REX American Resources Corp (REX) 2019 Q2 法說會逐字稿

Greetings, and welcome to the REX American Resources Fiscal 2019 Second 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 2019 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 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 risks and uncertainties associated with the forward-looking statements are described in today's news announcement and 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.

First, I'll review our financial performance and then turn the call over to Stuart for his comments.

Sales for the quarter declined 17.8%, primarily due to reduced ethanol gallons sold.

Sales for the quarter were based upon 60.4 million gallons this year versus 72.7 million last year.

The reduced production also resulted in lower unit sales for the ethanol byproducts.

The lower ethanol production was primarily at our NuGen South Dakota plant as we began to experience reduced availability of affordable corn, largely in response to the wet spring conditions, which has led to uncertainty on the current year corn production.

We also experienced lower distiller grain pricing on a year-over-year basis.

Our consolidated corn costs rose 5.5% compared to the prior year.

Combining these factors led to gross profit for the ethanol and byproduct segment decreasing from $13.7 million to $6.2 million for the second quarter.

The refined coal segment had a gross loss of $2.2 million for the second quarter of fiscal 2019 versus $4.3 million for the prior year, reflecting lower production levels in the current year.

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

SG&A decreased for the second quarter from $6.1 million to $4.8 million, primarily due to reduced incentive compensation associated with the core profitability and reduced commission fees associated with a lower refined coal production.

Equity and income of unconsolidated ethanol affiliates decreased from $874,000 to $239,000 for the quarter.

Interest and other income increased from $696,000 to $1.3 million reflecting higher interest rates on our cash and increased cash levels.

We booked a tax benefit of $2.6 million for the second quarter versus the benefit of $5.6 million in the prior year.

The benefit is primarily a result of the Section 45 credits from our refined coal operations.

The reduced benefits reflect lower production levels in the current year.

The above factors led to net income attributable to REX shareholders for the second quarter of $2.3 million this year compared to $9.2 million in the prior year and earnings per share of $0.36 versus $1.43 in the prior year.

Stuart, I'll leave it to you.

Thank you, Doug.

Going forward, our ethanol business is currently running at a rate of approximately $3 million to $4 million pretax loss for the current quarter, excluding -- and if we exclude our noncash depreciation charges, it's approximately breakeven.

Refined coal this quarter, the current quarter that we're in, is currently running significantly -- are projected to run significantly down from last year's same quarter, and that's basically due to slowing production, still running a rate that should be profitable on an after-tax basis.

Put it all together, and we're currently running at a rate -- and again, this is a fluid number because we're in the commodity business, but approximately $0.35 to $0.45 loss for the current quarter.

Biggest issues, which our CEO, Zafar Rizvi, will talk about later in the presentation, are corn shortages and RIN waivers.

In terms of cash on the balance sheet, that is now a little over $212 million.

Should the shares drop significantly, we still have authorization to buy over 300,000 shares, and we historically have bought on dips.

We continue to look for opportunities in the ethanol field.

But currently, profits are going down a lot faster than the price of the plants that we would be interested in.

And there's nothing imminent.

We always look for opportunities outside of our field, where we feel we can use our expertise.

We continue to do that.

Again, we have nothing imminent.

Our cash is being currently invested in short-term securities, and that has brought some income to our balance sheet -- or into our income statement.

I'll now turn it over to our CEO, Zafar Rizvi, to talk further on the overall business.

Thank you.

Good morning, everyone.

This is Zafar Rizvi.

I'll keep my remarks brief.

As I mentioned in our previous call, the first quarter challenging environment has continued in the second quarter, and now it has continued into the third quarter.

The company is facing a number of issues due to weather-related problems, which delayed the planting of corn, uncertainty regarding the expected corn yield and our expected delay in harvest.

We have struggled to obtain adequate supply for corn at our facility in South Dakota.

Our plant production continued to be interrupted due to corn availability at this facility.

For all these reasons, we will be facing a loss in the third 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.

Recently, EPA approved 31 small refineries exemptions, effectively reducing by 1.4 billion gallons to the obligation required under the Renewable Fuel Standard.

The EPA also granted a waiver for 2016 and 2017 totaling 2.6 billion gallons.

These waivers resulted in a reduced demand for ethanol and a drop in price, which led to the decline in the crush margin, as Doug mentioned earlier also.

Ethanol export was very healthy last year, approximately 1.7 billion gallons.

But during the first 6 months of 2019, export fell to 760 million gallons compared to 932 million gallons during the same period last year.

Brazil, Canada and India were the top 3 importers.

Ethanol exports are running behind last year's volume, and we expect ethanol exports will be below last year's level due to continued trade uncertainty.

We believe once the trade disputes are resolved, exports of ethanol will increase as more countries will begin to blend ethanol into their fuel supply because of their growing concern about air quality.

The ethanol stock last week report 385 billion -- 385,000 barrels and the stock ended with 22.982 million barrels, falling below 23 million barrels for the first time in nearly 2 months, according to EIA.

Production increased last week to 1.038 million barrels a day, rebounding from the 4 months low hit in the previous week.

Production was 3% less during the same week last year.

As for our concern about the distiller grain.

In the first 6 months of 2019, export fell slightly to approximately 5.35 million metric tons compared to 5.6 million metric tons in the first 6 months of 2018, according to USDA.

That's a reduction of 5%.

However, DDG export to Mexico increased 3%.

As you know, the trade dispute was resolved with Mexico.

Vietnam, 2%; and South Korea, 10%, during the first 6 months of 2019, while exports to Thailand dropped 55%; and Turkey, 34%, respectively.

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

And DDG are currently trading at approximately 80% to 90% of the corn value.

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

As we mentioned earlier about the corn, the corn crop is projected to yield approximately 13.9 billion bushels, according to an August 2019 USDA forecast report.

Farmers planted 90 million acres of corn and the estimated corn yield is 169.5 bushels per acre.

Corn condition improved slightly with 57% in good to excellent condition but still at a 7-year low according to the USDA report.

At this time last year, 68% of the corn was rated in the good to excellent condition.

The carryout for 2019 and '20 is expected to be 2.181 billion bushels according to USDA.

But due to heavy rain and floods, the planting season was delayed and many acres were planted very late or not at all.

As I have mentioned previously, we have struggled to obtain adequate supply of the corn.

We have -- we have not seen this kind of situation during the last 10 years, including the drought year of 2012.

Let me discuss a little bit about natural gas.

As you know, the natural gas is also very important for us.

Prices are expected to stay stable or may drop more as storage continue to increase.

These expenses will be a factor in our industry overall profitability going forward.

As for our concern about the capital projects.

During 2019, we made total capital investment of approximately $1.4 million at our consolidated ethanol plants.

We estimated $2 million to $4 million of capital improvements, excluding any maintenance and scheduled shutdown expenses this year.

At this time, we have no major project scheduled.

As I mentioned previously, in spite of very challenging operating environments throughout the year, floods, logistical problems, production interruption, small refineries exemption and trade disputes, REX delivered another profitable second quarter after-tax, and REX has $212 million cash and no debt.

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

Stuart?

Thank you, Zafar.

In conclusion, we drastically outperformed most of the industry during the quarter but are in a more challenging time than almost any time I can remember.

Corn supply and low RIN prices are a current problem, and they're going to cause difficulty in our profitability in the next quarter.

Zafar mentioned we still have large cash balances, and the ability to not just survive but to possibly have opportunities that other people -- or have cash to take advantage of opportunities that other people may not.

In terms of long term, we feel we have the best plants in the business.

Most importantly, we feel we have the best people, and we think that's all going to be needed to get through these difficult times.

I'll now leave the floor open to questions.

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

I appreciate the -- at a macro perspective on the market.

So you said you have a large cash balance, and indeed you do.

You've also said that right now -- or you've indicated that right now is one of the worst ethanol industry conditions in modern history.

What would prevent you from taking advantage of your underlevered balance sheet and deploying some of that cash to pick up assets, many of which, I imagine, under the current circumstances are distressed?

You're 100% right that a lot are distressed.

But the prices of the large Fagen/ICM plants in the corn belt, which is what we have and what we are interested in possibly looking at, are -- have not gone down here as much as -- have not gone down significantly, at least the asking price.

And we have looked and we've even talked to at least one party, and we just can't justify the current price that's being asked for those type of plants.

Now there are a lot of plants out there for sale at very, very inexpensive prices, but there -- but we've tried to be the premium player in this industry, and we're pretty much stuck to our knitting.

When we've gotten away from that, it hasn't worked out so well.

So if we do see something of that nature and the price was right, we would definitely pay very, very close attention to and possibly try to buy it, but we have not seen anything that meets all those criteria, seen everything but the price being right at least once, but that's the biggest part is the price being right, especially if we're going buy something losing money.

Right.

So what do you attribute this, which you've described as a bid-ask spread that's very wide for these assets?

Why do you think that is?

Is it because people are expecting the trade war with China to end and everything is going to go back to normal?

I think there's a couple of things that people are possibly expecting.

There's been talk of RIN adjustments.

Trump's talked about it.

People competing against Trump, certainly, have talked about being in favor of the ethanol business.

So if something of that nature would happen, that would help us a lot.

The trade war would help us slightly ending that, it would help our DDG a lot.

It would help ethanol exports a lot.

But the biggest issue that I see right now and Zafar, I'll let him follow up on this, is corn supply, which we don't know what the harvest is going to be this fall.

But right now, corn is very tight in South Dakota.

There's been articles written about it.

And the second -- and that just doesn't go away because China is settled.

So I'll let Zafar expand on that.

Yes.

I think, Pavel, I think the problem we're having in South Dakota is farmers own 79% of the corn and elevators own only 21% of the corn, according to a USDA report on June 1, which is -- new report is expected sometime in September.

So the farmers are looking at the corn price.

When it was at $4.50, they were looking at $5, and now it -- pounds continue to drop.

So they are hoping that corn price will go back again, at least to $4.50.

Then they will take it out to and sell.

So it's not that there is -- I mean, 210 million bushels are quite a lot in total storage there and then new harvest will be coming at this time.

Still 57% of the harvest is good to excellent in South Dakota.

But the problem we are facing is farmers are not selling and then if elevators don't have much, that's the reason is we see this kind of shortage of supply of the corn.

As I mentioned, even we have not seen at the drought year time.

At that time, the corn price was still very high and ethanol was also high, but the farmers were willing to sell at that time because they were getting $6, $7 a corn, so they were happy with it.

But now they see $3.40, $3.50, so they are just not selling it.

So that's what is causing the problem with the -- really the supply of the corn in that area.

But on the other hand, if you look at in Illinois, it's only 45% of the corn is owned by the farmers, and so there is corn available.

But you have -- we have to pay a little bit up, so that's a little bit different situation than Illinois -- than South Dakota.

So that really is the concern we have.

Okay.

One last question for me.

In the Renewable Fuel Standard statutes, going back to 2007, it says explicitly that we have to have 15 billion gallons of corn ethanol blending in this country and that obviously -- that law has not changed at all.

Given the EPA refinery waivers, do you have reason to doubt whether we are, in fact, the industry is, in fact, going to be blending 15 billion gallons in 2019 and 2020?

My opinions is we are going to make it, so we're going to have to blend it.

The problem being we all built our plants based on the RIN -- and we put -- and the industry put billions into these plants, and we've built our plants based on that 15 billion number and the capacity is 15 billion.

The only way the industry won't be -- and there is a real possibility.

I shouldn't have said it so quickly that we will.

But if things stay the way they are, there will be some shortages -- there will be some plants closing down, some of them probably for a long, long time.

And if that happens, then the industry probably will get back into supply and demand equilibrium, and then prices should go up -- usual supply and demand prices of ethanol should go up.

But at the moment, I think the industry is very disappointed that the law is -- in our opinion, is not being followed.

And as you mentioned, that is a law, 15 billion gallons are supposed to be blended using small refinery exemptions to lower that required number.

And it's very disappointing to not just me but to all ethanol producers.

Right.

So are we going to get to blend 15 billion gallons this year in your view?

That's up to Trump.

Are they going to require it?

My opinion, no.

Zafar, do you have a different answer?

My opinion, no, they're not going to require it.

I think it will be tough, given the situation we are facing right now.

So effectively, they'll reduce that 15 billion to 13.6 billion because by taking away 1.4 billion gallon.

And as you probably already know, there is -- plants are already some of them shutting down.

As far as the information which I have, it's almost 760 million gallons worth of ethanol plants have already shut down.

So that's also -- reduction in total production will go down.

And so situation at this time is different and changed.

And we do not know -- as you know, we are in a commodity market.

Tomorrow it will maybe different.

But it looks like I don't think we will be able to blend 15 billion gallon this year.

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

How are exports to Brazil, India and Canada this quarter?

And how are they this coming quarter?

I mean do you see growth in those numbers?

Or are they still declining?

I think, Brazil, this was at 219 million gallon was exported through -- January through June.

And India was 115.9 million was exported January to June.

And if you look at last year same period, Brazil was 343 million gallon was exported.

So there is certainly drop.

But last year, India was 74 million was exported, which is -- and compared to this year, 115 million gallon exported.

So there is increase in the India gallons, but there is a huge drop to Brazilian gallons this year.

Okay.

And then as far as China is concerned, do you see any openings there?

Will they demand any ethanol?

I think as you know, China has said that they want to blend 10%.

But given this trade war, which we're going through, unless this is resolved, China is not going to really import any ethanol.

And even if they try to import, there's going to be heavy tariff, and that really does not encourage any export.

So that's the main concern we have.

So far, this year in China, we see very little export if there is any, compared to last year, it was about -- same period about 54 million gallons was exported.

So it really got worse than last year to export to China.

Okay.

And then one thing for those, the Section 45 tax cuts for the coal business.

How long does those last?

They last for 2 more years, a little over 2 more years.

Production for 2 more years.

We can carry them forward up to 20 years.

Correct.

Thank you, Doug.

22 more years, it's how long we have to use whatever we generate.

And we have no further questions at this time.

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

And we'd like to thank everyone for listening, and we'll talk to you next quarter.

Thank you so much.

Bye.

Thank you, everyone.

Bye-bye.

That concludes today's call.

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