REX American Resources Corp (REX) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the REX American Resources Fiscal 2018 Third 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 Third Quarter Conference Call.

We'll get to our presentation and comments momentarily as well as your question-and-answer 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 meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements reflect the company's current expectations and beliefs, but 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 report 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 will first review our financial performance and then turn the call over to Stuart for his comments.

REX is pleased to report its fiscal 2018 third quarter earnings results.

Sales for the quarter increased 2.1%, primarily due to higher distiller grain pricing and increased volume in the ethanol and by-product segment, offset by a $0.17 reduction in per gallon ethanol pricing.

Sales for the quarter were based upon 71.4 million gallons of ethanol this year versus 66.4 million last year.

Primarily reflecting the lower ethanol pricing, gross profit declined in the ethanol by-product segment from $18.3 million to $11.3 million.

The refined coal segment had a gross loss of $3.5 million for the third quarter of fiscal '18 versus a $3.4 million loss for the prior year.

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

Selling, general and administrative expense decreased for the third quarter from $7.3 million to $5.4 million, the largest impact is commission expense booked in the prior year third quarter related to the refined coal acquisition.

Equity and income of unconsolidated ethanol affiliates decreased from $1.1 million to $611,000 for the third quarter.

Interest and other income increased from $645,000 to $809,000, primarily due to higher interest rates on our cash and short-term investments.

We booked tax benefit of approximately $10 million for this year's third quarter versus a benefit of $5.7 million in the prior year.

Our tax rate reflects the benefits of the Section 45 credits from our refined coal operations and in the current year, lower federal tax rates and recording R&D credits related to the ethanol operations.

Reflecting the above factors, our net income attributable to REX shareholders and earnings per share both declined for the third quarter from $13.2 million to $11.9 million and from $2 per share to $1.86 per share, respectively.

Stuart, go ahead with your comments now.

Going forward in the fourth quarter, earnings are running at a rate slightly below breakeven in the ethanol business.

Refined coal, which is a process that treats coal in a way that lowers pollutants, and thus qualifies for a tax credit, is running consistently profitable -- consistently after-tax profitable.

Overall, we are running at a rate that should make the fourth quarter profitable.

Terms of uses of cash -- at the end of the quarter, we had $193 million, $49.9 million at the parent level.

We plan to use those shares to continue to buy shares on dips.

Last quarter, we bought back 24,561 shares and we are still authorized to buy 402,620 shares.

We also continue to look for opportunities in the alternative energy business, both in the ethanol business and outside the ethanol industry.

Profits have come down in the ethanol industry with the price of plants that are up for sale currently are either what we feel is too high or not the type of plants we would prefer.

We continue to look in that area.

Higher interest income should -- we should benefit from higher interest rates with higher interest income, and we continue to spend money to keep our plants among the best in the industry.

I'll now turn the call over to Zafar Rizvi, our CEO, who will give you a further flavor of the ethanol business.

Thank you, Stuart.

Good morning.

As Stuart mentioned, while we saw some crush margin improvements at the end of the second quarter, the crush spread has since declined and a very challenging environment continues to exist.

Due to continued uncertainty over the trade dispute with other nation as well as the small refinery exemption, decline in RINs price and overproduction of ethanol, the crush margin has continued to decline.

Ethanol producer continue to operate at a record rate.

According to EIA, the ethanol stock last week was -- drew about 723,000 barrels and the stock ended 22.79 million barrels, approximately 3% down.

Even though stock dropped, inventory is still almost 4.1% more than last year at the same time.

According to EIA, production dropped last week to almost 1.042 million barrels a day, which is 2.98% lower than a year ago.

But I guess, we just saw another report which shows that stock and inventory -- stock and production is both up for this week again.

At this production rate, we expect ethanol production will increase to approximately 16 billion to 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 9 months of 2018 were approximately 1.2 billion gallons compared to 993 million gallons in the first 9 months of 2017.

Brazil, Canada, India, South Korea, Netherlands and China were the top 6 importers.

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

Brazil imports in September hit a 3-year low, and Peru slapped antidumping duties, approximately $48 per ton on U.S. ethanol imports.

Peru imported $41 million gallons through September this year.

Brazil imported 370 million gallons; Canada, 252 million gallons; and India 90 million gallons, during the last 9 months.

There is some hope that the Mexico and Canadian trade dispute will be resolved, and Japan plans to buy ethanol from the U.S. next year, which is positive sign.

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

Mexico will potentially replace MTBE.

Once that happens, Mexico will be big ethanol importer.

We expect ethanol export to increase 1.4 million to 1.5 million -- billion gallons or more this year.

As far as concern about distilled grains, export of distilled grains for the first 9 months of 2018 were 8.9 million metric tons compared to 8.1 million metric tons in the first 9 months of 2017.

Mexico, the top destination, bought 1.5 billion -- million metric tons, South Korea purchased 887,000 metric ton and Turkey bought 916,000 tons.

Vietnam was big comeback, imported about 858,000 metric tons compared to approximately 2,000 metric tons in the first 9 months of 2017.

U.S. export of distiller grain in the first 9 months of 2018 increased approximately 800,000 metric tons compared to the first 9 months of 2017 according to the USDA.

Mexico, Turkey, South Korea, Vietnam and Thailand were the top 5 destinations during the first 9 months of 2018.

DDGs are currently trading at approximately 110% to 120% of corn value, largely due to the reentry of Vietnam as an importer of this year.

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

The good news about the corn crops.

The corn crops is projected to yield about 14.6 billion bushels according to November 2018 USDA forecast report.

The estimated corn yield is nearly 178.9 bushels per acre, the highest yield -- highest yield ever, up to 2.3 bushels more than 2017 and the second-highest production on record.

The carry out is, for 2018, 2019, is expected to be 1.74 billion bushels.

The crop production report shows that Illinois and South Dakota will have record yields this year, where our 2 majority-owned plants are located.

Another factor in this industry is natural gas prices are expected to stay stable or may drop as storage continues to increase.

This too will be a factor on our industry's overall profitability.

Let me give you an update on our capital projects.

During the last 3 quarters of 2018, we made total capital investment of approximately $8 million at our ethanol plants, and all the capital projects are now almost completed.

We plan to spend $2 million to $3 million for capital improvements by the end of this year, excluding any maintenance and scheduled shutdown expenses.

At this time, we do not anticipate any capital expenses next year other than maintenance and scheduled shutdowns.

As I mentioned previously, in spite of very challenging operating environment this year, including increased pressure on ethanol pricing, overproduction of ethanol and trade dispute with other nation, REX delivered another profitable quarter, $11.9 million in net income and $1.86 per share for the third quarter.

I will give it back to Stuart Rose for his further comments.

Thank you.

Thanks, Zafar.

In conclusion, the ethanol was going through a rough period, but we feel we have among the top ethanol plants in the country.

Great locations, great rail, good supply of corn, and most importantly, we have what we feel are the best people and the best most -- and very experienced people in the industry that can handle challenging times.

And that's the real reason why we think we continue to outperform the industry and continue to be among the very best in our industry.

I'll now leave the forum open to questions.

(Operator Instructions) And our first question is from the line of Chris Sakai with Singular West (sic) [Research]

Just a question on Trump's new E15 policy, supposed to come out this summer.

So just wondering, what you guys thought about that policy?

And what do you think it will possibly do to your ethanol net sales?

And when do you think that will occur?

That's a good question.

We don't expect any great changes or improvements in our ethanol sales.

There will be some improvement, we'd rather have it than not have it.

But most gas -- the vast, vast, vast majority of gas stations, we do not believe will convert to allow customers to buy E15.

So it's not the benefit that -- it will be a benefit, it's -- but in our opinion, a very, very minor benefit.

The Trump administration, the bigger thing that we will see and that is a big question mark is whether exemptions will be given on RINs.

RINs have helped the industry a lot in the past.

This year not so much, because so many exemptions were put out, which in our opinion, lowered the price of the RINs to a point that to -- by a large -- by a significant margin to a point where it doesn't help us that much.

And that will be the question next year, there's a new EPA director, and we'll see what he does with RINs.

The big thing I think that we have going in our favor right now as ethanol continues to decline in price, even if we keep the trade dispute continues with China, it should be an attractive export product to a lot of other countries.

So we'll see what happens.

(Operator Instructions) And there appears to be no further questions on the phone lines at this time.

Okay thank you very much, everyone for listening, and we'll talk to you next at the end -- at the next earnings release.

Thank you so much.

Bye.

Bye-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.