REX American Resources Corp (REX) 2014 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 of REX American Resources. Please go ahead, sir.

Good morning and thank you for joining REX American Resources fiscal 2014 fourth-quarter conference call. We'll get to our presentation and comments shortly as well as your Q&A 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 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 risk 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.

REX is proud to report record fourth-quarter and fiscal year earnings and diluted earnings per share. Diluted earnings per share for the fourth quarter increased 31% from $1.95 to $2.55 and the full-year diluted EPS increased 151% to $10.76. Net sales in revenues for the fourth quarter declined 13% to $127.7 million compared to last year's fourth quarter primarily reflecting lower ethanol and distiller grain pricings for the quarter.

These prices decline for the full year as well but the distiller grain pricing decline was more significant in the fourth quarter as China had backed away from the market during that time. Our plant production rate for the fourth quarter remained relatively consistent with year-to-date production rates as we ran about 10% to 15% above nameplate capacity. The production rates continue to substantiate our belief that we have amongst the best quality plants in the industry.

Gross profit increased 14% for the quarter to $30 million versus $26.3 million as lower corn pricing more than offset the lower sales prices. REX benefited during the quarter as the spot ethanol pricing was stronger than CBOT during November and December and we were able to get a better price by not locking in our ethanol.

In addition on average our corn pricing was below CBOT as we were able to take advantage of our plant's proximity to the corn. Selling, general and administrative expenses declined on a quarter-over-quarter basis from $5.3 million last year to $4.1 million this year due to lower incentive compensation in the current year as bonus caps were hit earlier in the year and lower expenditures related to the deep heavy oil project. Equity income from our non-consolidated plants increased slightly from $7.6 million to $7.9 million.

As we mentioned on our last earnings call, we completely paid off our bank debt during the fourth quarter on the consolidated plants which has resulted in lower interest expense. The above items contributed to an increase of 28% and our net income attributable to REX shareholders to $20.3 million and an increase of 31% in diluted earnings per share to $2.55.

During the fourth quarter we used cash of $9.8 million to purchase about 161,000 shares and $33.5 million in the retirement of the consolidated debt. We now have 497,582 shares remaining on our current buyback program.

For the full year we spent about $10 million on capital expenditures. $7.6 million of the expenditures occurred at the NuGen plant to expand their ethanol, corn and dried distiller storage. We now have storage of 2.2 million to 3.2 million bushels of corn and 4.3 million to 5.2 million gallons of ethanol at the two consolidated plants.

I would now like to turn the call over to Stuart Rose, Chairman of the Board, for his commentary.

Thank you. The ethanol industry is a cyclical industry; currently, it is a struggling industry. In the first quarter many, many plants in the industry are struggling to turn a profit. Oil prices are probably the biggest cause of that.

During the fourth quarter as everyone knows oil prices dropped drastically. It's made the export market more challenging because we're priced last competitive to oil; also make E85 and E15 less competitive.

Another issue is there's been no finalization of blending requirements from the EPA and the uncertainty does affect the industry. In terms of ethanol inventory levels there's high, many plants came on last year that maybe shouldn't have come on or aren't as efficient and were previously closed. They are currently still running and that's created a glut on the market and it's drastically reduced crush spreads.

Going forward the industry will continue to face heavy lobbying pressure probably as great as ever from the oil companies. They refused to pay any attention to the benefits of ethanol: air quality, national defense, deficit reduction, trade balance of trade, energy independence, and totally focus on their marketshare and the lost marketshare to ethanol. And again they will continue to do that; however, with the Iowa caucuses coming it is our belief that there will be no major legislative changes in the near future.

In terms of EPA they seem to be in no great urgency to set blending limits and we don't think that they will cause great harm to our industry in the near future. Maybe even will benefit the industry if they ever do come out with their blending limits.

Oversupply issues should ease somewhat. Inefficient plants have already started to cut production. Driving season is about to start.

Demand will pick up; it was a rough winter, that limited demand. But we do expect with driving season gasoline to increase and simultaneously ethanol consumption to increase.

DDG prices also are looking better. Right now the Chinese market has again reopened and that should help DDG prices in the future.

REX continues to have great plants. We have Fagen built, ICM technology, good rail, solid corn belt locations. Because of this even with the narrowing crush spreads, even with crush spreads down a little bit our plants are still running at a slightly better than breakeven pace.

The margins in the last couple of weeks have gone up. We don't know if -- a little bit.

Not anywhere near last year, but we hope this is a positive trend until production goes down and until the glut gets eaten up a little bit we remain wary. DDG prices like I said earlier for REX, like the rest of the industry with the entry of China back into the market should help us in the future.

Cash at year-end we had $137 million in cash. We had no debt and no debt again is something that will help us in the future in terms of increasing or doing better than the rest of the industry. The biggest reason we feel we'll do better is our plants location, people, etc. but having no debt is also a big benefit.

Our share buyback continues. We have 497,582 shares currently authorized. The current price of our stock means that our plants are selling well, well below the replacement cost of the plants.

These plants have had great returns and so we look at our shares as our share buyback program as one great way to spend our excess cash. And again we buy on dips and we're very wary we don't buy -- we buy to lower the share count, not to replace options and that type of thing. Our strategy has always been is currently to buy to lower the share count.

We also continue to explore building a new plant. We believe that permitting now is possible but a go/no go decision would have to wait until the industry has better economics.

We also are looking at opportunities to buy plants and with the industry doing a little worse those opportunities may come. We have nothing imminent but again we buy opportunistically and we look to if the industry goes into a prolonged slump there may be that opportunity like there was in the past to buy plants and we plan on being there. We're true believers in the ethanol business if we can buy plants at an opportunistic price.

Looking forward in terms of other things other energy businesses we continue to look for other alternative energy businesses to go into. So far only heavy oil has shown up on our radar. We have nothing imminent other than that.

In terms of our heavy oil technology we continue to explore it. We hope to have a pilot plant up this year. There's billions of barrels of heavy oil out there that's unrecoverable.

It's our hope that we can create a process to recover this oil. It is unproven technology. We do not recommend people buying our shares because of our patents in this technology, at least not at this time, but we are going to see what we can to see if this technology works.

In conclusion we're proud to report a record year net income of $87.3 million, earnings per share of $10.76. And again all this can be contributed not just to our great plants which we think are the best in the industry but more importantly the great employees which we feel are the best in the industry. And they are really what makes us a really, really great company in the ethanol industry.

I'll now leave it open to questions.

(Operator Instructions) Katja Jancic, Sidoti & Company.

Hi, thank you for taking my call. First can you talk a little bit about the capital expenditures for this year? What are your expectations?

We don't currently have any major expenditures planned. I would tell you I would expect it to be anywhere from $2 million to $5 million and no major projects on the plate right now.

And regarding dry distiller grains, do you see this really helping in this quarter or we're going to see this more in the next the second quarter the benefit from increased --

I think it will help a little bit in this quarter but I expect a bigger benefit next quarter. Dry distiller grains there's a little bit of a lag between -- you have to go out a little bit further selling the product. But prices definitely have gotten better since China has gotten in the market.

So Stuart, you mentioned possibly acquiring, are you looking at acquiring other producers or you're looking to increasing the shares the equity stake in the facilities you already own?

We have looked at acquiring other producers. One thing that we are looking at that I didn't talk much about is increased, slowly increasing the capacity of our existing, not necessarily buying more shares in the Company so we own minority position but increasing the capacity of our existing plants. And that's probably the most efficient thing we can do in terms of growing the Company is just gradually grow our existing plants.

We have looked at -- we would want Fagen/ICM corn belt plants and we have looked at them. But the pricing that we've seen has been greater than -- or the pricing that other people have been willing to pay is greater than we're willing to pay. We are opportunistic buyers.

You mentioned increasing capacity. Are these projects because you previously said there's no major capital expenditures so I'm guessing this is not yet planned?

You try to increase a little bit as you can get more -- basically you do little things, we're one of the few -- a couple of our plants were one of the few that the EPA said were extremely efficient and allow more RINs. But there's nothing that I can report today that is not in Doug's numbers.

But that could be something that comes up if we're lucky later in the year. It would be a little more capital expenditures should that come up but it's nothing we can talk about today.

Okay. Thank you.

In terms of capital expenditures.

Shannon Collins, Water Street Capital.

Hi, Stuart. Just a quick question. I know that you discussed this briefly but your pricing both on an ethanol basis and a corn basis was better than would be available on the CME.

And I know in the past that that's not always been the case. Can you just give me a bit of a hint as to why that is and then also if you think that that's sustainable going forward?

One of the beauties of our Company in the fourth quarter was we did very little hedging out and we were on the spot market. CME is not the spot market. Even the most current month is not the spot market.

The spot market had a nice spike during part of the fourth quarter which allowed us to get an average price. It's pretty significantly above the CME price. Today the spot market is not above -- it's not significantly above CME.

It's pretty much right -- it's not anything -- CME would be a good barometer of where we're selling our product at. We actually sell a little below CME because of transportation and things like that but fourth quarter was unusual because the spot market was extremely strong.

Was that a railcar issue on the spot market?

No, my feeling is it was someone who had sold something out and we don't know who someone who had committed something to someone and got caught and they had to buy the product at a higher price.

Well, good for you and too bad for them.

Yes, we do not know who that is and that's just my gut feel of what happened.

Good. Well thanks very much and I appreciate the insight. That's all I've got.

(Operator Instructions) Jeremy Hellman, Singular Research.

Hey, good morning guys. Just a follow-up on the initial question that you were lapping up in terms of capacity expansion on the existing plants can I get some sense of maybe as a percentage of current volume that you might be able to increase and also what boxes you in? Is it just simple physics and engineering or at a certain point do you run into the EPA having to come stick their nose into it?

We'd like to do about 10% more. At a certain point the EPA RINs haven't become a factor but we'd like to get it up about 10% more and we think the EPA would cooperate with that.

So we're not -- I can't say 100% sure but that's probably what we're -- what we would like to do. So we'll see what happens.

Right. And so that 10% is more driven just by physics if you will?

Right, it's improving. You get better as you go down the experience curve you get better each year at what you're doing just better efficiencies, change see where we can make things a little better. And as you can see we started with 100 million gallon nameplate on these plants, we're running well in excess right now of 100 million nameplate.

So we've already way surpassed what originally these plants were planned to do. So that should give you some idea.

Okay. And congrats on getting the balance sheet down to a debt free state and I know you've still got some remaining room on your share repurchase program and given your comments in terms of newbuild or purchase do you have a number or a range in mind in terms of when you get too much cash on your balance sheet?

We right now because -- right now we have what we have. I don't think that's an issue at the moment because the industry's is on the downside of a cyclical industry. But too much I don't think -- I think we continue to buy in shares and never let that happen, but again that's a Board decision, not my decision, but that's been our historical what we've done historically.

Okay, thanks.

We have no further phone questions at this time so I'll turn it back over to you Mr. Rose for your closing remarks.

I would like to thank everyone for their support and again it's very much appreciated. And even though the industry is in a little bit of a tough time right now we're very, very big believers in the ethanol industry long term, have great, great hopes and faith that it will continue to do very, very well over a long, long -- over the long term.

Thank you for listening and appreciate it. Bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.