REX American Resources Corp (REX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the REX American Resources fiscal second-quarter conference call. (Operator Instructions) I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead, sir.

Good morning and thank you for joining REX American Resources' fiscal 2013 second-quarter conference call. We'll get to our presentation and comments momentarily, as well as your Q&A. 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 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 in the Company's filings with the Securities and Exchange Commission Act and include technology risk, 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'd now like to turn the call over to Stuart Rose, Chairman of the Board.

I'd like to thank everyone for attending our second-quarter conference call.

Earnings for the quarter rose 623%. Last year, we made $800,000 in the quarter, this year $5.8 million for the quarter on a sales increase of about 15%, from $153 million to roughly $175 million.

The alternative energy segment of REX showed an increase from $4.9 million last year to $17.7 million this year. Our income from noncontrolling interests in ethanol plants went from $10.4 million this year versus $1.7 million last year. Most importantly, our earnings per share, $0.71 this quarter versus $0.08 last year during the second quarter.

The reasons for the quarter and why we did so well relative to last year were fourfold. First, we were able to get corn. Corn was very scarce last year. A drought made it very, very tough. We did have to pay up for the corn. It wasn't cheap, but we were able to procure corn during times when some plants had to close because they couldn't get corn, or they couldn't get corn at reasonable prices. Our farmer partners proved, again, a great benefit to us and to them.

Secondly, our plants are Fagen/ICM plants. A lot of our competitors have a mishmash of a whole bunch of different plants. They've proven again that they're the best plants in the industry. Our locations being in the Corn Belt, our plants being with Fagen/ICM, again, has allowed us to drastically outperform the other public companies in the industry.

Our crush spreads during the quarter went up significantly. A lot of that had to do with something called RINs. RINs are an item or a number that refiners either have to buy our ethanol or they have to buy the RINs. The price of RINs went way up because of the shortage in ethanol, because of the shortage in corn. Because of this, we were able to get a price for our product that was a better price than previous quarters. And this allowed our crush margins to rise.

Our crush margins hit the spread between corn costs and ethanol sales, so our margins went up significantly because the refiners either have to buy this year 13.8 billion gallons or they have to buy the RINs. Either one of those things allows --- both of those things, I should say, allows us to have a market for our product and allowed us this quarter to increase our margins.

The other thing that worked out in our favor this quarter was a good market for corn oil and DDGs. These are the byproducts --- DDG in particular is a food byproduct that comes from the ethanol. Prices were good in those areas. They're tied to corn prices. Corn was up, and that helped us do better in those two segments.

In the real estate area of our Company this quarter, or since the first quarter, we've leased the remainder of our warehouse. We hope to sell it by the end of the year, but at the moment it's leased for a five-year lease. So we're in good shape there.

We sold three of our remaining stores, the residual stores left over from REX. We have 13 leased. Of the 13, 7 -- or 13 left. Of the 13, 7 are leased. Two of those leases are seasonal leases for Halloween stores.

Real estate, while most people did not do well in real estate, since the real estate that we bought when we were in business with REX turned out to be a good investment and has been a profitable investment for REX over time. The remaining stores are the ones we have left. And at the moment, we are working diligently to try and liquidate or lease those stores.

In terms of cash, it's $68.8 million on our balance sheet at the end of the quarter. Of that, $47.6 million was unrestricted. We also purchased [15,564] shares during the quarter, dropping our overall share count to 8,168,000.

Outside of the ethanol business, we made a technology investment, another technology investment, into an alternative energy technology. Spent about $400,000 in the quarter for a company, which includes applying for patents to purchase 60% of a technology to steam heavy oil at depths of below 2000 feet.

Currently, heavy oil can be steamed up to 2000 feet. You need to steam the heavy oil to make it flow. Current technology allows for pushing steam down to about 2000 feet. After you hit 2000 feet, it dissipates and really is not that productive, or not productive at all, depending on how low you go.

Our technology that we bought 60% of is patented, and it creates steam at depths below 2000 feet. In other words, we create the steam at that lower level, and that allows the oil to potentially flow and allows it to potentially be pumped up once the steam is put down to that level.

If successful --- and we're not saying it will be successful. We've just bought the technology, and we will be testing it. That will be the next step. But if successful, this will open the way for billions of barrels of production around the world.

The United States alone has billions of barrels. And there's the whole rest of the world --- many countries, I should say, in the rest of the world have heavy oil. And again, if we can prove out this technology, it has the potential to be --- it has that big of a potential. But, again, we just made the investment, or we've made the investment in the quarter, and we're a long way from saying it's proven technology. It is patented, proprietary technology.

We like the industry because it's a low capital investment. We so far have spent to date about $400,000. Has high potential returns. Again, it could be huge; it could be revolutionary. Now, that's the upside. The downside is we lose a little bit of money, not a lot of money relative to our net worth. But the upside is potentially very, very good.

Deep heavy oil is an alternative business. We've had -- alternative energy business. Current energy practices do not go after that deep heavy oil. Again, we think we have a unique ability to identify and make attempts to turn what was previously not thought possible into possibly something. But, again, this is at the very, very early stages.

It's a field that's going to require some capital investment and cost controls. Every business we've been in, we've been successful in watching how much we spend. And, again, we look at risk/return. This is a very, very low capital risk, and it has the potential for a huge, huge return for our shareholders.

In terms of the ethanol business, we remain very, very big proponents of the ethanol business. It's one of the few alternative energy businesses that have actually reduced our dependence on foreign oil in a big, big way. We get very little credit for reducing our country's dependence on foreign oil, but ethanol is a very, very large part of reducing our dependence from 60% to 40%. Again, ethanol never gets credit, but we are a big, big factor --- over 13 billion gallons, we expect, this year that would have previously been foreign oil purchases.

We help our local and national economies. We create jobs. There's no recession in farming communities. We allow farmers to turn a profit. Our government still pays farmers not to farm some of their land. And many farmers are trying to get that land out of the land bank so they can grow corn. Instead of paying the farmers, the government are paying farmers not to grow food. They actually are trying to get that land back. Some are trying to get that land back to make money on that land. And when they make money, they end up paying taxes, pay local taxes. They pay national taxes. All that goes towards reducing our national debt.

The most important benefit of ethanol has been the lower gas prices. Ethanol sells at a discount to gasoline. The drivers -- and that's at current prices of oil, we're at a discount to gasoline. If it wasn't for our 13 billion-plus gallons that we produce, oil prices would be significantly higher. Gas prices would be significantly higher. So to the average, everyday consumer, ethanol, we believe, is a huge, huge advantage.

Going forward, in the third quarter we continue to do well. We believe it appears that we will significantly outperform the third quarter last year. Again, same story -- corn is short, but crush margins are good. So we expect to do well in the third quarter. Fourth quarter is a quarter that could be really exciting for us.

Finally, we expect that corn supply will loosen up. It appears that farmers could have a record crop this year. If there's a record crop, then the spread between gasoline and ethanol should widen. And more important than that, the price that we pay for the corn should go lower. Right now, we're paying well above basis for our corn.

There is the potential that --- and then historically this has been the case --- that we could in the fourth quarter at some point in time be paying below basis. And, again, that's a huge benefit to us. And it's, again, a statement of our plants being in the areas that they're in in the Corn Belt, good access to rail to get the product out of the Corn Belt, into the refineries. And again, Fagen/ICM technology is a huge advantage, consistent advantage that we've had quarter in, quarter out, and continue to have.

I'd now like to open the forum up for questions.

(Operator Instructions) Gavin Richey, Rockwood Investments.

Could you talk a little bit more about RIN pricing and how much of an impact that has versus corn, given the volatility there lately?

Well, RIN prices has a lot to do with --- for people who don't know, RIN is -- the refiners are required to buy a certain amount of RINs. And they can get a RIN by buying ethanol, or they can buy RINs on the --- basically on the secondary market.

And RIN prices, because in previous years there was an overabundance of ethanol, and RIN prices were at basically zero, very, very low prices, so they could fulfill their quotas just by buying RINs. Today, RIN prices are at a pretty high level. There aren't a lot of excess RINs running around all over the place.

And it's because of that prices have risen, and it becomes more viable for them to pay up a little bit --- not a lot, but pay up a little bit for the ethanol. And because of that, it's increased our crush spreads, our margins.

And again, we expect next year, or if the law stays the same and no one's talking that I know of of getting -- no credible source is talking of getting rid of RINs. There's some talk of not allowing them to increase. But even if they don't increase, the situation we expect to be good going forward. And that's the law of the land. And we think it's been great for the United States and great for the consumers. I can't imagine that under this administration it would change in a big way, but that's the environment we deal with.

And how much is left under your buyback program?

Doug, do you have the answer to that?

About 370,000 shares.

It's share-based, not value-based?

Correct.

Correct, it's share-based.

Thank you.

(Operator Instructions) AJ Strasser, Cooper Creek Partners.

Nice -- great quarter here.

Okay. Thank you.

Can you talk a little bit about what's some of your dialogue with maybe some of the parties involved in the MLP conversion for ethanol players? There's been some, as you know, some strong support, bipartisan support, for allowing yourself to convert to an MLP. What kind of work are you guys doing, and how are you thinking about it?

Well, the bulk of what we've done is we have -- in fact, it's the lobbying firm of Dennis Hastert, who used to be the Speaker of the House. The firm he works for, and he works with us directly, and we've asked him to look into it. And to date, we're certainly not big enough to be the leaders to push it through. And our feeling is if it does go through, then we will look at it. But until then, it's another thing that's just something out there as a possibility, like a lot of things. But until it becomes -- until it happens, there's no point in really discussing it much at this point in time.

Okay. And then just kind of as you look to the business and we look towards more normal corn, assuming ethanol stays fairly high, which it seems like it should, given the supply/demand, given the stockpiles data, etc., what do you think kind of peak EBITDA margins could be? And to the extent that -- if you don't want to give a number, maybe as compared to ----

We don't like to project numbers and never have projected numbers on going forward, hard numbers. But logically, we're paying significantly above crush spread. Crush spread is actually more important to us than the actual price that we sell the ethanol. It's really the price we can buy the corn versus what we can sell the ethanol.

We're getting a good price for the ethanol today, but the price of corn is significantly above basis. Historically, it's been significantly -- it's been below basis. So our hope is that all that money can be additional profit to our bottom line once this harvest comes in.

There is some downside once the harvest comes in; the price of corn is going to come down. The price that we'll get for our DDGs will decrease because it's tied almost -- it's a substitute for corns. It's a feed. And so the profits we make on that will be less, but nowhere near if we can maintain -- if the industry crush spread stays the same, we'll way more than make up for that by buying corn at more attractive prices relative to basis, basis being the price that corn sells for on the exchanges.

So, Stuart, just kind of maybe generally speaking, and I respect your not wanting to give numbers, but when you look at your business -- and you just put up a really great quarter. When you look at the earnings power here of the story, and you kind of look towards Q4 in a more normal corn environment, is it fair to say that the earnings power is significantly higher than you put up even in this quarter?

That's a very fair statement, assuming crush spreads. And we have no reason to think that they won't stay where they are, but assuming crush spreads stay where they are, that's an absolute logical conclusion, in my mind.

Okay, great. Well, thanks again, and keep up the good work.

Thanks, AJ. Thank you very much.

Bill Jones, Singular Research.

Great numbers. I wanted to ask, just clarification -- did you say there were any real estate sales in the quarter?

Yes.

We sold one --

Since the end of the last quarter, we've sold three stores.

One during the quarter, and two subsequent to the end of the quarter.

Correct.

Gotcha.

We, more importantly than that, had leased the rest of our warehouse, or the bulk of the rest of our warehouse, which had been sitting empty for a number of years.

Yes. And then when we look at the cash flow, you paid off about $9 million or $10 million of long-term debt since the end of the year, I believe. And for six months, you generated $11 million net income, $8.5 million cash. Presumably, with the -- assuming your results stay strong, you're going to generate a lot of cash, right? So, what do you see the use of that? Continue to pay down debt?

Well, we're going to continue to pay down --- the most optimistic use? There's a few uses. One, we're looking at ethanol plants. We have not found one. We don't have anything imminent. There's none that we're currently negotiating on. But there's a potential of a consolidation in the industry.

Secondly, the new technology we bought, if that is successful, we will have a rapid, quick use of cash at a very, very high return. And so that's another use.

The third, AJ mentioned once we pay down the debt, the world is pretty much ours to do what we want with that money, whether it's to return it to shareholders through some form of a limited partnership, continue buybacks, like returning it to shareholders that way, dividends. All of those are open things.

Until that debt is paid off, we are restricted on -- we have over $47 million unrestricted, but the money in the plants is restricted. So we can't just grab at that, but it's a lot of money that's in the plants. And we plan on paying off the debt. And if things continue as they are, we should be able to do that in the next couple of years. But in the meantime, we're going ahead with all the other stuff that I just mentioned.

Excellent. And obviously, the stock is doing pretty well today on these results, but would you repurchase shares at these levels?

We've always bought on dips. We've never announced a price that we've repurchased shares. But I think the last quarter we bought shares at $18 --- the average price was a little over $18. So we don't have a firm level of --- there is no firm price where we repurchase shares. And to be honest, the stock should do well on its own. And so we'll see what happens. We hope the stock should do well on its own, but we will see what happens.

Okay. Well, I think that's all I have for now. Thanks again.

Thanks, Bill.

And we appear to have no further questions on the phone line at this time.

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

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.