REX American Resources Corp (REX) 2019 Q1 法說會逐字稿

Greetings and welcome to the REX American Resources Fiscal 2019 First Quarter Conference Call.

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

Please go ahead.

Thank you.

Good morning, and thank you for joining REX American Resources Fiscal 2019 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 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 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 decreased 13.4% primarily due to lower production levels as a result of weather-related and logistical issues from flooding in the Midwest as well as lower ethanol prices of $0.06 per gallon.

Sales for the quarter were based upon 61.3 million gallons this year versus 69.2 million last year.

We did use this as an opportunity to have an earlier plant shutdown at NuGen to try to minimize our lost production.

These same factors primarily led to gross profit for the ethanol and by-product segment decreasing for the first quarter from $13.5 million to $6.1 million.

The refined coal segment had a gross loss of $2.5 million for the first quarter of fiscal '19 versus $2.7 million for the prior year.

These losses are more than offset by tax benefits recorded under the Section 45 credits of $3.9 million and $4.0 million for the first quarter of fiscal '19 and '18, respectively.

SG&A was similar between quarters at $4.7 million versus $4.6 million in the prior year.

Equity and income of unconsolidated ethanol affiliates was down to $126,000 from $700,000 in the prior year, primarily reflecting industry conditions.

Interest and other income moved up from $654,000 to $1.1 million, primarily due to higher interest rates on our cash and short-term investments as well as higher balances.

We booked a tax benefit of $3.5 million for the first quarter of this year versus a tax benefit of $2.7 million in the prior year, again reflecting the aforementioned Section 45 credits from the refined coal operations.

These factors led to a net income decrease from $9.5 million to $2.8 million and an earnings per share decrease from $1.45 to $0.45 per share.

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

Thank you, Doug.

Going forward, we currently are -- in the ethanol business, our current projection is somewhere between a small loss and breakeven for the current quarter for the second quarter.

Refined coal, we expect to be -- the income to be down significantly.

From last year's production, it's down.

This won't be particularly significant to the company, so we're currently carrying lower tax credits, a significant amount of tax credits.

Crush spread in the current quarter is low.

As Doug mentioned, it's similar to the -- impacted by similar things as the first quarter and particularly wet weather in South Dakota, which is affecting our corn supply.

Crush spreads have also been affected by RIN low prices, which we believe is a result of the EPA issuing hardship waivers to -- a significant amount of hardship waivers causing the requirement for less RINs overall.

DDG prices are soft.

A lot of that might have to do with China not importing DDGs.

They, at one time, were a big part of our market.

And they also -- that also might be a reason for ethanol prices being soft, China not importing.

We continue to have a large cash balance, roughly $200 million on a consolidated basis and very little or no debt.

Our users have been and continue to be to look to buy in shares.

349,861 is our current authorization.

We do that on dips and we look for opportunistic buys.

We don't just buy it because we have an authorization.

We try to buy it to support the stock when it's low.

We continue to look for opportunities in the ethanol field.

There's nothing imminent that we're looking at currently.

We look for opportunities outside of the ethanol field, preferably in energy or some compatible business to the ethanol business, or some environmentally compatible business that might fit into what we currently do.

And we're also currently invested in short-term securities, which continue to pay interest, significantly more interest than it was a year -- a little over a year ago.

So that's been a benefit.

I'll now turn the conversation to Zafar Rizvi, our CEO, who'll talk a little bit more about the ethanol business.

Good morning.

I will keep my remarks brief.

As I mentioned in our previous call, the first quarter challenging environment has continued in the second quarter.

The company is facing a number of logistic issues due to weather-related problems and the unpredictable performance of the railroad at the facility (inaudible).

Our plant production was interrupted 18 days in March, 14 days in April and continued with some interruption in May at this -- at the South Dakota facility.

For all those reasons, we could be facing a loss or breakeven in the second quarter of 2019, as Stuart mentioned earlier.

On top of that, we are experiencing continued uncertainty because of the trade disputes and the small refineries exemptions.

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

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

Ethanol export were very healthy last year, 1.7 million gallons, but during the first 3 months of 2019, export fell to 382 million gallons compared to 512 million gallons during the same period last year.

Brazil, Canada, India were the top 3 importers.

Although exports of ethanol are running behind last year's volume, we expect ethanol export will be close to the 2018 level as more countries begin to blend ethanol into their fuel supplies due to -- because of their growing concerns about air quality.

Hopefully, the European market will open up soon for ethanol export.

As for our concern about distiller dried gain, as Stuart mentioned earlier, export of distiller dried grain of 2018 were 11.88 million metric tons compared to approximately 11 million tons in 2017.

But in the first 3 months of 2019, exports fell slightly to approximately 2.5 million metric tons compared to 2.6 million metric tons in the first 3 months of 2018 according to the USDA.

However, March DDG export were about 6% above the 905,000 metric tons exported in March 2018.

Mexico, South Korea, Vietnam, Indonesia and Turkey were the 5 top destinations.

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

As far as concern about the corn, the corn crop is projected to yield approximately 15 billion bushels according to May 2019 USDA forecast report.

Farmers are expected to plant 92.8 acres of corn and the estimated corn yield is 176 bushels per acre.

The carryout 2019-'20 is expected to be 2.5 billion bushels according to USDA.

But due to continued heavy rain and floods, the planting season is delayed and only 58% of the corn is planted compared to 90% at the same time last year.

For instance, Illinois planted only 35% compared to 99% last year.

South Dakota planted only 25% compared to 90% last year.

It's been very difficult for farmers to transport corn in the same back roads of South Dakota because of heavy rains.

The federal farm impact also makes final planted acreage uncertain at this time.

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

During 2019, we made a total capital investment of approximately $600,000 at our consolidated ethanol plant.

We estimate $4 million to $6 million of capital improvements, excluding any maintenance and schedule shutdown this year.

At this time, we have no major project scheduled.

As I mentioned previously, in spite of very challenging operating environments, floods, logistic problems and trade dispute, REX delivered another profitable first quarter after tax.

I will give back -- the floor back to Stuart Rose for any additional comments.

Thanks, Stuart.

Are you there?

Let's just open it to questions at this time.

Sorry.

In conclusion, we dramatically outperformed most of the industry in difficult times.

We're dealing with the period of low crush spreads caused by low RINs.

This affects our low RIN pricing, higher-than-normal basis corn pricing, and we still, like Zafar said, managed, overall, an after-tax profitable quarter.

We have among the best plants in the industry.

Their Fagen/ICM plants, good rail, and that's allowed us to outperform the industry.

But the most important thing, and it's going to become even more important over the next year, is our people.

We have good relationships with the farmer -- we have the best people in the industry who have maintained great relationships with farmers.

Some of those farmers are shareholders in our plants, and that's going to, in my opinion, be a huge benefit going forward.

Our people will set us apart and will make us, in my opinion, even better than we are now.

So again, I thank -- I applaud our people, and that's what really sets us apart from the rest of the industry.

I'll now leave the forum open for questions.

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

Let me ask about M&A.

I think in your comments, you said that you do not have any imminent ethanol plant acquisitions, but you also talked about how the entire industry is struggling and your margins are holding up better than the rest.

In that context, would it not make sense to gobble up some of the plants that may be struggling in particular or even facing some distressed situation?

It seems like this is very much a buyer's market at the moment.

To answer your question, it is a buyer's market, but we don't believe in gobbling up plants that have historically not been profitable.

It's a regional business.

It's tied to corn prices.

It's tied to rail.

It's tied to a number of different things, and we don't believe just by consolidating an industry, you can improve margins.

We believe that to make money in this business, you have to have the very best of the best plants, and those don't come on the market very often.

If one did come on the market, we would absolutely try to gobble it up.

And we have, in the past, and have been unsuccessful in those efforts, but that doesn't mean that we don't try.

We also don't want to pay.

We're pretty -- and I think our shareholders appreciate this about us.

We don't -- if we're going to gobble up someone, we're not going to overpay to do it and maybe if some -- if one of those great plants came on the market now, we might have the opportunity.

But to my knowledge, there's no plants that are on -- the people's -- the plants that people are trying to sell today, to my knowledge, at least what's been brought to me, have not been their best plants.

They've been marginal at best.

What we can say -- I wouldn't say marginal at best, but plants that only make money during the high crush spread periods or higher crush spread periods, and we're not -- we're interested in having the best of the best.

That's been our formula.

It's worked all these years, and I can't see us deviating from that.

Okay.

And then more about just the macro landscape.

Obviously, China has not bought any U.S. ethanol for 1.5 years since, I guess, April of 2018.

But the embargo on U.S. corn or the restrictions on U.S. corn are a lot more recent.

So if the lack of Chinese demand for U.S. corn is pressuring corn prices, but with ethanol, it's essentially a status quo, does that year-over-year comparison in terms of margins actually -- should it look better at some point?

Because they're maybe one and the same and...

Theoretically, corn prices should be going down, but they're going way up, a bigger, and Zafar can comment on this after, but a bigger impact has been the weather.

And the lack of corn planting has caused corn prices to skyrocket.

And Zafar, do you want to comment more on that?

Yes, Pavel, as you know, I've mentioned earlier, only 58% is planted compared to 90% and the 5-year average is also about 90%.

So I think the major problem we see is, as I mentioned, South Dakota.

The back roads are -- certainly, is making it difficult for transportation, and then the railroad is making it difficult -- railroad is not performing, and the farmers are really concerned what's going on at this time.

And so if the planting season is not very successful, that's why farmers and the funds are looking into it, and that's the reason that, continuously, prices of corn is continuing to go up.

And ethanol is moving in the same direction some.

We are really not majorly concerned about corn pricing going up and ethanol pricing going -- it goes the same time because it's all about margins.

But the main problem is the DDG market, due to the China situation, and the movement of the river and the railroads and trucks is really making the DDG price, it's not really as good as previously we have.

So those are the reasons, it's basically the margins are more shrinking due to the movement of DDG and due to the demand of the DDG.

Okay.

And lastly, what are your expectations for E15 implementation?

Is it going to happen this summer?

Or will it take another year?

I think whether it happens or it doesn't happen I look at it as a nonexempt.

I think it's -- there are so few pumps out there pumping E15.

And everyone acts like this E10, like all of a sudden, they're going to start blending new E15 immediately.

That's not the case.

There might be -- maybe in a year or 2, there may be more pumps with E15 and it can make a difference, but anyone that thinks that it's going to make a huge difference overnight is -- I don't think is right.

It's just not going to happen.

If 2%, and I don't even think it's 2% of the pumps, offer E15 and 10% of those 2% of their sales are E15, and I don't think it's that, then you're talking about such a negligible amount and that it's irrelevant, in my opinion, or a rounding error.

So I think everyone's -- I think the administration is giving that in place of really hurting us on the RIN side and acting like it's helping us a lot.

And it maybe will help us a lot a long way down in the future, but if they think there's going to be instant help on that front, I don't believe it.

Zafar, do you want to comment and give a little more flavor on your opinion?

Yes.

The only thing which I see is that basically, right now, most of the gas pumps cannot -- they have to change every 9 months.

So 3, 4 months, they cannot use the same pumps.

So it's going to make difference a little bit.

Now if they are able to sell E15 earlier around and they don't have to change the pumps, idle the pumps, so that will -- may help to increase incentive for the farmers -- these gas stations to add more E15 pumps over there.

That may help to increase it, but I agreed with Stuart, it's not going to happen overnight.

It's probably -- it's continuing at least 6 months or a year, and after that, we may see some changes.

But in the beginning, it's not going to be a major impact.

(Operator Instructions) The next question comes from the line of Chris Sakai with Singular Research.

This is Robert Maltbie in for Chris Sakai.

Chris is tied up at our Spring Select Web Call at present.

I'm traveling, so apologies if I missed some of the inputs earlier.

Question relates to the impact of the current weather on the crush spreads.

It's hurting us a lot, especially in South Dakota.

Farmers can't get it to our plants.

And so it's going -- it's hurting us.

And I'm sure they'll try at it at some point in time, if bases will go back to where they were.

But at the moment, the weather and also with the planting season, people are like planting some, as Zafar and I both had mentioned earlier, so both of those things are an issue.

And I may have missed it, can we get kind of a little bit of a background or update on the coal business?

Yes.

I'll give a quick overview.

It's generated after-tax profits.

It slowed down the plant where we have our operation.

It slowed down.

I think it has to do -- I don't even want to speculate why they've slowed down, but they've slowed down.

So we will be generating less credits, we believe, in the second quarter or running at the current rate of less credits in the second quarter than we did last year.

All that being said, it really doesn't make much difference because we have more than enough tax credits to cover.

We're carrying forward tax credits right now, so it's not -- it really does -- it won't, from a cash flow standpoint, it shouldn't make much difference.

Maybe even help it a little bit, having less production.

There are no further questions.

Mr. Rose, I'll turn the call back over to you.

Okay.

I'd like to thank everyone for your support, and we'll talk to you again next quarter.

Thank you very much.

Bye.

That does conclude the conference call for today.

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