REX American Resources Corp (REX) 2018 Q2 法說會逐字稿

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

(Operator Instructions) I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer.

Please go ahead.

Good morning, and thank you for joining REX American Resources Fiscal 2018 Second 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 the forward-looking statements, are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, included in 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 pleased to report its fiscal 2018 second quarter earnings results as we had a year-over-year improved performance in the ethanol and by-products segment and a positive contribution from the refined coal segment.

Sales for the quarter increased 18.4%, primarily due to higher ethanol gallon sold and higher distiller grain pricing, offset by $0.07 reduction in per gallon ethanol pricing.

Sales for the quarter were based upon 72.7 million gallons this year versus 61.3 million in the prior year.

These same factors largely led to gross profit for the ethanol and by-product segment increasing over 26% for the second quarter from $10.8 million to $13.7 million.

The refined coal segment had a gross loss of $4.3 million for the second quarter of fiscal 2018 versus no activity for the prior year as we acquired the entity on August 10, 2017.

This gross loss is more than offset by tax benefits recorded from the Section 45 credits.

SG&A increased for the second quarter from $4.8 million to $6.1 million, primarily due to increased incentive compensation associated with corporate profitability and higher freight-related charges.

Equity and income of unconsolidated ethanol affiliates increased from $137,000 to $874,000 for the second quarter.

Interest and other income increased from $334,000 to $696,000, reflecting higher interest rates on our cash and short-term investments.

We booked a tax benefit of $5.6 million for the second quarter of this year versus a tax provision of $2.3 million in the prior year.

This is primarily a result of the Section 45 credits from our refined coal operations as well as lower federal tax rates.

During the second quarter, the company purchased 102,012 shares at an average price of $73.72, bringing the total purchase year-to-date to 228,153 shares at an average price of $72.97.

Reflecting the above factors, our net income attributable to REX shareholders and earnings per share both increased more than threefold for the second quarter from $2.9 million to $9.2 million and from $0.45 per share to $1.43 per share, respectively.

Stuart, you can go ahead with your comments now.

Thank you, Doug.

Going forward, we expect third quarter earnings to be positive, but below last year's third quarter earnings.

Ethanol, we currently expect to be down due primarily to crush spreads, which our CEO, Zafar Rizvi, will elaborate on later.

Refined coal, we expect down mostly due to the large number of tax credits we reported last year, but it will still be profitable on an after-tax basis and will still -- we still believe that it will bring our overall tax line below -- federal tax line below 0. We benefit -- we will benefit during the next quarter from a lower tax rate, a lower federal tax rate, a lower share count, and we'll have higher interest income coming in during the next quarter than last year in those 3 areas.

In terms of segments, the refined coal segment, it continues to generate tax credits well in excess of expenses and effectively brings our federal tax rate below 0 and allowing credits that aren't used to be carried forward.

We have approximately 3 more years of credits related to this operation if all goes well.

Refined tax -- refined coal, for those who don't know, surprise us that lowered certain pollutants in coal as compared to burning the untreated feedstock.

In our case, we lowered the NOx and mercury process, although it loses money on an operations basis, generates a tax credit, which allows for a profit on an after-tax basis.

I'll now turn over to -- I'll now turn over the conversation to Zafar Rizvi, our CEO, who'll now discuss the ethanol segment.

Good morning, everyone.

During the first 2 quarters of 2018, we made total capital investment of approximately $5.8 million at our ethanol plants.

We plan to spend $4 million to $6 million for special -- capital improvements over the year, excluding any maintenance or scheduled shutdown expenses.

In the first quarter, we sold 18.6% more gallons at our consolidated ethanol plants than last year second quarter.

We grew 18.2% of year-over-year net sales and revenue and 26.8% rise in the gross profit and 37.5% increase in income before income tax from our ethanol plants.

The growth of our ethanol plants and tax cut resulted in 213% net income increase and 217.8% rise in earnings per share.

As far as our third quarter 2018 results for ethanol segments are expected to be lower than last year, at the same time, but -- while we saw some improvements at the end of the second quarter since then, the crush spread has declined and not rebounded.

Due to continued uncertainty of the trade dispute with other nation as well as the smaller refineries exemption, the gross margin has continued to decline.

There is some hope that the Mexico trade dispute maybe resolved soon.

As far as ethanol is concerned, the ethanol producer continued to operate at a record rates according to EIA.

Ethanol stock increased 242,000 barrels last week, a 22-week high and the highest since March 16, 2018.

At this production rate, we expect ethanol production will increase to approximately 16.4 billion gallons in 2018, while the gasoline demand is expected to increase approximately 2% or more compared to 2017.

Ethanol export during the first 6 months of 2018 was approximately 928 million gallons compared to 682 million gallons in the first 6 months of 2017.

Brazil, Canada, India and China were the top 4 importers.

Since then, China has dropped out and slide, and almost 70% import duty as a result of the growing trade dispute.

Brazil imported 346 million gallons, Canada 160 million gallons and India 70 million gallons during the first 6 months of 2018.

If the U.S. and China are able to satisfactorily resolve the trade dispute, we could see meaningful increase in export to China.

Mexico will potentially replace MTBE.

Once that happen, Mexico could be a big ethanol importer.

Mexico imported only 14 million gallon in the first 6 months of 2018 compared to 17 million gallon in the first month of 2017.

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

As far as concerned about distilled grain, export of distilled dried grain for the first 6 months of 2018 increased by 150,000 metric tons.

Mexico, the top destination, brought approximately 1 million metric tons, South Korea purchased 581,000 metric tons and Turkey bought 576,000 metric tons.

Vietnam imported 550,000 metric tons compared to only 2,000 metric tons in the first 6 months of 2017.

So there is a big increase from Vietnam this year.

During the first 6 months of 2018, exports totaled approximately 5.7 million metric tons compared to 5.5 million metric tons during the same time last year.

Mexico, South Korea, Turkey, Vietnam and Thailand were the top 5 importers in the first 6 months of 2018.

We're certainly concerned about the dispute between Turkey, which can hurt our DDG export.

DDG is currently trading at approximately 110% to 125% of the corn value, largely due to reentry of Vietnam as an importer of this year.

We believe that DDG market will be remained the same in the near future unless China's tariff is reduced or eliminated.

China purchased 96,000 metric tons in the first 6 months of 2018 compared to 309,000 metric tons in the first 6 months of 2017.

As far as corn, yesterday, corn crops report showed that 68% of the corn is good to excellent compared to 62% last year.

The corn crops is projected to yield 14.6 billion bushels according to the August 2018 USDA forecast.

The estimated corn yield is nearly 178.4 bushels per acre, an all-time high, which will result in the production of 14.6 billion bushels of new crops.

The carry out, which seems to be low 2018 and '19, is expected to be 1.7 billion bushels.

The crop production report show that Illinois and South Dakota, where our 2 majority owned plants are located, are expected to have better yield this year compared to last year.

Another factor, which we have in this ethanol business, is the cost of energy.

Natural gas prices are expected to stay stable or may drop as storage continued to increase.

This too will be affected in our industry overall profitability.

Now I hand over back to Stuart for his further comments.

Thank you, Zafar.

As most of you know, we have large amounts of cash or continue to generate large amounts of cash.

And in terms of uses of cash, our plans are to buy -- to continue to buy shares.

We bought 102,000 -- a little over 102,000 shares during the last quarter, we buy on dips, the average price that we paid during the last quarter was $73.72.

We continue to look for acquisitions either in the ethanol or other things in the energy field.

Nothing is eminent at this time.

We continue to spend, as Zafar talked about, capital expenses related to our ethanol plants to try and achieve greater efficiencies.

We now are investing our cash, which as I said earlier, is -- continues to be generated at a very high level.

We continue to invest it in short-term bonds and money markets.

And this year, we're able to earn some money on that money, which last year was very tough to do.

In terms of the plan -- in conclusion, although we are currently going through a difficult period related to the ethanol during this quarter after a good or after a fairly good quarter last quarter, we were pleased to be able to report that we were still significantly in the top part of the industry and our plants remain among the very, very best.

We have good locations.

We have good corn access.

And now with the expansion in the size of our plants, we have very good economies of scale.

However, the biggest thing that we have and the thing that really separates us and what I think make is the real reason we outperformed the industry almost every quarter is that we have, in my opinion, the best people in the industry.

That's what really sets us apart.

They're dedicated, hard-working people.

Most of them have been with us for very long time at this point in time.

They know what they're doing.

I really think that's the difference between us and why we continually do significantly better than most plants in the industry.

I'll now leave the forum open for questions.

(Operator Instructions) The first question is from the line of Pavel Molchanov with Raymond James.

Similar to last quarter, I wanted to ask about the M&A landscape.

So we're now well into probably 12 months, if not longer, into this rather depressed period of crush spreads.

Is your sense that most asset owners are likely to be net sellers at this point?

In other words, is it more of a buyer's market if you wanted to buy a new plant or a seller's market?

My opinion is that it's a buyer's market if you want to buy plants that are not, in my opinion, quality plants.

But the quality plants like we have, I don't know if any of that are on the market currently of the Fagen/ICM 100 million gallon plus plants in the corn belt.

Maybe there are some that I don't know, but I -- those type of plants are hard to come by, and I would guess if one comes up, it would be -- you would see it sold.

I don't know what price it would be sold at, but the ones that are not taken ICM, that are not in the corn belt, those are available, but they are usually not the type of -- at this point with these crush spreads are usually money loser or in my experience, I see them as money losers.

And I don't think there is much of a market for those, and those would definitely be a buyer's market if there was a buyer out there willing to buy them.

Okay.

How long do you think this current margin landscape needs to last before some real kind of desperation sets into the industry?

Maybe along the lines of what we saw in 2011, 2012?

Well, what we really need is some of these plants to close down and not be sold but to go out of service.

And I don't know whether, Zafar, maybe you have some comments -- some knowledge or some ideas on that?

I don't see any of them at this point in time going permanently out of service.

Zafar, do you want to elaborate on that?

Yes, I think I agree with Stuart that at this time, the corn belt plants, most of -- basically which is big farmers-owned, they're already -- debt is already paid and they are not expected to slow down.

They may slow down a little bit but they don't think -- I don't think they're going to close down for a longer period.

But I think the main concern would be the destination plants.

And if continue to be too much ethanol in the market that may -- those plants may in fact compared to the corn belt area.

More than that happens well in our industry, nothing ever closes permanently.

They close and then crush spreads go up and then they reopen and back at it again, that's just the nature of the industry.

Okay.

And then last one for me, on exports, you talked about obviously, China, that's been a headwind for exports but it seems like other countries are picking up the slack from China and maintaining total export volumes roughly on par with what they were in 2017 before the trade war, is that a fair statement?

Yes, I think.

Yes, I think -- I was just going to say one thing on the exports that yes, maybe it's about where it should be.

But with the price of ethanol versus the price of gasoline, exports should be significantly more and way up in my opinion and Zafar will elaborate after me, but I think that ethanol is a great bargain worldwide relative to gasoline and I -- and it's also a cleaner burning fuel.

So if we could ever work this trade stuff out, I think it would be a huge market worldwide for ethanol.

So far a huge increase, not just keep the same or slightly below.

I think it should be way up, and it could be way up if we could ever get the trade stuff settled.

Zafar?

Yes, I think if you look at that, the Brazil is the one who really ordered this year 346 million gallon compared to last year 159 million gallon.

Canada was a little bit behind and India was little bit behind compared to last year.

But the Brazil...

Pardon for the interruption, Mr. Rizvi has disconnected, we'll be reconnecting him right away.

Okay.

I'm still on the line, if there's any questions, I can answer while we -- till we get him back.

(Operator Instructions) Our next question is from the line of Peter Gylfe with Citadel.

One of your peers in Omaha has obviously talked about potentially selling some plants and you sort of mentioned that there was no M&A in ethanol, can you just sort of touch on why that wouldn't be of interest?

I -- in terms of why his plants wouldn't be of -- why I don't want to -- I wouldn't want to comment on why they wouldn't be of interest a lot.

There's a lot of issues related to -- it's always, in the end, comes down to what one person will pay versus what another person will pay.

That company you're talking about has many good plants and I'm not sure any of it that aren't as good, and I'm not sure exactly.

We -- let's put it like this, I'd rather not comment on something like that.

We just don't have anything eminent related to buying plants and I will say that, that company you're talking about does have good plants, not all good, but they have some really good plants.

Got it.

Maybe I'll ask a different question, but kind of semi-related, you talked about kind of a core plant and the value that would have and then sort of a non-core plant.

Do you have a view in your mind for what kind of prices those plants would go forward if they were sold?

No, I don't, and I really honestly don't, there hasn't been -- we sold a plant a few years ago, during -- right after a period of much better times for a couple of hundred million.

We didn't sell it.

We were a minority interest, but the majority interest and we went along with the transaction for about $200 million.

So that would be a benchmark that's out there.

There is also a bunch of plants that have been bought by Pacific and Green Plains that were public transactions which hold different level of pricing, and I think you can look at those too.

That group of transactions and look at the transaction we did, that should give you a pretty good idea of what the difference in price in plants has been historically.

I think I can add too, if you put -- go out there and try to build out another facility, about 100 million gallon plant will cost you approximately $194 million to $200 million and then it takes almost 18 to 20 months to really construct that plant.

So that will be construction cost and plus to build that in our plants, so it depends on all which market you are -- you have the plants located and compared to the market, if your destination plants they're little bit cheaper than the corn belt plants.

And Mr. Rose, there are no further questions at this time.

I will now turn the call back to you for closing remarks.

Well, we'd like to thank everyone for listening to the call and we'll look forward to talking to you after our next quarter results.

Thank you very much.

Bye.

Thank you.

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.