REX American Resources Corp (REX) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the REX American Resources fourth-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 fourth-quarter conference call.

We will 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 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 risk and uncertainties associated with the forward-looking statements are described in today's 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 now like to turn the call over to Stuart Rose, Chairman of the Board.

Thank you, Doug and I would like to welcome everyone on the call.

We are pleased to report record net income for the quarter of $15.9 million versus a loss last year during the quarter of $4.4 million.

Earnings per share were also a record, $1.95 for the quarter versus a $0.54 loss last year during the quarter.

Net income for the year, again, record net income, $35.1 million versus a $2.3 million loss.

Earnings per share, again, record, $4.15 versus a $0.35 loss.

Cash at the end of the year on the balance sheet was $105.1 million.

$63.3 million of that was at the parent level; $41.8 million was at the plant level.

That compares to $105 million this year versus $69 million in cash last year.

Our debt has gone down to $63.5 million from $91.3 million.

Sales were up slightly to $666.1 million.

On our real estate segment, we sold six stores and one warehouse and that real estate exposure has been reduced from $13.3 million to $4.7 million.

In terms of our industry, we are in the ethanol industry; we are proud to be in the ethanol industry and we are finally glad to see the ethanol industry getting its due, not just for what we do -- for what we feel we do in terms of our business, but finally glad to see shareholders in the industry getting some credit for the industry they are in.

It is a great industry; it helps our country in so many ways.

Cars burn cleaner because of ethanol.

The air quality is cleaner.

We receive no direct government subsidies.

We pay a huge amount in taxes both at the local and federal level.

Our farmers are paying more taxes; they are making more money on their crops.

Receive less aid and a large part of that is thanks to ethanol.

There is no bad economies that I know of in the farm belt, in the farm areas.

Unemployment is not a problem.

The balance of trade improves because of ethanol.

We import less oil.

Our national defense, our security of the country is more secure because of ethanol.

Less money is going out to oil-producing countries, some of which are not necessarily our friends and possibly our enemies.

So again, we are in what we feel is a great industry and proud to be in the industry.

In terms of the fourth quarter, the industry became increasingly more profitable.

Crush spreads rose during that quarter and continued through last month, continue to rise.

Corn prices are down significantly versus last year.

That has helped our margin.

There has been good demand for DDGs industrywide, especially from China and corn oil continues to be a profitable product for the industry.

REX, as usual, drastically outperformed the industry.

Again, we have some advantages that really helped us during this quarter to do better than the rest of the industry.

There was a good corn harvest in our market, so we were able to buy corn at a very attractive price, sometimes below CBOT.

We continue to get railcars.

At least to date we have not have the problems others in the industry have had.

There is a significant railcar shortage or a big problem getting the railcars back to the plants.

Because of where our plants are located and the good rail service, we have been lucky so far.

We don't go too far out; we try to match our ethanol sales with our corn purchases and we usually try to stay within 90 days in terms of how far out we will make our ethanol sales and generally have kept closer than most people in the industry or at least we have kept better control of matching our corn to our ethanol sales and most people in the industry do not take long, long hedges at least on our company-owned plants.

In terms of the technology, we have the best technology in the industry.

Fagan ICM, it's recognized as the best.

It has proven itself to be the best.

It hasn't had the issues other plants have had and that has been a huge advantage and having high-quality plants, we have actually been able to operate over nameplate and again, those are considered by most to be the very best in the industry.

The only negative during the quarter was natural gas prices; they spiked up.

In some cases, we had significant spikes in natural gas caused by some fine wording in the natural gas contracts.

But we overcame that and don't expect that to be a problem going forward.

Going forward, we do expect the current quarter to be a record quarter.

We expect it to be slightly above and this is a quarter that we are currently in.

We expect it to be slightly above the quarter that we just reported and many times more than -- we are up against a very, very easy number, $0.43 last year and we expect it to be well above -- way, way above that, again, slightly above what we just reported.

The quarter is only two-thirds -- not even two-thirds over, so we don't have final numbers, but things continue to go very, very well.

Cash continues to come in at a very, very strong pace.

This is a business that, when it is going well, it generates loads of cash and that continues to be happening right now.

We continue to have the good rail access, which should continue to be a benefit for us.

Corn supply is great in the areas we are in.

That is not an issue.

We hope to be able to continue to buy at or below CBOT pricing.

Very, very good crush spreads relative to the norm of the industry is what is going on now.

So things are probably about as good as they've been -- at least I would say they are as good as they have been since I've been in the industry.

Potential problems on the horizon, the railcar, I mentioned earlier, that is a real problem, it is a serious problem, getting the railcars back to the plants with coal coming onboard because of higher natural gas prices with oil and gas being such a boom product and no real pipelines out there.

So demand for rail and railcar shortages is a problem in the industry.

We have avoided it so far, but at any time that could crop up and be a problem.

Natural gas prices was a problem a little bit during the quarter we are in now, the first quarter and again, during the summer quarters, if there is a huge heat wave or something, we found that a spike in natural gas prices happens in our markets.

The potential EPA wind decision we think we are fairly comfortable that it is going to come in pretty close to what they said it would and we are comfortable with that number.

If it comes in drastically lower, that could be a problem, but, again, we don't anticipate that.

The other thing is there could be potentially less exports and even some imports if our prices keep going up, if the price of ethanol relative to gasoline, the difference has shrunk and again that makes other products more potentially -- that gives other products more potential and that is a potential problem for us, but so far has not affected us.

Currently, we are generating large amounts of cash; I mentioned that previously.

It has allowed us to pay our debt down.

It has allowed us to raise our cash balances in the Company to over $100 million.

While paying our debt down significantly, we continue to look for other ethanol properties to use our cash.

We have nothing that we are negotiation or on the horizon now, but we do look.

We will add or try to add more corn storage and ethanol storage to our plants just to take care of possible blips related to rail or possible opportunistic buying opportunities.

There is always a chance that we could find additional shares in the ethanol plants that we own a minority of.

We have done that in the past and we continue to look for that, but, again, there is nothing with the industry doing so well and us being opportunistic buyers, there is nothing that we have currently in the pipeline to tell you about on that.

The other thing that we are looking to do is look for other alternative energy products that have low investment and a very, very high potential return.

We have found one that at least meets that -- possibly meets that criteria in the heavy oil business.

Made a small investment in heavy oil technology.

There is billions of barrels of heavy oil throughout the world that can't be reached because steaming can't reach below a couple thousand feet.

Our technology, if it works, and I say if, has the potential to get to steam below 2000 feet and make that oil recoverable.

We don't want anyone buying our stock based on that technology.

It is not at this state proven technology, but we are slowly working towards trying to prove it up.

We leased a small plot in California.

We currently are waiting on permits.

Permitting in California is an extremely slow process, but we hope to get the demo plant up by the end of the year.

In conclusion, we just completed our most successful quarter ever, earnings per share $1.95 versus a loss of $0.54.

Credit has to be given to our locations; it saved us with the rail.

Our corn belt location allowed us to buy corn fairly inexpensively.

ICM Fagan technology allowed the plants to go at a great clip to make money and we expect the current quarter, the one we are in now, to even be better than -- slightly better than the last quarter and significantly better than the comparative quarter, which was $0.43.

Most importantly, I really want to thank our employees.

We have the best employees in the world.

Our real advantage, even though we have the best sites, best plants, is we have the best employees.

They have stuck with us through losses last year.

They have been with us from the beginning.

We have virtually no turnover at the upper end.

We really have the greatest employees that I know of in the world and that is the real secret to our success and they are the ones that deserve the full credit.

I will now leave it open to questions.

(Operator Instructions).

[Ariye Cole], [Cole Capital].

Good morning and thank you for doing this conference call.

I have a question for you about ethanol inventories in the industry.

Data, I think, this week released by the Energy Information Administration showed that there is about 15 million gallons of inventory of ethanol in the US.

Do you know approximately how many weeks of supply that would be equivalent to?

I will have to get back to you on that.

I am not sure, no.

Okay.

I would think that the same source that gave you that would give you the week supply, but I don't want to just throw a number off the top of my head.

But I know what you are quoting from and I believe they will also give you a week supply in that number in the report.

Secondly, in your press release, you mentioned that your average selling price for ethanol in the quarter was $1.86 per gallon.

Can you give us an update for your hedging efforts, what sort of prices you have hedged for the April quarter?

We are comfortable on saying, like I said, in the April quarter, we expect the earnings per share to be slightly better than the earnings per share this quarter.

So you can work back and you can just pretty much take the same number.

It is going to be -- working backwards, it is going to be the same spread, a little better.

The reason I ask is, if you look at the futures prices in Chicago, I guess at Argo today, ethanol was being sold for $3.50 per gallon, which is obviously much higher than what you sold in the January quarter.

So I'm just trying to understand --.

We saw that yesterday and that is the last drop of ethanol there is.

What is going on currently on the spot market, which we are more -- we don't sell -- like I said, we match when we buy the corn and sell our ethanol as close as we can get to that, so we are never getting the last drop.

But what has happened is a lot of plants have contracts, they have to supply their contracts and this has not happened to us, but they have to buy the ethanol now to supply the contracts because they cannot, for whatever reason, get the rail cars in.

There are some real issues going on right now.

Right, but what I am trying to understand is what are the ethanol prices that the plants are realizing and how different might they be from the spot prices we see in the future --?

Again, I am telling you on a quarterly basis and that is as far as we are willing to go that things are humming along.

We had a record quarter last quarter and we will do a little better this quarter.

So that should give you a pretty good idea.

Okay.

Then looking into the summer with inventories relatively low and this railcar problem persisting for the time being, to what degree, as you talk to colleagues in the industry, is there a fear that ethanol shortages will remain here into the summer as I guess the driving season starts and the demand for ethanol rises while production is still constrained?

Yes, that is interesting and also, if there is -- we are in requirement, so people have to buy the product for the wind and like you said, driving season started.

It could be -- we hope it continues for -- we hope it is the new norm of the industry, but we will see.

That is our hope.

We are in the ethanol industry and we have been in this long enough to know it can change in a second in any direction.

This is not a business that is especially stable and we are well aware of it and manage it that way.

Go ahead.

Thank you.

Thank you.

Paul Resnik, Uncommon Equities.

Just to follow up on what you just said about the high prices being paid, so at least some of those high prices are actually even paid by ethanol producers who are short of contract commitment?

It may be them, it may be -- I am not sure if it is producers; it could be marketers.

Marketers are the ones it could be.

Again, I am not going to speculate, but -- I don't know -- could just be speculators doing this too.

That is what happened with (inaudible) prices last year.

So, again, that was just my personal opinion that that could be the problem because there are definitely railcar shortages going on and people have sold out, they have to find the product somewhere, but I can't tell you.

I am not smart enough to know why it spikes and why it spiked where it is.

It is great for us because even though we don't sell on that particular index, that allows us hopefully to increase our margins in the upcoming months, but we will see.

On the EPA and the RFS mandate, again, what is your current thinking on how it is going to play out?

About the time they come up with it, the year is going to be over and it is going to be irrelevant when they are taking so long.

I don't know.

I assume it is going to be what they originally said it was going to be, maybe a little more because people are driving a little more and they want to keep it at 10%.

So they may give a little bit, but right now the industry seems to be running on its own economics irrelevant of that.

So one question is the high prices.

Do you see any capacity coming onstream?

Of course, with the rail problem, that is kind of problematic.

Everyone is trying to increase their capacity a little bit.

I didn't go over this very much in the call, but if we could get [rims] for up to 120 million gallons, if we could produce 120 million gallons, so we work on little things to increase the capacity of our plant every day and I assume everyone else is doing the same thing.

We would like to produce a little more, but as far as new plants coming online, I don't know of any new plants coming online.

And I would expect -- I don't expect any new plants coming online because generally banks are afraid to lend to new plants because of the history of the ethanol business over its life.

I was thinking more in terms of plants that have either reduced production or have been idled.

Some of that is coming online and those are the marginal plants you would expect to come online when things are really good and things are really good now.

So yes, some of that has happened and some of that will continue to happen.

There is still -- like I said, balancing that out, it is hard to get product out of certain parts of the country right now and that is causing a slowdown in production in certain areas.

Okay, well, once again congratulations on the quarter and --

Thank you.

-- looking forward.

Have a good day.

Thank you.

Thanks, Paul.

Katja Jancic, Sidoti & Co.

What is your plan regarding debt repayment?

I know you have been saying you're going to focus on that.

Is that still the main focus and could you just provide maybe a plan or how you look at it?

Well, generally, it is very low priced debt, but we paid down last year -- long-term debt went from $91.3 million to $63 million.

So if we continue like that, you are looking at roughly two more years of still having some debt on the balance sheet.

On the other hand, if we wanted to, we could pay it off tomorrow and that is a decision for the Board to make whether to just pay it off and be done with it or not.

The banks would certainly like us to keep it.

If we do pay it off and use our cash to pay off debt, that would limit our ability to possibly do some of the other things I talked about and so we like to have that flexibility.

We were very fortunate to be able to buy plants at good prices in the past.

We have this heavy oil investment and if it works and that is a big and again don't buy our shares based on that, but that could be huge and so it is good to have cash, if it is used, to be able to take advantage of the opportunity.

There is never a harm in my mind of having good cash levels.

That being said, our debt, if things continue just going the current pace, will be down, will be paid off in two years.

Now I know you mentioned you are looking at potentially investing in other facilities or increasing your share.

When you look at that, what specifically are you looking at?

What is your criteria, how much would you be willing to invest in?

All you can do is go by our historical and we have put in -- when we bought One Earth, we put in approximately -- it has turned out to be a fantastic investment, but we invested in equity of about $60 million in that one.

Maybe NuGen we invested probably $20 million to $30 million, some of these other investments $15 million to $20 million.

So those are the type size levels that we'd look for to make -- although I will say, on the Patriot plant, one of the shareholders wanted to sell some shares a few years ago and we bought a fairly good amount of them and increased our ownership about 3%.

Again, we are opportunistic; there is nothing out there right now.

Everyone is really happy that I know of with their ethanol investments and so this is probably the worst time to go out trying to solicit shares, but if something were to come our way, we certainly have the cash to do something.

You also mentioned that you are looking at increasing production.

Are you looking at yield increasing technologies and are you investing more in that, would that increase your capital expenditures?

Again, we are minority owners in some plants and majority owners in some plants.

Some of the minority-owned plants are looking at that type of stuff.

We will follow -- if they do it and if it is successful like we did with corn oil, then we will follow their lead.

We are basically just looking to get more production to any little logjam in the plan or any little thing to increase production.

We can only increase it a little bit anyway.

We only have the winds to go up a little bit anyway, so we think we can do that internally.

Okay, that is all for me.

Thank you.

Again, you only get a certain amount of [winds] right now and you try to increase that, but everything goes slow with the government.

Thank you, Katja.

Jay Goldstein, JBG Capital.

Thanks for taking my call.

There has been a lot of talk obviously with China and their air pollution and one of the popular news leaders talked about China potentially introducing a 5% ethanol blend.

Could you maybe speak to what you are hearing about that in the international markets in terms of how that is going to impact the demand as you guys see it?

I was just in Brazil and Brazil has probably more crowded highways than China.

Because they use so much ethanol, there is not near the air pollution problem that China has.

So I am not the Chinese government, but I think it would be smart if they did introduce something like that, but I have no knowledge that that is imminent, no more knowledge than you do that that is imminent.

I just think it would be smart on their behalf to do it.

In terms of exports, China is a new market.

The biggest market for exports is Canada, but China is starting and we will see what happens.

If that really happened where they introduced the 5% level, that would be fantastic, I think, for us, but I don't know any more about that than you do.

Okay, great.

Thanks.

Sure.

Michael Cosgrove, Vectra Capital.

Thank you for taking my call.

We have been looking at the weekly USDA surveys to try and get some sense of the price of corn paid and the price for ethanol sold and so forth.

In your previous seven quarters, it seemed that your ethanol sales price pretty reliably correlated to those USDA survey prices and in the most recent, it sort of meaningfully diverged and I wanted to ask if your plants participated in that survey and if you noticed the same divergence and if you had any comment at all on that.

Doug, do want to answer that?

I can't say if we participated in that survey or not.

I am not aware that we did or did not.

The Company does lock in a crush spread at times, so that may have caused some of that divergence, but I can't be real specific on what would have caused it.

I am not sure what -- I assume -- all I know is that our numbers relative to the industry continue to be -- we have the best plants in the industry, in my opinion and we continue to outperform the industry in relevant return on sales numbers, things like that.

Right, okay.

I assume from what I've heard in the call so far that there has been no change in the way that you sell ethanol and purchase corn, that whatever policy you have had in the past in terms of locking in margins, you have remained consistent with in the current quarter.

Is that correct?

That is correct.

There has been a better chance to profitably lock in maybe a month or two longer than normal and we have taken advantage of that.

But, again, we don't go real far out, but we have it locked in.

You can always buy the corn.

The ethanol market is strong enough now and it is maturing enough that you can lock in a month or two longer at what we consider for us extremely profitable levels.

So when that opportunity takes place, we have done a little bit more of that.

Okay.

Then I guess my final question is, in terms of your exposure to natural gas prices, do your plants generally buy natural gas on a fixed rate or a combination of blended and spot or is it all different?

Can you kind of give us a sense of how you purchase natural gas?

It has been on a combination and we have gotten hurt real badly.

I mean it was during this quarter, but we have had some bad times where we had to slow our plants down because the spot market natural gas for a few days.

When it got extremely cold, it went through the roof, way, way more than what you see on CBOT.

I mean many times more, so that is an issue.

You would think in South Dakota it wouldn't be an issue because there so much oil and gas exploration in that part of the country, but it absolutely was an issue for us and it is a lesson I guess we learned that it is better to lock it in and buy it even if it seems like high prices when you are locking it in.

Okay, got it.

Thank you very much for taking my call.

Thanks.

Thank you.

(Operator Instructions).

[John Segrich], [Lorum].

You gave a little bit of color just kind of with the last question -- I was just wondering -- typically how far out are you guys locking in kind of the ethanol and corn?

Are you two, three months out or -- I couldn't find your hedges on your balance sheet, so I want to understand your policy.

Yes, our policy is to buy the corn and lock in the ethanol.

We are maybe right now roughly a month out, we have locked in roughly through April, give or take.

I just want to understand the comment you made earlier where you talked about how I think the earnings would be up a little bit over kind of the prior quarters.

I think that is what you said, right?

Over the prior quarter and many, many times over the comp of last year.

Right, of course, but help me understand, because when I look at the crush spread and even if I run it out the curve, the market really didn't start to move until January.

So when I look at where this quarter has been tracking and even if I worked backwards and said you are locking one month out, you are not getting spot, but you get one or two month forward, your crush spread has got to be up over 100% from prior quarter.

So what am I missing?

I think you are probably going by the spot and I think the only thing you are missing is you have to go -- the CBOT is not necessarily -- I don't know what you are using for your ethanol, your corn is probably a good number.

I don't know what you are using for your forward ethanol.

Are you looking at CBOT or --?

Go ahead, Doug.

There is a couple of things that have come into play, in my opinion.

The Company can and has locked in anywhere from 90 to 120 days out, so that may be a little different than what you have used.

February is a short month of production, so you have got -- when crush spreads are as good as they are, that makes a difference and then as we talked about the natural gas pricing that spiked in the first quarter, that has a real dollar impact on earnings.

And with the number of shares that we have out there, a couple million dollars makes a difference.

So I think those are the three factors that maybe are a little different than what you may be expecting.

Right, but if the curve holds, and I roll your numbers forward on where you are hedging now, you've got to be hedging out at margins that are considerably better than what you just revealed for the last quarter as you go forward.

Not just a little better.

Again, what you are saying we hope is right, but we will see what happens.

But, again, for the current quarter we are in, we are saying slightly better than the quarter we just reported, just to make that very clear.

We will see how it comes out.

Thanks.

Good luck.

Thank you.

We appear to have no further questions at this time.

Very good.

Thank you for -- everyone, thank you for listening, thank you for your support and we will talk to you again next quarter.

Bye.

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

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