REX American Resources Corp (REX) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources third-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 Bruggeman, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining REX American Resources' fiscal 2013 third-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 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 like to now turn the call over to Stuart Rose, Chairman of the Board.

Thank you, Doug, and I'd like to welcome everyone to our third-quarter conference call. Earnings for the quarter rose to $9.9 million compared to $400,000 in the comparable quarter last year. Earnings per share rose to $1.21 from $0.05. Earnings year to date, $19.2 million versus $2.15 million last year. Earnings per share, year to date, $2.34 versus $0.26 last year. Sales were off a little bit. As we receive lower corn prices, we pass some of that back down to our customers.

The biggest reason why we did so well this quarter, and why things are going so well, is our gross margins went up so much. They increased 386%, from $3.7 million last year to $18.2 million in the quarter. And year-to-date, our gross margins have gone up almost over 100%, $37.9 million versus $16.2 million.

The reasons, again, why we're doing well, and things are going as they are currently -- there are a few reasons. The first is the increase in crush spread. Corn prices, the harvest came in, and we benefited. Some of that benefit came in this quarter. With the harvest coming, corn prices for us fell quicker than ethanol selling prices. We were paying significantly over basis for corn for most of this year. And with a good crop in, our prices have gone down dramatically relative to basis, and a lot of that has come into our margin.

The second thing is historically higher than RIN prices have allowed us to -- our customers have helped -- have caused them, or have incentivized them, to buy ethanol versus RINs, which we don't sell the RINs directly; we sell the ethanol and they could get RINs when they buy our ethanol.

The third and probably biggest reason is we have terrific plants. We have Fagen, ICM, large plants in the corn belt. And, again, our plants are among the finest in the industry. We don't have any plants that are dragging -- any plants that aren't Fagen/ICM. We have very, very good plants.

And the fourth reason is the selling price, the strong selling price of our byproducts, DDG and corn oil. They did very well in the quarter and they continue to do very well. Demand for both of those products is very, very good.

And, finally, and the most important thing that we have that separates us from the industry, and that we feel very strongly makes us better from the top down -- from Zafar Rizvi, who runs our ethanol division; to the plant managers, to the plants, to the people -- we feel we have the best employees in the industry, the most experienced, seasoned. We've been in this business for a long time. They've been doing their jobs for a long time. And, again, our employees are really what separates us and makes us better than -- makes us feel we are better than the rest of the industry.

Going forward, fourth quarter is continuing very strong. We definitely will outperform last year. Last year we had a large loss in the fourth quarter. And based on current results, if things stay as they have been, and we're already over a month into the quarter, we currently expect to outperform our results of the third quarter.

We currently benefit from strong ethanol demand. Inventories are low. Crush spreads are at very profitable levels. Corn prices now -- the harvest is in, so corn prices are in our favor. We are paying significantly less for corn, relative to basis, than we had previous during the year. So things are currently looking very, very good.

And our plants -- and I'll say this again -- we consider our plants to be among, if not the very best, in the industry. They are certainly among the very best in the industry.

On clouds on the horizon for next year, the only big one is the EPA's decision to reduce the renewable fuels standard a little bit. And that certainly is not a benefit. This year, I believe it was 13.8 million gallons. Next year -- or billion gallons. Next year, 13 billion gallons. And, again, that's something that the industry does not like to see. It's not helpful. We think it's silly. If the goal is to wean the US off foreign oil, this is a step in the wrong direction. Hurts our balance of trade; farmers been taken off price supports. Now there's talk of that starting to happen again. Farm belt hasn't been in recession. Again, we think this is a silly decision; don't understand it. And hopefully in the next 60 days in the discussion period, it will be changed.

That being said, if it's not changed, a lot of plants have opened in the last quarter. We've been through times when there's been more supply than there is demand. We expect the marginal plants to close. Corn prices are down significantly. We expect import of ethanol to be not down considerably. And, again, with the very best plants in the industry, we've been through this a number of times. The marginal ones fall off, and there are -- and the poorly financed ones fall off, and the better ones tend to get stronger. That's what's happened to us, and our results prove that out.

In terms of our -- the other thing I should say, related to next year, is corn prices -- if this mandates -- or if the lower RIN number stays in effect, it should dramatically lower corn prices, as demand for corn will be less. And with lower demand being in the corn belt, hopefully we can buy our corn relative to basis even better than we are currently doing.

In terms of our cash position, we now have $93.4 million in cash. $46 million of that is unrestricted at the parent level. Our debt is down to $88.4 million compared to $107 million, or approximately $106.9 million at the beginning of the fiscal year. We're in a very, very strong cash position. And, actually, our cash is greater than our debt, should we choose to pay all that debt.

Our repurchase program is continuing. It's active. We bought back 76,457 shares during the quarter at an average price of $29.07.

In terms of legacy stores related to our previous retail business, we sold four stores and one distribution center for $8.2 million. We now hold on our books only $4.7 million of real estate related to the old retail stores. And we've done a really terrific job of liquidating those stores, and also being good corporate citizens and not taking care of those stores, and making sure -- doing our best to make sure they go into good hands and don't become big empty warehouses sitting in the middle of cities.

We're actively pursuing our patented oil steaming technology. We bought 60% of an oil steaming technology at the beginning of the year. We are very excited about that business. It has the potential to free up billions of barrels of deep, heavy oil if successful. We hope to open -- or we expect to open our first demo plant next year. At that time, we'll be able to better evaluate the good technology and let you know what we expect future of that to be.

In conclusion, we are an extremely well financed company with what we feel are the very, very best plants, Fagen/ICM plants, in the corn belt. Our people are experienced and know what they're doing, and have been through all sorts of different times. And certainly they can do well in good times. But they've also, and this is what we are probably most proud of, adept at handling tough times from drought to high corn prices. We've been through it all. And through it all, we've come out and continued to do better than the rest of the industry.

Corn prices are coming down. And when I say that, I mean relative to basis. We paid significantly over basis in quarters leading up to this quarter. Right now it looks like we can buy our corn at historical prices, which will be a big benefit to our shareholders. The regulatory front is a cloud. But, again, with the best plants in the industry, we expect the marginal -- if this rule stays in effect -- the marginal plants to close down, and us to do better than the rest of the industry.

In conclusion, we are prepared for anything. And there's probably no one more excited or no company more excited about the ethanol industry, and better prepared to do well in this industry, than REX.

At this point, I'll leave it open for questions.

(Operator Instructions). Paul Resnik, Uncommon Equities.

Good morning and congratulations. That is incredible numbers. When you were saying you were paying less, relative to basis -- and I know it depends on the plant. But on balance, are we back to maybe a negative basis? (Multiple speakers).

Currently, on balance, I would say we are, yes.

Very good.

It's not always that way, but on balance, I'd say yes.

And exports have picked up. Are you participating in exports, or are you one removed from that?

We are very much -- we think we're participating very much in the DDG exports. We sell to marketers, and it's up to them to deal with the product. We don't track the product from there. But my guess, if exports have picked up, we don't know where -- it's interchangeable what our marketers buy, so we don't know exactly that our ethanol is being exported. But we can assume, if exports have picked up, that we are in the mix.

And lastly with regard to the EPA proposal, I'm still having trouble figuring out the legal basis for a cut in the mandate. Do you have any thoughts -- beyond being counterproductive to the country -- do you have any thoughts about, relative to the law, on what basis they feel they can reduce the mandate?

I don't have any comments on the legal basis. But by the time it gets challenged, the year will probably -- by the time it goes through, if they stick to their guns, it will probably be too late. I don't think they can mount a court challenge quick enough to change whatever is decided. But I'm sure our industry will mount a court challenge. It's very disappointing; they EPA stood strong during a very, very tough year last year, when there was drought and there were a lot of problems. This year, we don't really understand.

They put in E15 and we really don't understand why they caved into, in my opinion, big oil. But it's what happened; and, again, we are in the comment period. Hopefully it will change. It still has the ability to change. And, in any event, like I said earlier, with the best plants in the industry, when they go through a quarter or two of tough times -- but very quickly, this industry's supply and demand balances out. A number of marginal plants have opened up this year with lower corn prices. As you mentioned, export is a possibility. Lower corn prices, imports become tougher to come in.

That is one of the benefits of the new RIN policy. It limits the amount that we expect to be imported. So, in balance, it's just something that we have to deal with. It's not good, but it's something we have to deal with. That's all.

Thank you. And, once again, congratulations.

Thank you very much, Paul.

(Operator Instructions). Bill Jones, Singular Research.

Hello, guys. How are you doing?

Real good, thank you.

Congratulations on another great quarter. I wanted to touch on the cash that you mentioned that's currently on the consolidated balance sheet of about $93 million, which exceeds the debt. About half of that is at the -- is consolidated at the plants.

Can you just give us a little understanding of what you expect of that cash? Ultimately it's going to be used to pay -- I know you don't control it, but that would likely be used to pay debt, or pay it up to the parent at some point? (multiple speakers)

At some point we're going to be, as you probably have figured out, we're -- in fact, right now, we have more cash than we do debt. So we've been using our cash previously for -- while other people are out buying what we consider less -- what we consider less valuable, or more marginal plants than us, we've been pretty active just buying into our own plants and buying back shares -- not pretty active, real active, in spending our cash doing that, and paying down debt.

With the paydown of debt, once it's done, then the cash will be huge, assuming we can do as well as we did last quarter for an ongoing period of time. Cash flow will be huge. And at that point, it will be up to the Board to decide whether to start paying a dividend. Whether -- if this heavy oil operation -- that's so big it could be amazing, if it works. But, again, that's one thing that we could look at. But probably, knowing our Board and knowing me, we'll look at ways to -- besides a buyback -- of ways to distribute some of that cash to the shareholders.

Okay. And during the quarter year, you repurchased about $2.2 million of stock.

I'm sorry, not $2.2 million.

Shares.

Yes, dollars. That's correct. Yes. I'm sorry.

Yes, okay. And then related to the stores, so there's five stores left, and you sold four during the quarter?

Four -- and the biggest one we sold was the warehouse. That was the one that I felt would be the hardest to sell. The stores that are left were good -- many of them were good stores in good areas, in markets where the real estate is coming back. So we're not -- at this point, we feel any worries on that front are completely gone.

So the distribution center actually was sold after the quarter-end, correctors?

It was sold after quarter-end, that's right.

Just to understand, because the balance sheet is as of quarter-end, do you know what the amount that was, and the gain on that?

Doug, do you want to go over that?

Bill, there'd really be no gain on it. It would pretty much be a wash from a P&L perspective. The cash proceeds from that was a little over $5 million; between $5 million and $5.5 million.

Thank you. And that was pretty much my specific questions. Maybe just generally speaking, if you could remind us of just your vision for the going forward, Stuart, with obviously the ethanol market you believe in. But the growth may be limited obviously with this new EPA revised mandate. So maybe you can give us just your strategic vision longer-term, where you see the Company going and where you may make investments in the future.

Well, okay. There's a few things. One, we continue to look at it. We haven't had the opportunity. Things are really pretty good right now at all our plants to buy shares in our existing plants. That hasn't happened, but that could happen at any time, and our plants are really good. Another great plant could come up; we could look at that.

We are excited about the heavy oil. And probably the best option for us at this point, if things keep going and the cash keeps coming in, is to distribute some of that to our shareholders. And that is something that we've done through buybacks. If we don't have to pay down debt, there's going to be a lot more cash coming in. Again, this is looking a couple years down the road, but a lot of cash coming in, and that gives you a lot of flexibility to do good things for shareholders. And we tried to always do that, and that's what we'll continue to try to do, to the best of our ability.

Excellent. Well, thank you, gentlemen, for taking my questions (multiple speakers).

Sure.

(Operator Instructions). AJ Strasser, Cooper Creek Partners.

Hello, guys. Good morning. Great quarter. How are you?

Thank you. Great.

That's great. It just emphasizes the kind of [sick seller] of earnings power story here. I think the stocks could go a lot higher. Congratulations on a great quarter. I know maybe there could be minimal updates, but I just wanted to touch base with you on it. In terms of any updates or new thoughts on potential to translate into an MLP? Have you guys looked into that further?

We have looked at it. We have a lobbyist. In fact, the lobbyist is Dennis Hastert, who used to be Speaker of the House. And he works on -- he's looking -- we're looking into it. But with a frozen Congress right now, I wouldn't want to get anyone -- I think if there's ever a tax bill, there's a chance. There's a lot of support for it on the Hill. I've been to Washington to talk a little bit about it, and I think there definitely is a lot of support. But whether any tax bill that -- it's going to have to happen. We believe in a tax bill, and who knows what's going on with Congress? We don't know any more than anyone else, or expect anything more than anyone else with this Congress. So there's nothing new I can tell you.

Okay. It just seems like it's getting bipartisan support. And I guess Congress, their time on its side -- is it something that, if it did get passed or got close to it, you guys would take very seriously, I guess. (multiple speakers)

We would. At that point, we will look at it. We'd certainly want it to pass, because it's another option that we have for the Company. But at this point in time, it's not even an option, because it's waiting for -- legislatively, not able to do it.

Okay. And then could you guys just talk about, ex- the sale of the real estate assets, how much cash did you generate in the quarter? And assuming things stay this good, or as good as you kind of hinted at, what kind of cash flow generation could you do on an annualized basis at these levels? And would you consider a special dividend? And would that be the first of its kind? I'm just trying to understand it. It seems like you're considering that.

Doug, do you want to talk about the cash flow? In relation to the special dividend, everything is -- if we keep generating a lot of cash, everything is up in the air. But that would be a Board decision that I could not make, or tell you what would happen, or how they would decide what would go on with that.

Doug, do you want to talk about the cash regeneration in the quarter?

Sure, yes. Our cash flow from operating activities was about $43 million for the first nine months of the year. Obviously, the third quarter contributed a significant amount of that, just with how strong that quarter was. Obviously how that fluctuates just depends upon how much inventory you build and things like that. My personal belief is if things continue the way the third quarter was, the Company, on an adjusted basis, could earn as -- generate as much as $60 million to $70 million of EBITDA. When I talk about that, I'm talking about including the plants that we don't consolidate on our ownership percentage and things like that.

Sure.

Who knows where the industry goes in the future? But the way the third and fourth quarter have been running, that's the potential.

All right. $60 million to $70 million of EBITDA, with a $240 million market cap, is a lot of cash generation. Can you specifically tell us how much cash did you generate in Q3, just because it was so skewed to it?

I just have the nine-month numbers in front of me, AJ. I don't have them just specific for the quarter.

Okay.

(Multiple speakers) It was pretty much, we don't -- we didn't have any big capital expenditures. So if you add back our depreciation it will give you a rough number, but not an exact number.

Right. Well, congratulations again. It's a phenomenal quarter, and it's great (multiple speakers).

Our [portfolio] depreciation, by the way, is different from our tax depreciation, so it's not exact.

Go ahead. Thanks, AJ.

Just wanted to -- happy to be shareholders. Thank you.

(Operator Instructions). Katja Jancic, Sidoti & Company.

Hello, guys. Thank you for taking my call.

How are you?

I'm good, how are you?

Great, thank you.

I think you mentioned that you expect the fourth quarter to be stronger than the third quarter. Is that correct?

Yes. My words -- the exact words were, if things continue like they're going now, it's the Company's expectations to do better in the fourth quarter than the third quarter. And we already have month of the quarter in, so we're feeling really good about the fourth quarter.

You're being below basis for corn. Is there any, percentage-wise, you could share how much below basis you're paying, or arrange?

No, I think that's all we want to say right now.

Okay. Now for the heavy oil project, you mentioned you're going to start testing it, if I'm correct, next year. Are there any expenditures you expect that will be associated with that?

Less than $5 million; probably less than $3 million for the demo plant, and that will be it for the demo plant. The beauty of this technique is it doesn't require a lot of heavy, heavy, heavy expenditures. And it can produce -- if it does what it's supposed to do, it has the possibility to open up reserves all over the world without large, large expenditures, just by the nature of the technology.

Regarding the byproducts, with the falling corn prices, do you expect the price of the byproducts to decline as well?

I'm sure they will, yes.

Okay. (multiple speakers)

So far, they've held up amazingly well though, to be -- amazingly well. China has been a big, big buyer of DDGs, and our corn oil prices have held up. But certainly if corn falls, it's only natural that the byproducts will fall at some point in time.

Okay. Well, thank you for taking my questions.

Sure.

And there are no further questions on the phone line at this time.

I will now turn the call back over to you, Stuart Rose.

Well, we'd like to thank everyone for being our shareholders. And we'll do our best to keep things going in the direction they're going. And thank you very much for your support. 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 line.