REX American Resources Corp (REX) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rex American Resources fiscal 2014 first-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 of Rex American Resources. Please go ahead.

Good morning and thank you for joining Rex American Resources' fiscal 2014 first-quarter conference call. We'll get to our presentation comments momentarily, as well as a brief question-and-answer 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 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 would now like to turn the call over to Stuart Rose, Chairman of the Board.

Thank you Doug. We are happy this quarter to report record net income again, $21.7 million versus $3.5 million last year. Record earnings-per-share for the quarter, again, $2.67 versus $0.43 last year. Cash balances now are over $125 million. Long-term debt is down to $68 million. Sales did decline over the quarter, $155.9 million versus $178.4 million, that was caused by lower corn prices, but more than offset by higher crush margins.

Ethanol, as far as what's going on in the country, there's a lot of criticism, and we think it's totally unwarranted. And I just wanted to go over a couple of reasons why ethanol, in my opinion, and our company's opinion, has been great for both our shareholders and our country. First, cars burn cleaner. There's less air pollution because of ethanol.

Second, we receive no government subsidies. In fact, we pay a huge amount in taxes on our earnings and local taxes in the communities we serve.

Third, our farmers are paying more taxes. They are making more money on their crops. They are paying more taxes and a lot of that has to do with ethanol, again helping our budget deficits.

Fourth, there's no bad economies in the Farm Belt at this time that I know of. Unemployment has gone down. We are a major source of jobs ourselves and the people who send things to our plants, who work in the towns and community shops, that type of thing, all do better because of us.

Fifth, the balanced trade improves. We are importing a lot less oil. Fracking likes to take the credit for it but a good part of that less importing of oil has to do with ethanol. It's never mentioned, but we are a major, major part, over 13 billion gallons of gasoline is produced by our industry. If it wasn't for our industry, we would have to import 13 billion more gallons of gasoline or the raw material to make that gasoline. We've made a major impact on balance of trade.

Next is defense issues. A lot of the money that's used, a lot of the oil-producing states aren't necessarily our friends. We are buying oil from them and sometimes fighting wars against them. They're funding -- using our money to fund enemies. Again, we are keeping the money in the United States, and that money might be going to places that aren't necessarily friends of the United States.

In terms of the industry, increasingly, it was for this quarter increasingly, for the last -- for the first quarter, the industry in the first quarter was increasingly profitable. Good crush spreads, corn prices are down significantly versus last year. Crush spreads rose. Crush spreads is the relationship between ethanol prices and corn prices that got better during the first quarter.

Good demand for DDG's, especially from China. DDG's is our byproduct. We don't -- that's a part of the corn net that's not used in ethanol, which is the highest protein part of the corn, and that's used to feed animals both in the United States and it's a good export product.

Corn oil is another product derived from our plants. That continues to be a very profitable product. The export market right now appears to be getting stronger, and as long as ethanol stays low priced compared to gasoline, foreign countries, we expect that to be good for the industry.

In terms of Rex, during this quarter, we drastically, again drastically outperformed the industry. Again, we were able to buy corn at below CBOT prices. Last year, we were paying way above CBOT prices. Due to a good corn crop, our price of corn relative to CBOT has come way down.

We continue to get railcars. Railcars was an issue for some of our competitors. We were lucky. Our people did a good job of getting railcars and we were able to -- a lot of that has to do with the location of the plants being where they are in the Corn Belt. And we were very fortunate that we did get railcars and did not have that problem.

We sell fairly, close, we don't enter into as long a term contract as others in the industry, so that gives us a chance to take advantage of rising crush spreads a little bit better than some of the other in the industry.

We have the best technology. Most of our plants are 100 million gallon Fagan/ICM plants. That's the best technology that I know that's out there. It's the most efficient technology, and it has a lot to do with why we outperform the other people in the industry.

The only negative during the quarter, and it was a serious negative for us, was natural gas. We paid $9.33 on average per MMBtu versus $4.29, to give you some impact on our bottom-line. Natural gas cost is $14.6 million this year versus $6.6 million last year, so we had an $8 million shortfall caused by natural gas spiking up, and that happened during the cold part of the winter.

Going forward, we expect the current quarter to stay extremely strong. Things are continuing at a very, very good rate. We expect to do well over 100% better than what we did last year, and last year was not a bad quarter. We had $0.71 a quarter during the second quarter. Again, we expect to do well over 100% greater than that number.

Cash continues to grow at a strong pace. This is not -- when you're making money like this, a lot of it flows into your cash line, giving us a lot of flexibility.

Crush spreads right now are strong. Currently for May, we are on the spot market, which appears to be a very good place to be. June production, we have sold about half of our June production; the other half is spot. Sometimes we will sell out a little bit forward if we deem the margins to be very good. We felt that on the June -- on some of our June production. August currently has not been -- excuse me, July currently is still on spot, but we'll see what happens.

Again, we sell fairly close and when we do sell out, we like to match our corn purchases to our, as best we can to our forward sales and lock in spreads.

Railcar delivery for the industry is still a problem, but we expect it to ease. It was a problem because of the weather, but it could still be a problem in the future, which I'll talk about a little bit later. But to date here, it has not been a major problem for Rex.

Corn supply has been steady. CBOT prices are stable and we are buying on average under CBOT. So things in that area look very good. Summer season driving is going on now, so there should be a natural demand for ethanol, and that should help us during the next quarter.

Natural gas currently is stable. We are not having those big huge rises like we did in the first quarter. And again, very good crush spreads relative to normal.

In terms of potential problems in the future, railcars could always be a problem. There's a huge demand for railcars in North Dakota due to the oil industry, and that's always an issue of getting our railcars back on time. We have not had the issue to date affect us, but it's something we worry about, and our people have done an excellent job of making sure that railcars get back and we get our product out. If we don't have railcars to ship the product, then we can't make the ethanol.

Second major potential problem is the EPA ruling. They have already preliminarily said that they're going to cut back on their required number of RIMs a little bit. We think they're going to revise that ruling and maybe go up a little bit from that, but as long as it's only cut back to the level that they have previously announced, which is about 13 billion gallons, we feel we can survive, and not just survive, we can do very well and continue to do very well. That's what the industry is pretty much anticipating now. But there is a chance, because more people are driving more, that they will raise that number a little. There's also the longshot that they will cut it, but we do not expect that to happen. We expect it to either be that number or a little bit higher number on RIMs.

Natural gas fluctuations, as you saw in the first quarter, can make a big difference in our bottom-line. Right now, it's stable. If it gets really, really hot during the summer, it could be an issue again, but so far so good.

The final thing, and most -- the biggest wildcard is weather. We had a great weather season last year. So far we've had lots of rain. It's been a great weather season this year. But the biggest part of the growing season is coming up. We need rain and we need proper corn growing weather. And the next couple of months will be crucial as far as the corn crops, and that can make all the difference in the world in the ethanol business.

Currently, with the large amounts of cash that we are generating, we are doing a few things -- we continue do a few things we've done in the past. One is paying down debt. In the last 12 months, we paid down over $30 million of our debt. We still are doing that. And we are gradually reducing our debt load and our interest expense that goes along with that.

We are gradually trying to increase our production in our existing plants. We are approved to sell 120 million gallons, and we'd like to -- even though our nameplate is only 100 million gallons, we are working to try and get to a little higher level in each plant.

We have capital improvements going on in our plants mostly related to storage to allow us to opportunistically take advantage of different markets. We are spending about $5 million in our NuGen plant to add 1.2 million bushels of corn storage, spending $1.5 million in our NuGen plant to add 1.5 million gallons of ethanol storage. We're spending $300,000 to add 3000 tons of DDG storage, and we are spending about $1.1 million to add about 1.5 million gallons of ethanol storage in our One Earth facility. Altogether, that's about $8 million we're spending to increase our storage, which should give us added flexibility.

In terms of other things that we are looking to do, we always look for more plants to buy. We really like the 120 million gallon Fagen ethanol plants. To date, we don't see -- and none have been offered us for sale, so at the moment there's not that opportunity, but we certainly have the cash and the financial ability should an opportunistic chance come up to take advantage of it. We also have cash, should some of the plants that we have investments in, should people want to sell shares. And again with the plants doing so well, that doesn't come along often. But it did happen a couple years ago where we were able to buy our NuGen plant. So first we bought half, then we were able to buy the other half. So it could happen, but, again, nothing on the horizon.

The other thing that we have is a small investment in heavy oil technology. What we have is a patented product that can steam heavy oil, that we hope can steam heavy oil below 2000 feet. There's billions and billions of unrecoverable heavy oil that just can't be lifted below 2000 feet. A lot of it is in California. We hope to open a pilot plant during the fiscal year. We aren't going to spend a lot on it, probably less than $3 million. But, if successful, it could be huge for our company and our country. But again, this is only a pilot plant; it's not proven technology. We would not encourage people to buy Rex's stock based on this investment. Our ethanol business is our primary business.

In conclusion, we just completed our best quarter ever in our history, $2.67 versus $0.43 last year. We expect next quarter to continue at a very, very strong pace. We made $0.71 last year for the second quarter. We are comfortable in saying that we expect to earn well over 100% greater than that number this quarter. Things continue to go along very, very well.

We continue to outperform the industry. We have the best plants. We have the best locations. And more importantly than any of that, we feel very strongly that we have the best people. And in the end, that's what separates us from the others in our industry and what makes us stand out in a strong industry as, in our opinion, the strongest player in that industry.

At this point in time, I would now like to leave it open for questions.

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

Thank you for taking my question. You mentioned that June is 50% locked in. Can you provide more information as to at what levels, what are the margins?

Roughly just -- I'm just talking bottom-line margins, roughly $2.5 million per plant, and these are only in the two plants.

So this is only for the two plants that are consolidated.

Yes.

Just taking a look at corn and ethanol, I would say that that was locked in anywhere from $0.30 to $0.40.

I'd say it that way.

$0.30 to $0.40?

Yes.

And why the decision to lock in June and not May and July? Or what I'm trying to get is when do you decide to lock in the margins? What's the point, and at what point do you decide on this?

That's done by our risk management team, led by Zafar Rizvi, and he decides when and if he thinks that -- and in this case, it's very, very strong margins for June relative to spot. So, he felt take a little bit of the risk out of June and May, he felt -- and again, this is -- we leave this totally up to the risk management team, but led by Zafar. May, for example, he felt we can make more money on spot. In June, he felt it was too good of a chance to pass up. But again, we don't go very far out, and he has to match the corn to the ethanol purchase.

And you also mentioned --

Or he tries to match it. I wouldn't say it's an exact science but he tries to match it. He needs everything in place to be able to lock in, otherwise spot and spot is very strong, as you know.

Yes. You're going to spending $8 million of capital expenditures, if I understand correctly. Is this going to be throughout the year or is this in a specific quarter?

That's a number for the year. I'm not sure when the expenditures -- that's $8 million on the ethanol plants and we'll probably spend another a little bit on heavy oil technology too.

So what are you looking at together? What will be the capital expenditure?

I would say would be under $11 million.

Under $11 million?

Yes.

And for let's say next year? Is this a run rate we could look at?

No, I think this year we are spending more on storage than we normally expect to spend. At least on the ethanol side, I would not expect this to be a run rate.

Okay.

We need the storage. We learn -- especially ethanol storage. We were very fortunate not to have railcar problems and we want to protect ourself for that. We need ethanol storage. And for that matter, corn storage too. Corn, we don't know how next year's crop is going to be, so having corn storage gives us a little flexibility.

Okay, that's all for me. Thank you.

Bernard Rabinowitz, Morgan Stanley.

This is not a question. It's just a comment. I've been in the business for 53 years, and I do not remember as much of a remarkable transformation of a company as I see in Rex over the last few years. And you should be complimented.

Thank you very much, Bernie. Coming from you, that means a lot. Thank you.

(Operator Instructions). Jeremy Hellman, Singular Research.

Can you hear me okay? I'm on a mobile.

Yes, I hear you fine, Jeremy.

Great. Just going back to the point from the first caller regarding the fact that you've basically hedged half of June, and May you're on spot. Considering that we are pretty much wrapped up with May, what can you tell us about how May's net fares versus that half of June that you noted?

May, all I can say is it continued a very, very strong trend. We don't have our May numbers in to tell you exactly. When you're on spot, you get an average price, so it's not like the CBOT price. It's an average price for the month. So I don't have -- we are still in the month of May, I don't have the final figures, but I know the crush spread is good. And again, I'm comfortable saying that and that's what gives me the confidence to say we are going to do double what we did, well in excess of double what we did last year in the second quarter, because we started off good. But again, in the ethanol business, especially when you are in the spot market, the risk is that crush spreads can fall. Sometimes we've seen negative crush spreads, and it happens quickly. That's why Zafar likes to on occasion lock in a little bit of the profits. And it can happen. We don't expect it to happen, but that's just the nature of this industry.

Sure. And then I know you usually put this in the Q and K, and with that not out yet, how much of -- or on a percentage basis, what percentage of your revenues for ethanol, which were -- sorry, non-ethanol revenues in the quarter?

They remained relatively consistent from the previous quarters. It still runs around 75% ethanol, and then the remainder are the byproducts.

The remainder is EVG and corn. We get a little rental income from a few properties we have, but that's basically faded away on a book value of about $0.25 billion I think. The real estate is maybe $4 million to $5 million on our books.

Okay. And then turning to the balance sheet, and this is probably somewhat from me being somewhat new to the story, you paid down some debt and you still had $20 million Q-over-Q increase in cash. Should I interpret that as your debt-equity ratio is at a level of leverage that you want it to be now, or is there something else going on that precludes you from paying down more debt?

No, we could pay down the rest of the debt. We choose not to mostly because it's very -- it's LIBOR-based debt, and it's very expensive debt. We just -- we keep it in case -- it may be hard to raise that at that rate again, and we keep a lot of our power in case something opportunistic comes along that we can grab. But, say, at late, it hasn't come along yet but we look for it every day.

Okay. One last one for me and I'll jump back. Just back to the CapEx subject, and given the railcar issue that many others have seen, it certainly makes sense what you're doing to invest in storage. I'm trying to look for some characterization of your spend versus what could be spent. Is that everything you can be doing, or are you doing 50% of what could be doing from a theoretical perspective? Just wanted to get some relative sense of that.

We could always put in more storage than this, but this is what we feel -- if it gets terrible and all of a sudden we can't get any rail cars for a month, then we wouldn't have had enough storage. And that would be -- but this is what we feel at least at this point in time of raising our storage to. Depending on what happens, we can always raise it more.

Thanks a lot guys.

(Operator Instructions). [Arier Cole], [Cole] Capital.

Good morning gentlemen. Thank you for doing the conference call. A couple of questions, but I'll just ask them one at a time. Regarding the supply-demand dynamics for ethanol industry, you've obviously entered the driving season here for the next couple of months. Based on your assessment, do you see the availability of ethanol becoming -- let me ask the question differently. Is industry supply-demand going to get tighter you think here in the next three or four months as demand builds because of greater driving, but supply for the industry on the production side basically being I guess level. So, is that going to happen, or do you still see an ability for production to rise a fair bit from here?

I think a lot of it depends on the EPA decision, because I think what would happen depending on if the EPA adjusts their number based on more driving going on, then I think there is a potential -- in my opinion there's a potential for tightness in the market. But otherwise my guess is that they won't -- that if they don't change it, I don't think there will be a shortage of product. I just think it will be a good strong industry, and if anything, then oil companies will adjust and buy a little bit -- will blend a little bit less ethanol this quarter if they can't get it.

Okay. And regarding --

My hope is that the EPA does raise it a little bit over what they have previously announced. And if that's the case, then they pretty much have to buy 10%. And your dynamics could possibly happen, but we are not counting on that.

Okay. And then regarding the use of the E-15 blend, I know there are a number of retail gasoline stations in the US who have moved to that blend number. What is your understanding for why that is not a more common occurrence in the industry? Most of the cars on the road can handle E-15 and clearly it leads to a cheaper gasoline for the consumer. So, why is it not more common, given you think retailers obviously would benefit?

Again, the consumer would benefit. The economy would benefit. The country would benefit. The problem is the oil companies who own of a lot of the gas stations fight it tooth and nail. They don't want to put in the E-15 pumps; it takes their market share away from their oil product, which is what they are really in business to do. The other issue is it doesn't work on all cars, so there's a potential liability issue if someone pumps E-15 into a car that shouldn't have it.

And E-85, also -- there should be E-85 pumps at every gas station for a lot of reasons. But again, the oil companies fight us tooth and nail on that. We take their market share, they don't like it, and that's issue we deal with every day.

Okay. And one last question. I'm assuming your natural gas costs have kind of normalized now.

Yes.

Is it fair to understand that that $14.6 million cost in the quarter you are reporting would fall back to maybe $6 million or $7 million per quarter, so you would be having I guess an extra $7 million of profit falling to your bottom line?

Maybe not quite that much, but yes, it will fall back. There were huge spikes during the first quarter when it got very, very cold. Natural gas is up a little bit over last year, but nothing like what that was during the first quarter.

Okay, great. Listen, I enjoy the profit balancing as long as it lasts.

Thank you, I appreciate it.

There are no further questions at this time. I'll now turn the call back to you for your closing remarks.

I'd just like to thank everyone for supporting our company, and we appreciate it very much. Thank you. Bye.

Thank you 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. Thank you and have a good day.