REX American Resources Corp (REX) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the conference over to Mr. Doug Bruggeman. Please go ahead.

Good morning, and thank you for joining REX American Resources FY16 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 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 these 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 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.

REX is extremely pleased to report on its FY16 third-quarter operating results. Sales for the third quarter were $116.3 million, which represents approximately a 5% increase over the prior year. Sales were based upon 62.8 million ethanol gallons this year versus 57.3 million gallons in the prior year, which resulted in increased ethanol sales of $7.9 million.

We experienced approximately a $24 per ton reduction in DDG pricing year over year for the quarter, which resulted in approximately a $3 million reduction in dry distiller grain sales. Gross profit increased from $14.3 million to $20.2 million for the third quarter, principally due to the improved crush spread associated with lower corn costs year over year, and increased production levels. DDG pricing continued to be negatively affected by uncertainty of demand from China amid the previously announced anti-dumping and countervailing duty investigation.

SG&A was slightly higher year over year, increasing from $4.7 million to $5.1 million, primarily due to higher incentive compensation associated with overall higher profitability for the quarter. Equity method income was relatively consistent at $1.8 million this year versus $1.3 million in the prior-year third quarter. Our tax rate for the third quarter was approximately 39.1%, and for year-to-date, was approximately 37.1% net of non-controlling interest.

Our net income for the quarter was $8.9 million versus $7.5 million in the prior year. And our diluted earnings per share for the third quarter was $1.36 versus $1.08 in the prior year, representing a 26% year-over-year increase.

I'll now turn the call over the Stuart for his comments.

Thank you, Doug. Going forward, earnings in the fourth quarter are running at a pretax rate of over 100% better than last year's corresponding quarter. We have some significant benefits going our way. First, of course, is lower corn pricing, which followed an excellent corn harvest this year. We have better crush spreads going on right now, as Doug previously mentioned.

The EPA has given us stability not just for the rest of this year, but next year, where they've called for RINs on 15 billion gallons of domestic ethanol use, which is the maximum. We have continued low natural gas rates, and we have increased exports, which Zafar Rizvi will talk about later.

The negative side -- DDG prices continue to be lower than last year, which goes along with lower corn prices. There's also worries about China demand. The other thing that is a negative is low oil prices, which makes our product less competitive on the world market.

The big question marks out there are the new administration, which is a big question mark for every business. Trump has consistently supported ethanol and RINs, and a big part of his program is US energy independence, and we believe we're a big component of that US energy independence. In terms of Trump's supporters, people like Gingrich and Huckabee have expressed strong support for ethanol all along, and have always been very good supporters. Other of his supporters, like Carl Icahn, have at times expressed disapproval with the EPA RINs program. We don't expect any legislative changes to take place.

The big, big question mark will be who heads the EPA. As shown by the last EPA, it's a wild card, and they pretty much can do what they choose with RINs. So that's going to be a big appointment and we'll see how that goes.

Other government question marks out there are the Trump tax cut. We pay a full tax rate, so if the taxes are cut, we'll benefit directly from that. Also our consumers will benefit directly from a tax cut, taking more vacations, driving more, potentially increasing ethanol demand. Trade barriers could help and hurt us. Trade barriers could stop the importing of Brazilian ethanol, but it could also hurt our ethanol exports.

In terms of cash, we continue to generate large amounts of cash. Our cash balance at the end of the quarter -- consolidated cash balance was $162.8 million. That relates to $135.8 million at the beginning of the year. $61 million -- almost $62 million is at the parent level, and over $100 million is at the consolidated ethanol facility level.

We're actively looking for other industrial projects and potential acquisitions, preferably in the energy or natural resource field. We've proven that we can operate large plants and do it efficiently and well-over a number of years, so we would consider other industrial acquisitions or other industrial projects. We want proven technology if possible, where we can show -- in a relatively short time, we can show increases to earnings per share, should we buy anything.

We're also looking for other top ethanol plants, high-quality ethanol plants. To date, we haven't found -- we have nothing imminent. But we're always out there looking to see if any come on the market. Very seldom do the type of plants we would like to buy come on the market.

We continue to try to buy back our stock, but we only buy it back opportunistically, on dips, when the opportunity occurs. In terms of the biggest place where we're showing growth and we'll continue to show growth, is expanding our current ethanol plants. Zafar Rizvi will talk about the expansion of our ethanol plants and what's going on in the export market.

Good afternoon, this is Zafar Rizvi. During the financial year 2016, we made capital investments of approximately $12 million to increase production. As you probably remember that we made approximately $8 million to $9 million in 2015.

We have completed all capital investment projects at our consolidated plants. We increased our production level at NuGen to approximately now 135 million gallons annual run rate. We are also increasing our production rate at One Earth Energy. One Earth Energy is expected to be higher rate by the end of first quarter of 2017.

While we are working on eliminating bottlenecking, we have received final pathway approval for One Earth Energy also at this time. As you probably remember, we mentioned previously that we have received from NuGen already. NuGen now has a permit, as we mentioned previously, about 150 million gallons, and one up to 131 million gallons. NuGen also has qualified for carbon intensity for California ethanol shipment.

As we continue to increase our ethanol production, we will continue to monitor our gross margin. We will be soon evaluating how do we take a next step to increase our production to 150 million gallons at NuGen plant. So we are working on some other bottlenecks to reach that stage, which we believe that probably will be next year sometime, or later next year sometime, we will with able to achieve that goal.

So that's where we are with construction update at this time. Stuart?

Thank you. In conclusion, we've substantially outperformed most of the industry, most companies in general, with a 25% increase in earnings per share during the quarter. One thing that we noticed during the quarter was that exports, even though oil prices have not really risen -- in fact, in some cases, have come down during the quarter -- exports are going up. We see demand from a number of different countries that need clean air, and it's been a big -- it's been some help this quarter. We have the ability to export our product, and we hope it will be good, even better in the future.

On the horizon, there's very few negatives on the short-term horizon. We are benefiting from low natural gas prices, good crush spreads, strong EPA RIN rulings, great locations, very good harvest. Put it all together, and during the next quarter we expect -- we're currently running at a rate of greater than 100% better than the corresponding quarter, fourth quarter of last year.

The biggest asset that we have is our people. Our people, we consider them the best in the industry. We really have great people. That's really -- when you compare us to not just the rest of the industry, but many -- most companies in the world, that's what really makes us stand out, makes us look a lot better, and makes us a better Company than most companies that you'll see out there.

I'll now leave it open to questions.

Thank you.

(Operator Instructions)

We have a question from the line of Brent Rystrom from Feltl. Please proceed.

Hi, Brent.

This is Aaron Steele on for Brent.

Hi, Aaron.

Hi. I was just wondering if you could talk a little bit about the [bases] opportunity that you maybe have seen in South Dakota, and then kind of how that compares to Illinois?

Zafar, do you want to answer that?

Yes, I think suddenly the bases are much better at the South Dakota location than Illinois, although Illinois has great corn production this year. But as you know, there's a huge complication in Illinois, in Decatur and Champagne, and around that area. So certainly the bases are a little bit -- are much better at the South Dakota than Illinois at this time.

Okay, excellent. Thank you. And then --

We tend to make up that difference with lower rail prices. So the [bud] plants do pretty -- in the end, there's no rhyme or reason of which one necessarily does better.

Yes, I think what Stuart is saying is that the ethanol bases are better at the Illinois plants than South Dakota, due to transportation reason. So that's what's really -- so it's one better in the corn, the other better in the ethanol.

Okay, yes, that makes sense. And then just on DDG pricing in the quarter, can you kind of comment on what you've seen, and then what you'll see kind of going forward? I know there's been some difficulty -- you mentioned China and then Vietnam as well, some of the regulations coming out of there.

I think certainly we see the DDG pricing is consistently coming down at this time, somewhere 80% to 90% of the corn value, and certainly concerned about Vietnam and China. But on the other hand, we see some of the other areas, DDG price is certainly increasing. We have seen some coming from even from Egypt and some other areas, the DDG price.

So at this time, certainly we are concerned, but I think we can see some growth coming from other area. In spite of China's anti-dumping, as you probably know, that in September 2016, even the China was still very importing more DDG than any other countries. But certainly, since that time they slowed down.

Okay, thank you.

Thank you.

And then just one more question, if I could.

Sure.

I was just wondering if you could comment on the EPA's latest -- the RFS volume standards? So with the 15 billion gallons of conventional biofuel, just wondering kind of your take and how you see this impacting the industry going forward?

It couldn't have been a better ruling. It's the right thing to do, it's the law. And our industry will produce it and the customers can use it. E85 should be a much bigger component of what's going on out there. It's not. Maybe it will be next year.

In our opinion, the people opposing this really don't have any ground to stand on. The country can use more ethanol. Ethanol is produced at home. It creates cleaner air. It takes care of our people, our farmers, and we -- which, I'm starting to sound like Trump -- but it's a very American product.

And from our way of thinking, the EPA did the right thing, and we hope that continues. We hope the next EPA head will see it the way the last EPA heads saw it. And we certainly qualify as a great American product, with great American workers. So we'll see what happens.

All right. That's it from me, thank you.

I think the one more thing which I wanted to probably add, that, as you probably know, the consumption of gasoline is also increasing rapidly. We're expecting this year 144 billion gallons compared to last year, about 141 billion gallons. So as the consumption of gasoline will increase, the consumption of ethanol will also -- will increase with that.

Okay, thank you.

(Operator Instructions)

In that case, if there's no more questions, I will thank everyone for the call. And again, we're in the middle of a great quarter right now, and hopefully it continues to the end of -- hopefully it continues for a long time. But currently, we're looking at very good numbers, and we thank everyone for their 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 lines. Have a great day everyone.