REX American Resources Corp (REX) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the REX American Resources Fiscal 2018 First Quarter Conference Call.

(Operator Instructions)

Now I would like to turn the call over to Doug Bruggeman, Chief Financial Officer.

Please go ahead, sir.

Good morning, and thank you for joining REX American Resources fiscal 2018 first quarter conference call.

We'll get to our presentation and comments momentarily 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 risks and uncertainties within the meanings 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 increased approximately 6.8%, primarily due to higher ethanol gallons sold and higher distiller grain pricing offset by $0.11 reduction in per gallon ethanol pricing.

Sales for the quarter were based upon 69.2 million ethanol gallons this year versus 63.3 million last year.

The same factors led to gross profit for the ethanol and by-products segment, increasing for the first quarter from 12.5 million to 13.5 million.

The refined coal segment had a gross loss of 2.7 million for the first quarter of fiscal 2018 versus nothing in the prior year based upon beginning operations upon its acquisition in August of '17.

The losses more than offset by tax benefits recorded from the Section 45 credits.

SG&A was down for the first quarter from $5.4 million to $4.6 million with the largest decrease resulting from reduced incentive compensation, reflecting a one-time earnings adjustment in the current fiscal year and lower railcar repair costs.

Equity and income of unconsolidated ethanol affiliates was flat at approximately $700,000.

Interest and other income moved up from $215,000 to $654,000, reflecting higher interest rates on our cash and short-term investments.

We booked a tax benefit of $2.7 million for the first quarter of this year versus a tax provision of $2.4 million in the prior year.

This primarily is a result of the Section 45 credits from our refined coal operation as well as lower federal tax rates and recording certain R&D credits from our ethanol plant operations.

Our net income and earnings per share more than doubled for the first quarter from $4.5 million to $9.5 million and from $0.69 per share to $$1.45 per share, respectively.

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

Thank you, Doug.

Going forward, we expect ethanol -- we expect earnings in the ethanol division to be similar to last year's first quarter ethanol earnings.

After-tax earnings, we expect to be up significantly.

It's mainly due to the lower tax rate and after-tax earnings related to our refined coal division.

In terms of crush spreads, they remain challenging.

They are not what we would like them to be.

Biggest reason we see for crush spreads being what they are is RINs, which continue to be under pressure as the EPA has granted waivers to both large and small refiners, and it appears that, that -- no one is going to stop them -- at least as far as we can see, under the current secretary of the EPA, no one is going to stop that.

Corn prices have also risen, which has hurt our crush spread margins.

On the positive side, we've increased our production, so we get -- so we've been able to benefit from corresponding economies of scale that go with that increased production.

DDG prices are currently selling at a premium to corn.

There's a possible thawing out of relations with China, which could potentially open up even a bigger market for exports than we currently have in DDGs and ethanol.

And the biggest thing, high gasoline prices, allows us to price our products at very, very good value relative to gasoline, which should both help export prices and should cause refiners to naturally want to buy our product since they can make more money on our product, I believe, than they can on gasoline.

In terms of uses of cash, we had $175.7 million in cash.

$60 million of that cash was at the parent level, the rest was at the subsidiary level.

We've been using it to buy back shares.

Bought back 126,141 shares in the first quarter.

We're still open to buy 520 -- as of the end of the first quarter 525,732 more shares.

And clearly, as we -- with the money we're making as we buy in shares, that will increase -- assuming we'll continue to make the money, we'll increase our earnings per share.

We look for other ethanol companies to buy in other alternative energy operations today.

As of today, we have nothing imminent, but we're always looking.

The industry is such that the good plants continue to make money, so there's been no real push to people to sell plants to us at a price that we're willing to consider.

In terms of the remainder of the ethanol business, I'll turn it over to Zafar to discuss our ethanol operations.

Good morning.

During the first quarter of 2018, we made total capital investment of approximately $3.2 million at our ethanol plants.

As I stated last quarter, we plan to continue to increase our production, and at this time, we have no plans to slow down.

In the first quarter, we sold 9% more gallons at our consolidated ethanol plants than during last year's first quarter.

In addition, an increase in DDG price helped to grow the gross profit.

One Earth Energy, LLC also received EPA approval for production of 150 million gallons.

We plan to spend $6 million to $8 million for capital improvement this year, excluding any maintenance and scheduled shutdown expenses.

Our second quarter, as Stuart mentioned earlier, results are expected to be similar to the second quarter of 2017 for ethanol and by-product segment income before tax.

We have seen some improvement in the beginning of the second quarter, but since then, as Stuart said, the class spread has declined.

The ethanol producers, as you know, continue to operate at record rates according to the EIA.

The ethanol industry produced at its capacity growth to 15.8 million gallons in 2017.

Americans consumed 143 billion gallons of gasoline in 2017.

We expect ethanol production will increase to approximately 16 billion gallons in 2018, while the gasoline demand is expected to increase 3% or more compared to 2017.

As for exports, U.S. exports -- U.S. ethanol exports, 1.37 billion gallons in 2017, were the highest on record according to EIA report overall.

But as we, Canada, India ranked as the top 3 importers in 2017.

In 2018, ethanol exports during the first quarter of 2018 were approximately 522 million gallons.

Brazil, Canada and China were ranked at the top 3 destinations.

Brazil also imported 103 million gallons in April 2018.

According to the country's (inaudible).

We expect ethanol export to increase 1.5 billion to 1.6 billion gallons or more this year.

As concerned DDG U.S. exported, our DDG for 2017 was 11.1 million metric tons compared to 11.3 metric tons during the 2016.

Mexico, Canada -- Mexico and -- Mexico was the top destination.

U.S. export from 2018 fell approximately 400,000 tons in the first quarter compared to last year.

During the first 3 months of 2018, exports totaled 2.6 million metric tons compared to 3 million metric tons during the same time last year.

Mexico, Vietnam, South Korea, Thailand and Indonesia were the top 5 destinations for the first quarter.

DDG trailing approximately 110% to 125% of the corn value, largely due to reentry of Vietnam as importer this year.

We believe the DDG market will remain the same in the near future unless China tariff is reduced or eliminated.

China purchased 44,000 tons in the first quarter of 2018 compared to 200,000 metric tons in the first quarter of 2017.

Stuart?

Thank you.

In conclusion, we feel we -- our operations are among the best plants in the ethanol business.

Good rail, good corn supply, good technology.

And now, they're among the largest.

But the biggest difference in our company and the rest of the industry and why we continue to outperform the public -- the many, many, in fact most of the ethanol companies in our industry, is we feel we have the best people in the industry.

They're dedicated, hardworking, and they're really the main reason for our success.

I'll now open everything up for questions.

(Operator Instructions) And we'll get our first question on the line from Pavel Molchanov with Raymond James.

So you referenced the EPA waivers granted to some of the smaller refineries.

Obviously, a hot topic in the headlines these days.

Is this something that is solely impacting the crush spread?

Or do you think it is also influencing the physical volume of domestic ethanol demand?

I don't know about the physical volume of ethanol demand.

I don't think it should make that much difference since it's selling at a price so much below gasoline.

But in terms of the crush spread, in my opinion, I believe it's definitely making a difference.

It affects what people can make on our product.

The less they make -- basically, it hurts -- in the end, even though we don't receive those RINs, or customers receive those RINs and don't get those RINs and don't make the money, they have less incentive to buy our products.

So going back to the second part of your question, it very well could be.

It may -- it probably isn't related to the physical demand because it's coming out of our pocket.

But if we were to try to chart -- or if it wasn't coming out of our pocket, it would affect the physical demand.

I hope that answers your question.

Okay.

And the other policy sort of debate in Washington is about year-round E15 as a potential offset to those refinery waivers to the extent that year-round E15 were to be authorized.

How impactful do you think that would be for stimulating demand?

Short term, I believe, and this is my opinion, it will be negligible, because unless they change the E10 pumps to E15 because there are not enough pumps out there, E15 short-term to make much difference.

Long term, if ethanol continues to sell for less than gasoline and E15 can -- and people can pay less for gasoline, they'll buy E15.

But if there's no pumps out there to pump it, it's short-term, just a waste of -- and we do need a long term, don't get me wrong.

But if people are expecting the minute they change it, demand to go up, I don't believe it will happen unless the gas stations change their pumps from E10 to E15, and I do not see that happening.

Zafar, you want to comment further your opinion on that question.

It's a good question.

I think the advantage will be -- this is Zafar.

The advantage will be that these gas stations will be able to sell year-round.

Now they sell part of the year, and part of the year ,they cannot sell.

So they really don't have incentive to convert those E10, E15 pump to pump it.

So once they have now, they will be able to sell year-round slowly, I think it will increase.

As you can see, some pumps in Indiana, in Michigan, in Iowa have those E15, but the problem is always contained that they cannot sell all year round.

But once they start all year round, it probably will -- there will be some incentive for these gas station to start selling -- have those separate pumps.

In my opinion, if they're talking trading one for the other, I'd rather have the law -- have the refiner -- have the EPA have to follow the law -- or follow as previously EPAs did, and that grant us waivers like crazy.

And if it's granting all those waivers versus E15, that's not a good trade, in my opinion, for the ethanol industry versus year-round.

But I don't know if it will come down to a trade.

With this EPA, they do what they want.

Pavel, yesterday, RINs spread -- 2017, and RINs spreaded as low as $0.23, and 2018, $0.31.

And I think that discouraged some of -- although RBOB was trading 2 26.

There is enough difference between RBOB and ethanol price.

But the small vendors use these RINs.

They have to take not only advantage of the difference between RBOB and ethanol, but they also take advantage of the RIN price.

So if the RIN price continue to go down and if RBOB came down to us, so then it becomes difficult to have those blending increase.

Yes, that's what we'd have concern.

(Operator Instructions) And we'll get to our next question on the line from the line [Chris Sakay] with Singular research.

My question is on the coal, on your refined coal division, for how long will you expect the income tax benefit?

We will receive it for about 3 more years credits, and those credits carry forward for a long time if we have excess credits.

Hopefully, we will use the bulk of them, make a lot of money and use them.

But if we don't, we can carry them forward for a long, long time.

Doug, do you want to go over exactly how long that is?

Stuart's correct.

They will -- we expect to receive the Section 45 credits through November 21.

So we'll book those into income as we earn the credits.

We are, at the current rate, earning more credits than what we are using.

So we will build up an asset on our balance sheet that we'll be able to use beyond 2021.

And how long that lasts, obviously, will depend upon what our income is.

But under today's law, it allows us, from federal income tax purposes, to take payment of tax all the way down to 0%.

So it's from a cash flow perspective...

Okay.

I just want as well, could you provide some outlook on that refined coal business?

Well, in terms of the business itself, it's a great -- from our standpoint, it's a great business.

From the country standpoint, in our opinion, it helps the coal business.

It reduces the pollution that comes -- on a testing basis, reduces the pollution that comes out of the power plants.

And so in terms of quality business, we -- and it's very profitable business for us.

So, so far, so good.

We've been in it less than a year, but our plant that we have installed and things are so going extremely smooth.

Okay.

It just looked like gross profit was negative for the quarter there.

Gross profit.

That's the nature of the business.

It's federal law is such that they knew you would lose money.

Because again, we're taking -- we're putting in a lot of chemicals and pollution control things.

Of course we lose -- and we get no revenue from that from the power plant.

We actually pay the power plant.

And then in return, the federal government, per statute, gives us a tax credit, and the money is -- and so you can't really look at saying we lose money on operations because that's the nature of the business.

You have to look at the after-tax losses or profits on that business.

And in this case, this quarter, we had very nice after-tax profits, and that's the only way you can look at this business.

And the way we booked the credits, we estimate what our expected tax rate will be for the year, so the credits don't necessarily get reflected in our bottom line income proportionate with when they're earned throughout the year.

As your end -- you're booking an expected annualized rate.

So again, as Stuart said, you expect to get a loss from operations, which we deduct those loses for federal income taxes, and then we also get the credits.

So bottom line, it's been a good business for us so far.

Thank you.

And we have no further questions on the line.

Please continue with any closing remarks.

We just want to thank everyone for being a shareholder, and we very much appreciate your support.

Thank you very much.

Bye.

Thank you, everyone.

And ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation.

You may now disconnect your lines.

Have a good day, everyone.