REX American Resources Corp (REX) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the REX American Resources Fiscal 2017 Second Quarter Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded on Wednesday, August 30, 2017.

I would now like to turn the conference over to Mr. Doug Bruggeman, Chief Financial Officer.

Please go ahead.

Good morning, and thank you for joining REX American Resources Fiscal 2017 Second Quarter Conference Call.

We'll get to our presentation and comments momentarily as well as your question and answers, but first, I'll review the safe harbor disclosure.

In addition to historic facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks 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 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 Rose for his comments.

Sales for the quarter decreased approximately 6% to $108.7 million.

Sales were based upon 61.3 million ethanol gallons this year versus 60.9 million gallons in the prior year.

We had a 2.7% reduction in ethanol pricing, which resulted in lower ethanol sales of $2.1 million.

Similar to the first quarter, we experienced a significant reduction in DDG pricing year-over-year, which resulted in approximately a $5.5 million reduction in DDG sales for the second quarter.

Gross profit declined from $17.3 million to $10.8 million for the second quarter, principally due to the aforementioned lower pricing and higher year-over-year natural gas pricing as well as maintenance costs.

SG&A for the second quarter was slightly reduced from $5.2 million to $4.8 million, with the reduction due to lower incentive compensation.

Equity method income was $137,000 this year versus $1.2 million in the prior year.

We've got a slight uptick on the interest and other income, reflecting slightly higher interest rates, which resulted in the increase from $97,000 to $334,000.

Income before tax and noncontrolling interest is $6.5 million versus $13.5 million in the prior year second quarter.

Our year-to-date tax rate for fiscal 2017 was approximately 38.5% net of noncontrolling interest.

We expect this to be significantly lower for the remainder of the year based upon the refined coal operation we acquired after the end of the second quarter.

Our net income for REX shareholders for the quarter was $2.9 million versus $8.2 million in the prior year, and diluted earnings per share for the second quarter was $0.45 versus $1.24.

Stuart, I'll turn the call over to you at this point.

Thank you, Doug.

Going forward, as you -- as Doug alluded to, we recently have entered into a refined coal transaction, which we expect to be accretive to earnings per share.

The plant was purchased for $12 million in cash, excluding transaction fees.

REX expects that the revenue from the refined coal produced in these facilities will be subsidized by federal production tax credits subject to meeting qualified emissions reductions as governed by Section 45 of the Internal Revenue Code.

Within our 10-Q to be filed for the second quarter, we will discuss the risks and uncertainties related to this transaction.

Earnings next quarter, the third quarter, in ethanol currently are running at a rate above first and second quarter this year but below third quarter of last year.

With tax credits related to the refined coal transaction, we are currently running at a rate that could hopefully put us slightly ahead of last year's earnings per share in the third quarter.

Earnings in crush spreads have expanded in recent weeks as corn prices have declined.

Currently, we expect a good corn crop, which should be beneficial for next year.

EPA has issued guidelines for this year's RINs, requiring refiners to purchase 15 billion gallons of related RINs, which we consider beneficial to the industry, and we currently expect that 15 billion RIN number to be in place for next year.

Natural gas has been steady.

And again, we expect it to stay that way.

DDG prices stayed steady also, and we expect them to stay at 80% to 85% of the current corn value for the next quarter.

We expect increase in demand right now from -- for the whole ethanol product as refiners go to meet their RIN requirements.

We think they're behind, and we think there will have to be some catch-up, but we'll see.

In terms of negative, there's been a lot of expansion in ethanol plants.

So even though RIN prices have gone up, supply is also going up, and consequently, we've been limited in pricing power.

And ethanol has not gone up significantly over the quarter even though RIN prices have gone up.

It's also impossible to sell in the future market, which we very seldom did, but future ethanol prices, looking at the board, are significantly below current prices.

That's not unusual in the industry, but that's one of the reasons why we've always tried to match our ethanol sales to our corn purchases and go out -- do not go out too far.

In fact, trying not to go out past maybe a month on our ethanol sales.

And again, that's because prices are higher and usually are in the ethanol business, are currently higher today than the future market.

Also, corn is lower today than the future market, so that's always worked well for us.

In terms of cash, we keep generating large amounts of cash.

We have good earnings; no debt; currently have cash on the balance sheet of $186 million.

76.2% -- $76.2 million is at the parent level, and $109.8 million is at the plant level.

Again, we have controlling interest in those plants.

We just bought -- used some of that money to buy a 95.35% interest in the refined coal plant, which cost $12 million -- the total transaction was $12 million before transaction fees.

We continue to look for other opportunities in the energy field where we can use our management expertise and hopefully, be accretive to earn something.

If we do look for anything, we hope that it's accretive to earnings, and as we hope this refined coal transaction will be.

We continue to look to acquire ethanol plants.

We're only looking for the very best in the industry.

We have a proven formula that if we have great plants, great locations, great management, we can do consistently better than the industry, and that's worked for us.

And I see nothing that will take us away from that strategy.

Again, we have nothing imminent in either acquisitions in the energy field or in the ethanol field at this current time.

We're currently expanding both of our ethanol plants.

Zafar Rizvi, our CEO, will now talk about our expansion and maybe a little bit about the industry.

Thank you.

Zafar?

Good afternoon, everybody.

I will talk briefly on where the construction is at this time.

During the last 2 quarters of 2017, we made total capital investment of approximately $14.4 million.

So we used that cash, which, as Stuart mentioned earlier, $14.4 million, also to increase our production.

Some of the construction work is still not completed yet.

Meanwhile, we are working on bottlenecking and waiting for construction to complete.

We have been able to produce approximately 135 million to 140 million plus annual rate but not on consistent basis.

Hopefully, during the fourth quarter, we will be able to achieve our goals, but it all depends on the crush margin, completion of all construction work and no surprise bottlenecking, which can restrict our production level.

So I think, hopefully, that's our goal, and we will be able to achieve.

But it's -- as I've mentioned earlier, but it all depends on how the crush margin will lead and bottlenecking.

And some of the equipments also on back, not received yet, like the boiler and other equipments, which we are waiting.

Hopefully, we will receive those soon.

That's one of the reasons the construction is delayed.

As far as concern about the industry, seems to be -- we have seen improvements in the cost spread during the third quarter, and we expect to perform, as Stuart mentioned, better than last 2 quarters.

That's where we are at this stage.

Thanks, Stuart.

Thank you, Zafar.

In conclusion, we have entered into a new business, refined coal, which we expect to be accretive to earnings and to earnings per share where we remain profitable and running at a better profitability rate in the third quarter than the first and second quarter.

We continue to expand our ethanol plants, which stand out and have -- and continue to do better than virtually everyone in the industry.

And again, it's due to great locations.

We're in good corn markets.

We have very good Fagen/ICM large-scale plants.

Most important, and we really consider this what makes us the big difference between us and the other people in the industry, we have top people that have been with us a long time.

We consider them to be not just among the best in our industry but among the best in the industry, and that's what truly sets us apart.

I'll now leave the forum open to questions, if anyone has any questions today.

(Operator Instructions)

If we have no questions, I'll move on to -- -- and we'll talk about -- do we have a question, operator?

We do have a question from the line of Craig Irwin with Roth Capital Partners.

Others in the industry appear to be moving forward on probably building new plants.

And in the past, you have messaged that this is something that you're considering, something where you clearly have enough capital to do it and the experience with a wide fleet of plants.

Can you say what you would look for specifically before you actually move forward with the construction renewed facility?

And can you maybe talk about the diversity of potential plants that you're evaluating at this moment?

In terms of new plants, we did look at it, and we looked at it pretty closely, closer than just about anyone.

And it's doable.

No question.

It would have to be in a great corn area, and it would have to be, for me, at least for me, to consider it successful, was when we looked at it, it was significantly more to build a new plant than the last time we've built a plant.

And someone would have to be very careful with the RINs.

It's an important part of our business.

And if you can't get RINs, I think it would be very, very hard to make money and sell all those gallons.

And so there is a pathway to get there.

It's doable.

We looked at it and currently don't think it's the best use of our shareholders' money.

The things that I mentioned earlier, looking at possibly, we think there might be opportunities over the next few years to maybe.

And we always are looking.

We haven't bought anything in a long time, but that's how we built our company was we know how to buy ethanol plants and -- both buy and build ethanol plants.

So I think that might be a little better way to go for us, but building more plants is out there, and so I imagine some people would do it.

The industry currently doesn't have a return to justify it but historically has a return that might justify it.

And if they can raise some money, I think there are people out there that would build plants.

And we looked at it very closely, probably, like I said, closer than anyone, and we decided it wasn't for us at this time.

Any other questions?

Our next question comes from the line of A.J. Strasser with Cooper Creek.

Could you just repeat what you said in terms of the Q3 outlook?

I think -- did -- I thought...

I said that we're running better than first and second quarter currently, running the rate better than first and second quarter, worse in third quarter of last year.

But with refined coal, we are hopeful -- we're just starting that operation.

We are hopeful that our earnings per share will be slightly better than what they were last year's third quarter.

We -- but again, we are just starting the quarter.

We'll see what happens.

But that's the rate we're currently running at.

Okay.

Just to put that in context, I mean, you guys, on average, did something in the mid-50s of earnings per share per quarter.

It's like average Q1 and Q2.

I think last year was like $1.36 in Q3 of last year.

So to get to where you're sort of at now versus that $1.36 you're saying, the coal operation would help.

I mean, that sounds like a pretty big...

Well, again, if you listened to what I said, I'll say it again, so you understand.

I didn't say -- I said we're running between, which is a large range, second -- the higher, first and second.

We're running better than first and second quarter and currently running less than third quarter.

But that's a very wide range, as you just pointed out.

So that's -- it's, again, just the beginning of the quarter.

We'll see what's happening.

Crush spreads have been going up, as you probably know, as you follow the industry really well.

So we'll see what happens.

It's way too early for me to tell you we're definitely going to do anything.

But we have -- I did say, we expect that refined coal will be accretive, and that could be the difference between doing better than third quarter, doing worse, but it's way, way too early to say.

Then being -- so that could take you potentially to above Q3 of last year, if things go well?

Potentially, possibly.

And again, we're just starting that business.

But that...

Can you just give us some context on how we should be looking at coal in terms of its earnings accretion just so -- I mean, how...

It's really hard to do that since we just started.

Everything we can say about this, we'll say in the 10-Q.

But it's -- there's a lot of restrictions on what can be said and can't be said.

So I would advise everyone related to refined coal, including risks and uncertainties, to look in the 10-Q, which will be out shortly.

(Operator Instructions) There seems to be no further questions at this time.

Well, great.

I'd like to thank everyone for listening, and appreciate your support very much.

Thank you.

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.