REX American Resources Corp (REX) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the REX American Resources Fiscal 2018 Fourth 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 2018 Fourth 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 risk 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 the expectations.

The risk 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 for his comments.

Sales for the quarter increased approximately 3.5%.

Sales were based upon 72.6 million gallons this year versus 64.9 million in the prior fourth quarter.

The increase in gallons at higher prices for dried distillers grains were offset by a $0.10 reduction in ethanol pricing.

These same general factors led to a growth of 7.5% in sales for the full year.

Sales for the full year were based upon 285.8 million gallons this year versus 256 million gallons in the prior year as the company rolled out increased production from its plant expansion projects.

Gross profit for the ethanol and by-product segment was down for the fourth quarter from $10 million to $5.4 million, primarily due to lower crush spreads, which was offset somewhat by stronger distiller grain pricing.

Again, the same factors led to a decline in gross profit for the ethanol and by-product segment for the full fiscal year from $51.5 million in the prior year to $43.9 million.

The refined coal segment had a gross loss of $3.2 million for this year's fourth quarter versus $4 million for the prior year and $13.6 million versus $7.3 million for the full year based upon production levels and acquiring the plant on August 10, 2017.

As we've stated in the past, these losses are more than offset by tax benefits from the Section 45 credits.

SG&A was down for the fourth quarter from $6.5 million to $4.5 million and for the full year, from $24.1 million to $20.6 million, primarily due to lower executive incentive compensation related to lower earnings and a onetime cumulative adjustment.

Full year results were also impacted by higher commission and professional fees in the prior year related to the refined coal acquisition.

The company recorded a loss from its unconsolidated equity investment of $646,000 for the fourth quarter versus income of $1.3 million in the prior year and income of $1.5 million for the full year versus $3.2 million in the prior year, primarily reflecting industry dynamics throughout the year.

We recognized a tax benefit of $4.6 million in this year's fourth quarter, primarily a result of our refined coal operations and research and experimentation credits associated with the ethanol operations.

In the prior year's fourth quarter, we recognized a tax benefit of $18.5 million, which included a onetime benefit of approximately $14.4 million, resulting from the federal tax rate reduction as well as benefits from our refined coal operations.

We, likewise, had a tax benefit for the full year of $22.9 million this year versus $19.5 million in the prior year.

This resulted in net income in the fourth quarter of $1.1 million versus $19.1 million in the prior year and net income for the full year of $31.6 million versus $39.7 million in the prior year.

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

Thank you, Doug.

Going forward, we expect the current quarter to remain profitable with ethanol running about breakeven and refined coal remaining profitable on an after-tax basis.

As Doug mentioned earlier, refined coal reduces -- loses money on an operating basis but because of tax credits, is profitable -- loses money on a pretax basis, but because of tax credits, it's profitable on an after-tax basis.

The cash, we expect to continue to grow.

Crush spreads during the current quarter were low at the beginning of the quarter but recovered nicely in the last couple of weeks or so, but we worry this is temporary due to flooding in Nebraska, which is affecting the industry and the industry's ability to get ethanol to the market.

The Nebraska flooding has also affected our South Dakota plant and our ability to transport ethanol, which Zafar will talk a little bit about later.

Corn supply has been stable.

Gas prices have been stable.

Potential problems, going forward, is -- the biggest one I see is crush spreads.

Once Nebraska opens up, we'll fall back to the level that they were prior to the floods, which were very, very historically low level.

Very tough to make money at those crush spreads.

Also, the EPA is talking E15.

We don't look at that as a great benefit.

And then the same time, they're talking about limiting trading in RINs and putting a -- which could hurt RIN prices significantly.

Also, there is still waivers being given out -- or we're afraid they're -- they'll continue to be given out, and that also hurts RIN prices, which has -- which has an indirect effect on our margins.

We have a large cash balance, approximately $200 million.

That continues to grow, as I mentioned earlier, as we make after-tax profits and as we continue to have good cash flow, period.

We continue to buy shares.

We have authorized 349,861.

And again, we buy those shares on dips.

We don't just buy them to buy shares.

If the stock does dip significantly, then that's when we look to use our buyback.

We also look to and continue to look at purchasing ethanol plants.

There is a fair amount that are on the market or we expect to go on the market, but, again, we only want to buy very, very good plants, the very best in the industry, and there's very few of those on the market.

But we do continue to look at those.

We're able to earn on our cash interest again.

Rates have gone up, so we are able to make short-term, safe investments that allow us to, again, earn interest income.

And again, we're always looking for other energy or environmental -- or environmentally compatible businesses to use our expertise in.

I'll now turn the conversation over to our Chief Executive Officer, Zafar Rizvi, to talk a little bit more about the ethanol industry and our ethanol plants.

Thank you.

Good morning, everyone.

While we saw some crush margin improved during 2018, but most of the year, particularly in the fourth quarter, was challenging.

That challenging environment has continued in the first quarter of 2019.

The first quarter ethanol income is close to breakeven as Stuart mentioned.

But the company is facing a number of logistic issues due to heavy snow, floods and the unpredictable performance of the railroad company in our location in South Dakota.

For all those reasons, we could be facing ethanol loss.

We also decided to use this time to correct the bad logistic situation at NuGen and shut down the plant for -- now for regular maintenance instead of the -- instead of in late April.

We plan to be back in operation by Friday evening.

On top of that, we are experiencing continued uncertainty because of the pay dispute with other nation in addition to small refinery -- refining exemptions has resulted in a decline in the RINs price.

The overproduction of ethanol has led to a decline in the crush margin.

We have seen some crush margin improved for second quarter of 2019.

Ethanol producers produced over 16 billion gallons in 2018, according to EIA.

Ethanol export were a very healthy 1.7 billion gallons.

The EIA -- EPA granted 53 small refineries exemptions totaling an estimated 2.26 billion gallons.

Because of that move, the price of RINs continue to go down resulting in a drop in the blend rate for the first time since 2009.

In 2017, 14.5 billion gallon was -- ethanol were blended.

In 2018, that fell to 14.38 billion gallon.

We saw a 120 million gallon drop in consumption.

The 2017 blend rate was 10.13%, which dropped to 10.07% according to the -- according to RFA.

Ethanol exports in 2000 (sic) [2018] were approximately 1.7 billion gallons as I mentioned previously, which is 11% of the total U.S. ethanol production.

That's an all-time high compared to 1.378 billion gallons in 2017.

Brazil, Canada, India, South Korea, Netherland and the Philippines were the top 6 importers.

China dropped out for most of the year and slapped an almost 70% import duty as a result of the growing trade dispute.

2018.

Brazil imported 503 million gallons; Canada, 349 million gallons; and India, 157 million gallons.

As far as concern about the distiller grains, export of distiller grains for 2018 were 11.88 million metric tons compared to approximately 11 million metric ton in 2017, a 7.76% increase according to USDA.

That represent a total aggregate value of almost $2.47 billion in 2018.

An estimated 31% of the total DDG production was exported to 50 different countries.

However, the summer DDG export fell 9% compared to the previous year at the same time and fell 12.5% from November 2018.

Mexico, the top destination, bought approximately 2 million metric ton, 17% of DDG export.

Vietnam imported 1.25 million metric tons.

DDG is currently trading at approximately 110% and 120% of the corn value.

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

The corn crops is projected to yield 14.42 billion bushels according to March 2019 USDA forecast report.

The estimated corn yield is nearly 101 -- 176.4 bushels per acre compared to 176.6 bushel yield in March 2017.

The carryout for 2018 and '19 is expected to be 1.835 billion bushels according to the USDA.

The price per bushel is expected to be between $3.35 and $3.75.

Due to heavy rain and floods, the planting season is expected to be delayed, but we do not anticipate any major problem at this time.

Natural gas.

Another factor in our performance is the cost of energy.

Natural gas prices are expected to stay stable, or may drop more, as storage continue to increase.

The change in weather and the production will also affect the price.

The expense is -- this expense will be a factor in our industry overall profitability going forward.

Let me give you -- a little bit about our capital expenses.

Last year, during 2018, we made total capital investment of approximately $10.8 million at our consolidated ethanol plants and at corporate level, which resulted in a production average of 143 million gallons per plant on our -- on annualized basis.

We estimate $4 million to $6 million for capital improvements, if needed.

At this time, we have no projects scheduled, excluding any -- we have no projects exclude -- scheduled at this time, but this is excluding any maintenance or shutdown expenses.

As I mentioned previously, in spite of very challenging operating environment last year, including increased pressure on ethanol pricing; overproduction of ethanol; small industry exemption, which caused a drop in the blend rate; and RINs price in spite of higher -- RINs price drop in spite of higher price RBOB compared to ethanol; and trade disputes with other nations, REX delivered another profitable fourth quarter after tax.

We saw $1.1 million in profit and generated $31.6 million net income for the fiscal year 2018.

I will give it back to Stuart Rose for additional comments now.

Thank you, Stuart.

Thanks, Zafar.

In conclusion, we feel we have among the best plants, great locations, great rail.

Crush spreads, as Zafar has mentioned, were challenging in the fourth quarter, continue to be challenging, have improved lately.

We'll see if it stays improved, or if the Nebraska flooding was a reason for the improvement, and it goes back to the way it was.

But most important, the thing that allows us to be, especially in the fourth quarter, one of the few profitable companies in the industry on an overall after-tax basis is we feel, and feel very strongly, about this, that we have the -- our people are among the best in the industry.

And I think, I would say, I feel they're the best, and that's really what separates us most from the competition, allows us to stand out, and our numbers to be well above the average that you see in our industry.

I'll now leave the forum open to questions.

(Operator Instructions) Our first question comes from Pavel Molchanov with Raymond James.

We're, obviously, all watching with bated breath what happens between Washington and Beijing in the trade talks.

None of us can predict the politics, but suppose for a moment that a trade deal were to be reached on a sustainable basis.

If and when that happens, how quickly do you think before China reopens the import window to U.S. ethanol gallons?

Zafar, do you want to answer that?

I'm not sure, but I think, as you know, that China is a totalitarian government, and they're going to open it in a -- as quickly as possible.

It all depends on the government what they will -- steps they will take.

But I believe that will be very quickly.

And a little bit also, again, China was a big importer prior to them shutting us out.

If they go back to where they were and everyone else, and I think this could happen if ethanol stays priced below wholesale gasoline.

The export market could be a real driver for our industry.

But again, there is no guarantees that China is going to open up.

And when they would do open up, there is no guarantees they're going to purchase our product, that's for sure.

They do whatever they choose to do, and it's very erratic.

Right.

So in that context...

They're also a good customer, Pavel, for DDGs.

I'm sorry to interrupt you.

They're a very good customer for DDGs, which also is a big, big product that we sell.

I'm sorry, go ahead.

Right.

No.

no.

In that context, given the uncertainty over the Chinese situation, the industry has still got to record export volumes last year, even with the loss of China.

Do you expect kind of all else being equal, ignoring China for the moment, you think exports will be up or down in 2019?

I believe -- I think that it will be almost same as we had last year.

But export is not major problem at this time.

It's the small industry exemption.

As you know that they have given 2.26 billion gallon exemption, and that is -- basically is causing a major problem for the industry -- industry and farmers.

And if that continue, that can be really not healthy for the -- overall for the ethanol industries.

(Operator Instructions)

If there is no other questions, I will thank everyone for being on the call, and we'll talk to everyone next quarter.

And your support is very much appreciated.

Thank you very much.

Thank you, everyone.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation and ask that you please disconnect your lines.