REX American Resources Corp (REX) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources Fiscal 2017 Third Quarter Conference Call. (Operator Instructions)

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

Good morning, and thank you for joining REX American Resources Fiscal 2017 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 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 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.

The first thing I want to point out is we now have 2 reporting segments, ethanol and by-products and refined coal. We acquired our refined coal facility on August 10, 2017, so this is the first quarter has been impacted our financial results. Our comments on refined coal segment are contractually limited, so please keep that in mind for your questions.

The third quarter resulted in our best quarter for the current year-to-date for our ethanol and by-products segment. Consolidated sales for the quarter increased approximately 4% to $121.2 million. Ethanol sales increased approximately 6%. Sales are based upon 66.4 million ethanol gallons this year versus 62.8 million gallons in the prior year as we continue to work on ramping up production at the consolidated plants.

Consistent with the first half of the year, we experienced a reduction in DDG pricing year-over-year, which resulted in approximately a $2.8 million reduction in DDG sales for the third quarter. This was partially offset by increased modified distiller -- distillers production and result in increased sales of approximately $1 million from modified distillers.

I'd like to point out, at the refined coal segment, we report sales net, meaning we reduce our sales refined coal by the cost of the coal feedstock. Primarily reflecting the above factors, gross profit for the ethanol and by-products segment declined slightly from $20.2 million to $18.3 million for the third quarter. [GP] was also negatively impacted from the refined coal segment by $3.4 million.

SG&A for the third quarter increased from $5.1 million to $7.3 million largely due to transaction costs related to the refined coal acquisition.

Equity method income was $1.1 million this year versus $1.8 million in the prior year. Interest and other income increased from $117,000 to $745,000 due to increased interest rates for the cash on hand as well as grant money related to work at an ethanol plant. Reflecting the benefits of our refined coal operations, we reported a tax benefit of $5.7 million this year versus a tax provision of $5.7 million in the prior year third quarter.

The benefits reported for the quarter were larger than we expect for a normal quarter as this was the first quarter of refined coal operation. We estimate our expected tax rate for the full year, which results in the catch-up for the first half of the year, as no refined coal tax credits were available or recorded in the first half of the year.

Net income for REX shareholders for the third quarter was $13.2 million or $2 per share versus $8.9 million or $1.36 per share in the prior year.

Stuart, I'll turn the call over to you now for your comments.

Thanks, Doug. Going forward, REX expects earnings to be down in the fourth quarter relative to both last year's fourth quarter and the third quarter. Ethanol crush spreads are lower than both the fourth quarter of last year and the third quarter of this year. Refined coal operating losses are expected to be higher during the quarter as they will be operating for a full quarter and we have the possibility of greater production depending on weather. This will be offset by tax credits, which will be incremental to earnings per share but not enough to offset the lower crush spreads we're currently experiencing in ethanol. The crush spread is currently impacted by very, very high production -- high -- record production, actually, in -- from the ethanol producers. Many of them are -- have expanded, creating more capacity than before and also, the drop in driving due to the seasonality. RIN prices remain very, very high, given refiners' incentives to buy our product versus buying RINs, but to date, that has not been reflected in ethanol prices.

Corn is plentiful, and prices are reasonable. DDG prices are up slightly over the third quarter. We keep projecting, that because of the low prices of ethanol, exports to pick up. But to date, that hasn't been a huge increase over the previous year. They have not gone up significantly over the previous year. Corn oil and natural gas prices have remained steady.

Next year, we're -- we are optimistic. We're up against -- after the fourth quarter, we're up against this year comparisons in the first and second quarter. We have EPA guidelines in place. RINs of 15 billion gallons are required, which is the maximum amount the EPA can require according to the statutes.

We -- corn supplies, as I said earlier, is good. Prices, in my opinion, seem likely to rebound with spring driving season coming. There's certainly incentives to sell ethanol versus gasoline or price. In my opinion, you could see an E85 sell for a while as well as $0.99 a gallon. If that happens, I think a lot of -- there'll be a lot more demand for our product. Of course, demand, higher demand creates higher prices.

The tax rate cut will be good for REX. With even lower -- we already have a fairly low tax rate. It would lower it even further. And more importantly, we think it would stimulate the economy.

Currently, if the new law -- the big part of the new law that could help us as if AMT is eliminated, and that currently is in the law to eliminate the AMT. We'll see what happens.

On the downside, production is -- we don't see any letup in production, even though a number of plants are probably unprofitable at this time. They don't seem to be closing down. They should be closing down. And there's a number, we believe, that aren't making money that are not the best plants in the industry. But to date, production, as I said earlier, is at an all-time high.

We continue to generate large amounts of cash on the balance sheet, $190.5 million. $65.5 million that was at the plant level -- $65.5 million was at the parent level, and $127 million was at the plant level. We continue to look for opportunities to expand. We continue to look to buy capital-line ethanol plants. We have feelers out there but nothing imminent, nothing to report on that front.

In terms of -- we also are looking, like we did with refined coal, other energy opportunities. We have nothing imminent on that front, but it's something that we always look at. And we've been pretty creative in finding, over the many years, of finding ways to finding uses of our cash and finding ways to spend that cash.

Zafar Rizvi now, our CEO, will talk a little bit about where we are on our expansion of our ethanol plants and a little bit about our ethanol business.

Good morning, everybody. I'll go over briefly about the construction during the last quarter of 2017. We made total capital investment of approximately $19.3 million at our ethanol plants. Almost all the construction work at the NuGen facility is completed, and we are working on eliminating any bottlenecks.

We received new boilers at the one ethanol day, which have been delayed, and we are working on completing that construction work, too. We have been able to produce close to 140 million-plus annual rate at NuGen but not a consistent basis. Hopefully, during the first quarter 2018, we will be able to achieve these goals.

As I stated last quarter, but all -- it all depends on the crush margin, meaning completing up all construction work and no surprise bottlenecking, which can restrict the production level.

As far as ethanol, as Stuart already mentioned, that as you know that the production level is all-time high. And due to that reason, certainly, consistently, ethanol prices are coming down. And the good news is same time, corn prices are also coming down. So the crush margin is declining, but it's -- we believe that will be still profitable this quarter.

Stuart?

Thank you, Zafar. In conclusion, we continue to outperform the industry significantly, especially in the ethanol -- especially the ethanol industry. After-tax earnings grew in the third quarter, 47% in terms of -- a lot of that was related to our refined coal operation, which is off to a good start.

In the future, we're currently limited by low crush spreads, but things should -- we hope things will improve as driving season comes in, as, hopefully, with the low price of ethanol exports pick up, and hopefully, we'll see some more -- some increase in E85 sales. Our -- the price of our product is significantly -- currently significantly below the price of gasoline. We have the best plants in the industry, great locations, good corn supply, good rail, and most importantly, and I can't underemphasize this, we have the best people in the industry. And that's really what sets us apart from the rest of the -- in my opinion, the best people in the industry, and that's what's really set us apart from the rest of the industry and allowed us to show certainly better results than many, many others in the industry.

I'll now leave it open to questions.

(Operator Instructions) And our first question comes from the line of Pavel Molchanov with Raymond James.

You've touched on some of the pricing softness in the ethanol market. But just to kind of drill down, as I look at today at gasoline versus CBOT ethanol, it's a $0.40 discount, which I think is the widest it's been probably since the days of $100 oil more than 3 years ago. And then surely, that's not sustainable. I'm curious what you think will kind of revert that price relationship back to more sustainable, healthier levels and how long do you think that process of rebalancing the market will take.

To put further color on what you're saying, Pavel, is not only is ethanol low-priced, but RINs are still -- last I looked, slightly below $0.90. So theoretically, an independent like a Walmart or Kroger can buy our products, sell the RINs and buy our product. So far, below gasoline, it's almost crazy how low it's priced. And some -- if I figure it right, under -- they can buy roughly $0.50 a gallon, somewhere in that range. So it's ridiculously low-priced. I think the issue might be, at this time, the storage is full because I can't imagine that ethanol price is staying so far not just below wholesale gasoline but with RINs where they are staying at the price where they are. But I would have said that a month ago, too, when things -- prices have even gotten lower. So to answer your question, I can't -- I gave color on what I thought would be the logical answer that some of these plants that are losing money and a number of them are, just can't continue to operate and lose money forever. And it usually happens, supply and demand gets back into the right area. But in the meantime, we're still making money. Our philosophy is to run these plants into -- and it takes running these plants pretty much at full blast to still make money. So if we can do that and still make money and other people are losing money, in the end, we might have a healthy -- and these plans go out of commission. If they stayed out of commission, we might have a healthier business. But in the meantime, as long as there's oversupply, storage is full, who knows what will happen. I can't tell you. You probably have better insight on that than me. I just see more and more oversupply, lower prices or the same prices until things -- until that changes.

Okay. And can I get your perspective as well on the latest on the export front? I mean, there's a lot of headlines about Mexican market opening up and some of the other kind of emerging opportunities. But obviously, China has been more of a headwind. So any thoughts on kind of the condition?

Zafar, do want to answer that one?

Yes. I think if you've probably seen the latest news about Japan is also trying to implement to use ethanol about 10%. And as you know, today, they have exported close to 1 billion gallon, but we expect that maybe end up go to 1.2 billion, 1.3 billion. Mexico is using MTBE, and I believe that soon, there will be -- sooner or later, they have to really eliminate MTBE. As you know, that causes cancer. And we expect that market certainly will grow, but then again, it depends how the NAFTA situation will turn out with Mexico and Canada. And if that worked out, I think we will see that more export will go to that direction.

(Operator Instructions) Our next question comes from the line of Greg Eisen with Singular Research.

I'd like to inquire based around the supply side of this equation. So the ethanol mandate this year is 15.0 billion gallons, and the mandate for next year, I believe, is unchanged at 15.0 billion. So your industry capacity, and this is your -- on your own slide deck, you stated it was 15.6 billion at January of '17. What would you -- do you have a guess as what you think capacity is for 2018? And to what -- I'm trying to figure out what's the extent of the overcapacity of the industry if -- given in the current situation.

I think we believe -- this is Zafar. I think we believe that probably, capacity is close to 16 -- 15.7 billion to 16 billion gallons, and the mandate is, as you know, is a 15 billion gallons. And at the export, we -- at least, to date, we have about 1 billion gallon. So if you take the mandate and the export that -- and then if it's a $16 billion capacity, so it's all -- 16 billion gallon capacity is all goes washed out. But some of the ethanol plants are still working and trying to increase that capacity, depending on how far they can able to clean up their bottlenecks and improve their production level. So we don't see many other plants coming in, except we'll see there is a 2 ethanol plants are under construction at that time. But apart from that, we do not see any more construction coming along, any more capacity is building up. Does that answer your question?

I think that does. And I was just going to summarize your answer by saying we're very close to the edge, if you will, of if a little bit of capacity goes offline percentage-wise, it could be meaningful to the supply/demand equation if we saw a few hundred million gallons come offline.

Yes. But keep in mind that our prices now are so much lower than gasoline. There should be -- forget the RIN side of it, there should be a natural increase in exports just because it's more profitable. Simple as that. There should be a natural increase in E85 simply because people can buy gas. The biggest argument the oil companies used against us this year is we were increasing the price of gasoline. They sure can -- now we're significantly, in my opinion, lowering to the consumer, lowering the price of gasoline. And there should be some driving -- there should be some natural serious increases because of our low prices. It's normal supply and demand.

So it seems -- you're describing a conundrum that...

No. I'm saying what should happen. That doesn't mean it will happen. We're in the ethanol business, so anything can happen.

Right. I'd like to think of the -- I'd like to guide my thinking based upon the rule that if things are not sustainable, they won't sustain. So if something seems like...

I think that's a good way to put it.

It's not sustainable, eventually, it changes. But we're all -- everyone's impatient, and I realize that. Changing the subject. Your 4 equity investment plans, which obviously are your small percentage ownership position right now. We've talked about that before, and the other partners, obviously, have high expectations on what they'd sell out at. But are those plants investing any capital to expand their capacity the way you've been doing at your 2 consolidated plants?

Zafar?

Yes. Recently, actually, they are evaluating, and they're trying to making some kind of budget to invest. And also, hopefully, they will be expanding their capacity. Depending on -- every ethanol plant is unique, and every ethanol plant has a capacity how much they can increase the production. And so it depends on how and where they find the bottleneckings and all those things. So to answer your question is yes, certainly, they are looking at it to expand their capacity. That's why I said earlier, there is few plants that are still out there, which can increase their production, but almost all could increase the production. Previously, they have already done, and they are working on it. So there is -- that's why we're expecting some other ethanol facilities also may expand a little bit.

Okay. Okay. If I could turn to the refined coal business for a moment. Will there be any recurring SG&A cost that we should model for in future quarters in the refined coal segment?

There's always recurring SG&A cost in everything.

But just to point out, specially, we had a $1.6 million P&L charge in the third quarter related to acquisition of the refined coal as well as some professional fees on top of that. So we don't expect to have it at this high of a run rate.

Okay. And then turning to the tax rate going forward. You had a credit for the quarter, indicative of it. That was a catch-up for the cumulative effect of RCO on your business. But looking at the fourth quarter and then maybe forecasting out to next fiscal year, could you describe the range at which you think your consolidated tax rate will be now that you have the refined coal business?

I think that number is so up in the air. We really don't want to comment on it because it's up in the air. We don't know what the fourth quarter production will be at our plant. We hope it will be higher due to the cold weather, but we're not sure. Logical would tell that, but logical would tell you we'd have higher ethanol plant prices. Also, the tax bill just throws a -- it could be significant -- who knows what the tax bill is going to be or if there will be a tax bill. And so I just don't want to go there right now. Whatever I told you would be a complete -- your guess is as good as mine, so I just don't want to go there at this early time. We'll give you more -- next conference call, we might be able to give you a better answer, and I apologize for that.

Understood. Maybe it's something about tax by then, but maybe. And maybe they'll just push it out until January, February and.

Maybe, so next year. One of the bills, I think, said next year or Jan, or 2019, or anyway, who knows?

Right. We never know. Turning to just your cash level. You have a strong cash, and you produce cash. Could you talk about where -- what you see is next for your cash? I realized you just invested money in the [RC] plant, and that's good. And you're continuing to invest, as you just described, in the -- working to expand the capacity of your consolidated plants. But is there anything in particular we should look for in terms of your use of cash? Or just at a 40 above (inaudible)

No, we're just -- we have our eyes out for other energy transactions. So there's nothing imminent. But we're pretty good at looking, and we've done, and we're pretty patient also. But when we see something that gives the type and we'd like, as everyone knows, good returns on our money, so when we see something that looks right, but at this point, with -- and I think a lot of people are saying this, with at least the public price is where they are, there's not very much out there that looks attractive that -- and we just did the refined coal business, so we'll see what happens there. That's a whole new segment for us. So let's see what happens there. And we can give you better or we -- we'll see what happens. We have nothing imminent. We would love to buy a top-notch ethanol plant if one became available at a reasonable price, but again, we have nothing imminent.

Okay. And one last question, going back to the cost side of the equation. Estimated 2017 corn production looks like 14.3 billion bushels versus 15.1 billion bushels last year in 2016. And how do you see this, if at all, affecting your crush spread or your -- at least your cost? Well, you can't predict the spread because we don't know what the sales price would be but your cost of production.

Zafar?

Yes, I think the -- it's at 14 point, almost 14.6 billion bushels. And as you can see, the yield was about 175.4 bushels per acre, and the carry is about 2.4 billion bushels. And certainly, due to that reason, as you can see that corn price is consistently coming down. And I believe if these numbers as USDA predict or forecasted, I will -- we believe that the corn price will continue to decline. And if the ethanol price stays stable, then certainly, crush margin will increase. But at this time, crush margin, as Stuart mentioned earlier, certainly declined in the fourth quarter. But as you can see, this is a commodity market, and things can change very quickly.

Right. So it can change quickly, but all else equal, corn -- reduced corn prices would help your margin.

Of course. Absolutely.

Yes, certainly, but...

Of course.

That was the point I was trying to get at here.

Yes. I mean, because lower corn prices also we think help with the potential for an export market. But as we talked earlier, a lot of countries are looking at it. Everybody in our industry thinks it makes a lot of sense throughout the world as far as reducing their pollution and things like that. So I really think that's where the opportunity exists.

It all depends on the export market. That really is the key to this ethanol crush margin. It's certainly, India, Japan, Mexico, Canada, and as you can see, there's some other Middle East countries are beginning to import and -- like Jamaica, Nigeria and I think Oman and several other countries are -- even Saudi Arabia, several other countries are importing. If they continue to increase their product import, I think certainly, we -- the crush margin will certainly will increase.

The other thing that we -- at current crush margins that will happen, it happens all the time, in my opinion, a number of these marginal plants will shut down. They probably won't stay permanently shutdown, but if those shutdown would stay, it will increase supply for the year. And as someone pointed out earlier, it's pretty tight between supply and demand for the RINs that people need to hit. So even if they shut down for a few months, that could alter the supply/demand balance.

Our next question comes from the line of Joseph Santos with Deutsche Asset Management.

Just was wondering if you guys have evaluated investing in a maximized stillage co-products technology that I know some others are currently implementing at their ethanol plants in the U.S. today. Any kind of commentary on why this water maybe wouldn't be attractive for you would be helpful.

Zafar?

Yes. I think we have looked at it very carefully. We don't really believe at this time it will be what investing in that technology because some of them who are producing that DDG after that suddenly increased their protein level, but they are not really getting the benefit of the protein level in DDG. And people are not really going out there and paying $20, $30 more or even $10 more for those DDG. So I think as this technology, we'll dwell a little bit better, and then we certainly will review that. But at this time, we don't have any plan to invest.

Okay. And then just what's the outlook on maybe any incremental de-bottlenecking opportunities, if there are any? And maybe sort of what some of the puts and takes are there?

I think that as I've mentioned previously, we have increased the production on our ethanol facilities. Certainly, the bottlenecking process is a very slow process. We do not want to be in a situation and to compromise any safety of these ethanol facilities, so we continue to increase our production slowly but surely. And but on the same time, we are -- #1 on our priority is the safety, and we make sure that we increase our production safely. And so it could take longer period, and it could -- it depends on what we'll find and where the bottlenecking will be. But as I've mentioned, we hope that by the first quarter of 2018, we will be able to find out what exactly these concerns, which we may have and how do we increase this production.

And there are no more questions at this time.

Thank you very much, everyone, and we'll talk to you next quarter. Appreciate your interest. 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.