able to get all the press whereas our industry and the farm industry right now is not getting -- for whatever reason is being dumped on and the drought is being used as an excuse.

Even with the drought, there's more than enough corn to satisfy domestic needs and the ethanol business.

And it's -- so I forget which politician -- it might've been Obama at one time said "A crisis is a horrible thing to waste." And that's exactly what I think the oil industry is trying to do -- take advantage of the drought and put our industry back many years.

Hopefully, we'll be able to prevail.

Okay.

So in practical terms, is there any way not to become an industry punching bag?

What does it --

We are working on it.

We are looking at trying all sorts of different ways to better get our statement out.

Unfortunately, in terms of the public ethanol, mostly the companies that make most of their revenue from ethanol, it's a sick industry to begin with.

It's cutting back anyway, so I think it's going to be pretty much in our hands to get the -- or we're going to have to take a little bit more leadership in getting the story out there, which is not something that we have been historically comfortable doing.

But I think it's something we're going to have to try to do anyway.

It's really unfair what's going on.

It would seem that way.

All right, I do appreciate it.

Thank you very much, and continued good luck and that was a very good quarter to come out profitable.

So thanks.

Thank you very much.

Bill Jones, Singular Research.

Thank you.

Congratulations again on remaining profitable and outperforming the industry.

But I wanted to ask, Stuart, the last few years there's been seasonality where Q4 was really strong.

I know it's hard to project what's going to happen, but should we -- what do you think the most probable scenario is?

You still have the mandates.

Should we say keep the mandate in place, Q4 should be good because there would be -- although the oil companies don't -- they still have some leeway left from prior purchases in prior years, that the mandate is in place and the spread between wholesale gasoline and wholesale ethanol, even if it narrows, which is good for us, they are still making -- can still make good money on our product and I would think it would be -- if the mandate stays in place, we will be in good shape.

Everything for the fourth quarter is probably predicated on leaving things alone, which we hope happens.

Right, so assuming all the mandates stay in place, there's still contracts (multiple speakers) pattern (multiple speakers)

(multiple speakers).

On the other hand, if the mandate, if they temporarily waive the mandate, we will do fine long-term, but that's going to create havoc.

I think a lot of people are shut down.

There will still be a demand for ethanol.

The spread between wholesale gas and corn will probably drop a little bit.

The spread will get greater.

We'll probably do okay but I don't know if we will do anywhere near what we did historically in the fourth quarter.

But if they waive the mandate logistically, can the ethanol -- will people -- the ethanol still kind of ingrained in the system.

Even if it's waived, do you see them not buying it as much?

I think they will buy -- the refiners that are not owned by the oil companies will continue buying just as much.

The ones that are owned by the oil companies, it probably depends on their particular economics.

Okay.

Thank you.

That's helpful.

(Operator Instructions).

There seems to be no further questions at this time.

Please continue with your presentation or closing remarks.

I just want to thank everyone for listening today, and I appreciate your support for not just us but the ethanol industry.

And we are going to continue to run the best company we can, and we'll see what happens.

Thank you very much.

Bye.

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

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

Have a great day everybody.