REX American Resources Corp (REX) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources second-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). As a reminder, this conference is being recorded today, Thursday, August 25, 2016.

I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer for REX American Resources. Please go ahead sir.

Good morning and thank you for joining REX American Resources' fiscal 2016 second-quarter conference call. We'll get our presentation and comments momentarily as well as your 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 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 filing 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 have joining me on the call today Stuart Rose, Executive Chairman of the Board, and Zafar Rizvi, Chief Executive Officer. I'll first review our financial performance and then turn the call over to Stuart for his comments.

Sales for the quarter increased approximately 2%. Sales were based upon 60.9 million ethanol gallons this year versus 57.9 million gallons in the prior year, which resulted in increased ethanol sales of $3.9 million. We experienced approximately a $35 per ton reduction in dry distiller grain pricing year-over-year for the quarter, which resulted in approximately a $2.6 million reduction in DDG sales.

Gross profit declined from $18.3 million to $17.3 million for the second quarter, principally due to the aforementioned DDG pricing and slightly higher year-over-year corn pricing for the quarter. DDG pricing continues to be affected by uncertainty of demand from China amid the anti-dumping and countervailing duty investigation.

SG&A was reduced slightly year-over-year from $6.5 million to $5.2 million primarily due to lower incentive compensation in line with lower overall profitability for the quarter.

Equity method income was $1.2 million this year versus $5.1 million in prior year. The Patriot plant contributed $2.5 million in the prior year prior to its sale on June 1, 2015.

Income before tax is $13.5 million this year versus $27.4 million for the prior-year second quarter. If you back out the $2.5 million Patriot equity method contribution and the $10.4 million pretax gain from its sale and other related effects in the prior year, our income before tax and noncontrolling interest is $13.5 million this year versus approximately $15.4 million in the prior year.

Our tax rate for the second quarter and year-to-date fiscal 2016 was approximately 35.5% net of noncontrolling interest. We currently believe this is a good approximation for the tax rate for the year, excluding any discrete tax items.

Our net income for the quarter was $8.2 million versus $16.4 million in the prior year and our dilutive earnings per share for the second quarter was $1.24 versus $2.16 with the reductions largely due to the Patriot gain and operating contributions in the prior year.

I'll now turn the call over Stuart Rose, Executive Chairman of the Board, for his commentary.

Thank you Doug. Going forward, earnings in the third quarter are currently running at a pretax rate that is a little bit better than last year's corresponding third quarter. We are being benefited by lower corn prices, a crush spread that's a little better than last year, the EPA has provided more stability this year, and natural gas prices remain low.

As Doug mentioned earlier, there are a couple of negatives out there that we are having to overcome, lower DDG prices, which is our byproduct being the biggest one, and the lack or the lessening of China demand. We also have a potential possibility of less corn supply, or less -- or a little bit lower harvest than last year due to a little bit less rain in South Dakota, and we are monitoring that situation, but it's too early to tell whether that will affect our business. We also are being hurt a little bit by lower oil prices as well as that is used to make gasoline, which, if prices were higher, we would expect a larger export business.

We continue to generate large amounts of cash. We are looking for other opportunities, both in the ethanol business and the commodity manufacturing other commodities where we can use our manufacturing expertise.

Heavy oil remains something that we were spending a little bit of money on. We are working towards a pilot plant, but with the low oil prices today, we have no high expectations for that to be a profitable business anytime in the future and, again, tell people not to buy our stock based on that, but it is something we continue to work on.

The biggest opportunities are expanding our ethanol plants, and Zafar Rizvi will give you an overview of how that's going along and what we are doing to better our ethanol plants. Zafar is our CEO and I turn the call over to him.

Good morning everybody. During the financial year 2015, in ethanol we made a capital investment of approximately $16 million to increase production. We have completed almost all capital investment projects at our consolidated plants. We continue to focus on improving our (inaudible) managing cost of production, increasing ethanol yield and dissolving other bottlenecks as we increase our production to a rate of 135 million gallons or more for our NuGen plant. We expect capital spending of $3 million to $5 million for this reminder of this year. We have received final pathway approval from EPA for NuGen. Although it is still pending for One Earth Energy, NuGen now has a permit to produce up to 150 million gallons. We will continue to monitor cash margin while we bring the plants to higher rate. Our plants continue to be cash flow positive. Currently, we are producing at almost full capacity.

Thank you. Stuart?

In conclusion, we are running at a rate during the quarter we are currently in, which is our third quarter, that is slightly better than the previous year's corresponding quarter on a pretax basis. We continue to drastically outperform most other companies in our industry, and we think there's a few reasons for that -- good plant locations that are expandable as we are doing with our South Dakota plan and attempting to do with our Illinois plant, good rail, good corn supply in our markets for the most part.

And again, most importantly, we feel we have the best people in the industry. They have been with us almost from the very, very beginning, and we work -- again, we think our people are as good or better than anyone else in the industry, and we think that's a real secret that allows us to do so much better.

I now leave the call open to questions.

(Operator Instructions).

If there's no questions, I'd like to thank everyone for being on the call. And again, things are looking up for this quarter. We could very well have an increase if we continue -- an increase in pretax profit if we continue running at the rate we are running. And we look forward to talking to you next quarter. Thank you. (multiple speakers)

Thank you. Pavel Molchanov, Raymond James.

Thanks for taking my question. The issue of RINs has been gaining a lot of attention in the press. It's even made its way into the election campaign. Obviously, RIN values are at historically high levels right now. So, maybe two things. One is why do you think they are as high as they are? And do you anticipate this sustaining itself kind of into 2017, or is this more of a seasonal issue?

The RIN values are only high -- the only people that have to buy RINs are people that don't blend enough at the refineries, they don't blend enough ethanol to meet the standards. And the people that are complaining that are buying RINs, they could say -- if I were running their business, they could save a lot of money just by buying more ethanol. So I really don't understand it.

In terms of the political situation, both parties, both of the presidential candidates have come out in favor of the ethanol business, whether they change the RINs. The movement today is to change the RINs where the blenders are responsible instead of the refiners. I don't think that would make much difference to our business.

We do not get paid on the RINs. We just sell the ethanol at a net price. So if the RINs -- if the blender was responsible, then they would have to buy more ethanol theoretically. So I don't look at that as our issue. I do hear the refiners complaining, but to be honest with you, from day one, the oil industry has complained about our business because we are a good competitor. We are lessening our dependence on foreign oil. We are lessening -- we are taking some of their market share and we are growing. So I think it's always going to be a little bit of a battle with them. But in terms of what we do in keeping our country energy independent, I think at least both presidential candidates recognize it and appreciate our industry for doing that.

Thanks for that. Let me also ask about the recent headlines in terms of M&A in the ethanol production space. Just this week, we saw the Abengoa plant getting sold, and I realize guys are not directly involved in that transaction, so I thought maybe I would ask kind of what is your independent perspective on how the valuations looked, and what you think of this consolidation.

These were plants that previously, and I'm sure they will be redone and be better plants, they were bought by a very good company, at least three of them, and now they're better with them, but these were previously plants that did not run very well, that did not make money while the industry historically didn't make money and went bankrupt. Well, the industry has done great over the last 10 years.

So our feeling is we want to stick with premium plants with vacant ICM plants. But if these plants are going to be bought and reopened, they need to be in stronger hands, and I think they will be in stronger hands. And it's probably a lot healthier for the industry and for the farmers to have someone buying their corn that can pay their bills, and I think that's what's going to happen.

I don't know that -- it's not our strategy to try and turn around broken plants, but we certainly understand the strategy. We certainly have looked at the Abengoa plants. Again, we understand the strategy and they are better off in strong hands than in weak hands. And I think that's where they are going.

Appreciate it, guys.

Paul Resnik, Resnik Asset Management.

Two questions. One, beyond the RIN question, is there any other political development taking place or -- I mean there's always discussion -- that you think is worth commenting on here?

Oil companies, the refiners and oil companies are never going to like us, and so they always have a strong lobby with -- and I respect it from the Senators and Congressmen in their states. But I think, as far as the ethanol business being an established business, we don't see any great -- we don't believe there will be any great changes, maybe minor changes, but any great changes during the next four years.

Very good. And secondly, I know I could look this up, but you indicated pretax will be better this year than a year ago.

Again, I would say we are running at a rate we certainly don't (multiple speakers) the quarters, we are not even one month into the quarter. But it's looking good and running at a rate better -- pretax is running at a rate better than last year's third quarter.

Yes. Could you remind me what were the number of shares outstanding in the quarter a year ago? (multiple speakers)

Doug, do you have that number?

Yes. For the second or third quarter?

For the October quarter.

Our quarter is based upon 6.9 million shares outstanding.

Last year.

Correct.

Okay. Thank you. That's all I have. Again thank you (multiple speakers) and things are looking pretty good.

Thank you.

Brent Rystrom, Feltl.

Good morning. Just quick, could you expand a little on your concerns about South Dakota? I would assume it's not a very big concern because the yield expectations don't look horrible; they just look a little soft. Is that a fair assessment?

At this point in time, they haven't had as much rain -- the corn crop nationally is going to be fantastic. South Dakota, where it's -- we don't -- it's not going to be terrible, but we don't know what it's going to be yet. They have had less rain than the rest of the country. So at this point, we are just monitoring it. We are still buying our corn at below basis -- we're still buying it below basis, so we will see what happens. But Illinois, on the other hand, looks like it's going to have -- most of where we own minority interest plants -- looks like they are going to have a great, great harvest. So we will see what happens.

And how do you think about -- when you look at the carryout expanding, as it looks like it will off of this crop, how are you guys thinking about planting next year in the areas where your plants and your affiliates are located?

Well, again, that's not our area of expertise. I don't know, Zafar, do you have any comments on that? I couldn't try to guess what the farmers will do next year, but maybe Zafar knows a little bit, maybe he can comment a little more.

As you know, it's hard to predict, but most farmers don't like to plant corn on corn, so it depends what happens next year. But this year, as you know, according to USDA report, it will be about 175 bushels per acre and about 15.1 billion goes to -- that will be production, and carries also increased. So I think, yes, earlier as Stuart mentioned about South Dakota, as you know, South Dakota, according to their fold, USDA shows 53% compared to 76% last year at this time. But we recently had some rain and it looks -- some scouts have gone around that area. And that review that looks at the corn a little bit better than actually USDA reported earlier. So, it's getting a little bit better but it's not as good as it was last year.

Yes, I think they are saying it's a mid 140s yield, the Pro Farmer Tour, so not really that bad in my opinion. Thank you.

No, no, exactly. This is much better than what USDA was showing.

Thank you.

(Operator Instructions). Greg Eisen, Singular Research.

Good morning. I apologize. I got on the call a little bit late. I was waiting a long time on hold there with the operator. But did I hear the number correctly? You said you've invested was it $16 million, 1-6, to increase -- $16 million to increase production so far for completing these projects?

That's correct. Yes, we've invested approximately $16 million so far from last year to up to date.

Through the end of the quarter. Any you have $3 million to $5 million of capital spending for the rest of the year. Is that correct?

That's correct.

So, that's really just maintenance spending.

Yes, that's what we estimate, $3 million to $5 million. That's the remainder of the year.

For maintenance.

For maintenance and the remainder of whatever needs to be done.

Yes, a little bit finish up and then maintenance, correct.

Got it. NuGen is now permitted to produce up to 150 million gallons you said. Remind me again. What's the status of the One Earth plant in terms of its permitted capacity?

Actually, we have applied it also for One Earth Energy pathway, pathway we have not received, and we are applying for EPA to -- we already had up to 125 million gallons we produce at One Earth Energy, but we are trying to increase it at the slow step there due to some regulation in Illinois. We probably increased to 135 million and then further to increase that later on close to 150 million. But all of these things really we have to wait for up the time we receive the pathway for One Earth Energy to increase further production.

So you're looking to increase the permitted capacity to 135 million from 125 million first in the first step?

Correct.

And 150 million is down the road.

Yes, I think we will -- that is our ultimate goal we'd like to achieve.

Okay. And do you have any guess or estimate as to when you would achieve that 135 million capacity permitting?

I think it's hard to say that, because we are trying to make sure that, when we are pushing these extra gallons, we want to make sure that we go slow and making sure the other bottlenecks are worked out so that we don't have any emergency or create some problem. So, I think it depends, but I think we are, at the NuGen, we are very close to that level but we are going very slow. So it's really hard to say, but I think early next year is expected.

Early next year for the One Earth.

For the pathway, that's right.

For the pathway. And assuming you get that permitting, can you estimate what the capital spending will be to put that in place? Is it that meaningful?

You mean to 150 million or 135 million?

To 135 million.

I think we have mostly capital investment is already done, and maybe it grows $3 million to $5 million more, as I said. But we are not pushing hard at One Earth Energy due to the reason we do not have a pathway. Up to the time we receive the pathway, then we will start pushing a little bit harder.

We have expanded the capacity -- we've put in the infrastructure in place at One Earth as part of that $16 million that we mentioned.

Yes, that's correct.

Okay, so that's already paid for. It's a question (multiple speakers) the pathway.

We are ready to go, we are ready to go if we can get -- if and when we get the pathway, which we expect.

Got it. Okay. I'll let someone else go. Thank you.

Thank you. I'm showing no further questions at this time. Mr. Rose, I will now turn the call back to you.

Okay. Again, I'd like to thank everyone for listening and we look forward to talking to you next quarter. Thank you very much. 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.