REX American Resources Corp (REX) 2019 Q3 法說會逐字稿

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

We'll get to our presentation and comments momentarily as well as a 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 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 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.

Sales for the quarter declined 30%, primarily due to reduced ethanol gallons sold, offset by an $0.11 increase in per gallon ethanol pricing.

Sales for the quarter were based upon 47.6 million gallons this year versus 71.4 million last year.

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

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

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

Our consolidated corn cost per bushel rose 25% compared to the prior year also -- again, largely reflecting the concern for corn availability.

Combining these factors led to gross profit for the ethanol and byproduct segment decreasing from 11.3 million in the prior year to 25,000 for the current year.

The refined coal segment had a gross loss of $1.8 million for the third quarter of fiscal 2019 versus $3.5 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 third quarter from $5.4 million to $4.1 million, primarily due to reduced incentive compensation associated with corporate profitability and reduced commission fees associated with the lower refined coal production.

Equity and income of unconsolidated ethanol affiliates decreased from $611,000 to a small loss of $15,000 for the quarter.

Interest and other income increased from $809,000 to $1 million, primarily reflecting higher interest rates in the current year.

We booked a tax benefit of $3.2 million for the third quarter of this year versus a benefit of $10 million in the prior year.

The benefit is primarily as a result of the Section 45 credits from our refined coal operation and, again, reflects lower refined coal production in the current year.

The above factors led to a net loss attributable to REX shareholders for the third quarter of $2.1 million this year compared to income of $11.9 million and a loss per share of $0.32 this year versus income of $1.86 in the prior year.

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

Thank you, Doug.

Going forward, our corn supply has improved over last quarter and the crush spreads have also improved.

We have -- there's less production going on currently in the industry as many plants have closed -- a number of plants have closed or slowed down.

Demand next year should be up if the government sticks to the announced RIN products.

We're currently running at a profitable rate in ethanol and we're running at a rate that's above last year's corresponding quarter and certainly above the quarter we just reported.

In refined coal, we continue to run at a rate that -- or we continue to expect a rate less than last year, but we expect it to still be profitable in the current quarter on an after-tax basis.

Our cash balance was approximately $196 million.

We have -- still have our authorized share repurchase program.

350,000 shares are still open to be bought.

We generally have bought those shares on dips.

We still have that availability should we choose.

We also continue to look for opportunities in the ethanol field.

At the moment, there's nothing imminent, but we are looking.

We have -- also looking at opportunities outside the ethanol field where we could use our management abilities to make profits for our shareholders.

In terms of our cash, we're currently investing it in short-term securities.

I'll now turn the call over to Zafar Rizvi, our CEO, who will discuss more our ethanol operations.

Thank you.

Thank you, Stuart.

Good morning, everyone.

As I mentioned in our previous 2 calls, a challenging environment has continued throughout the year.

The company faced a number of issues due to weather-related problems, which delayed the planting of corn, uncertainty regarding the expected corn yields and expected delays in the harvest.

We struggled to obtain an adequate supply of corn at our NuGen facility in South Dakota where production has fallen off of historical level.

Our production at this point -- at this plant continue to be interrupted due to corn availability, including no operation in October.

Thus, largely we experienced a loss in the ethanol segment in the third quarter of 2019.

The only other time this happened was in the fourth quarter of fiscal 2012 because of drought, and that was almost 7 years ago.

On top of that, we are experiencing continued uncertainty because of the trade disputes and a small refinery exemption.

Recently, the EPA approved 31 small refineries exemptions for 2018, effectively reducing by 1.4 billion gallons the obligation required under the Renewable Fuel Standard.

The EPA has granted a waiver of 2016 and 2017 totaling 2.6 billion gallons.

The EPA has already received 10 quotations for small refinery exemption for -- from the 2019 Renewable Fuel Standard compliance year.

These quotations have doubled since the EPA updated its online dashboard in September.

These waivers are contrary to President Trump's promise to deliver a huge package to the ethanol industry during the trade disputes.

As you all know, the ethanol industry did not receive any payments or subsidies from USDA or any other federal agencies.

As far as concern about ethanol export, during the first 9 months of 2019, export fell to 1.1 billion gallons compared to 1.25 billion gallons during the same period last year.

Brazil, Canada and India were the top 3 importers.

Last year, ethanol export were very healthy, 1.7 billion gallon.

We expect ethanol export will drop to 1.5 billion gallon this year due to the continued trade uncertainty.

If or when trade disputes are resolved, export of ethanol are expected to 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 drew 237,000 barrels and the stock ended 22.277 million barrels.

That's almost -- that's now off almost 1.6 million barrels over just the last 3 weeks according to the EIA data released on November 27 for the week ending November 22.

Ethanol stock is down 11.6% compared to the same week last year.

We are pleased that New York becomes the latest state to allow the sale of E15, opening up the fourth largest fuel market in the U.S.A., but we are still waiting on California to approve the blend all year around.

As far as concern about the distiller grain, in the first 9 months of 2019, export fell to approximately 8.3 million metric tons compared to 8.9 million metric tons in the first 9 months of 2018 according to the USDA.

That's a reduction of 6% U.S. export of distiller grain in the September dropped approximately 72,000 metric tons to 1,046,000 metric tons, about 6.4% reduction in August.

However, that was 2% above the 1,020,000 metric tons exported in September 2018.

Mexico was the top buyer.

The country bought approximately 137,000 metric tons, down about 23% from the 180,000 metric tons it bought in August.

The top 5 importers of DDG in September were Mexico, Vietnam, Turkey, South Korea and Japan.

DDG is currently trading at approximately 100% to 110% of the corn value.

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

As far as concern about the corn, the corn crops is projected to yield approximately 13.66 billion bushels according to the November 8 USDA forecast report.

Farmers planted 90 million acres of corn and the estimated corn yield is about 167 bushels per acre.

Corn used for ethanol feed were down 25 million bushels each and export and domestic consumption were down about 50 million bushels each.

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

Because of the delayed planting season, it is estimated approximately 1 billion or more bushels of corn are left to be harvested.

The carryout for 2019 and 2020 is expected to be 1.91 billion bushels according to USDA.

As I mentioned previously, we have struggled to obtain adequate supply of corn in South Dakota.

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

We have seen some improvements in the supply of corn during the harvest and the crush margin also has increased, as Stuart mentioned earlier, but I stress caution into the harvest until the harvest is completed.

As far as concern about the capital expenses, during the last 9 months, we made total capital expenses of approximately $2.6 million at our consolidated ethanol plant.

We estimate $5 million to $6 million of capital expenses during the fourth quarter, excluding any maintenance expenses.

In summary, it was a very challenging operating environment throughout the year.

We faced floods, logistic problem, production interruption because of lack of corn at the NuGen plant, small refineries exemption and trade disputes, but we have seen a recent improvement in the crush margin, as Stuart mentioned earlier, and we currently expect to be profitable for the fourth quarter at this time, provided this trend continues and we face no more corn shortage.

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

Thanks, Stuart.

Thank you.

In conclusion, as Zafar just mentioned, crush spreads and corn supplies have improved quarter-to-date versus last quarter and we are again running at a profitable rate and should -- and currently project, if we can continue this, to do better than fourth quarter of last year.

We continue to outperform the industry even in difficult times.

We attribute this to good plants, good rail and, most importantly, we really believe we have the best people in the industry and that's really what separates us from the industry.

I'll now turn the conference call over to questions.

(Operator Instructions)

We have no questions.

I would thank everyone for their -- do we have a question, operator?

We do have a question.

Our first question comes from the line of Pavel Molchanov with Raymond James.

I wanted to ask about just your individual perspective on the refinery waivers heading into 2020.

The 35 or so waivers that were granted this past summer will come up for renewal in the summer of 2020, which, of course, is the middle of the Presidential campaign.

Just on political grounds, if nothing else, is it your sense that, more likely than not, the administration will want to kind of set those aside, essentially end them by next summer instead of picking a fight with farmers in the middle of an election year?

The way I understand it is even if they grant the waivers, they're still going to require $15 billion in RINs next year.

So it was in -- at least, that was the current -- my current understanding of what will happen next year, which is always subject to change.

We have not been -- we've been led to believe a lot of things that don't come true.

So we are very skeptical of everything that comes out of the government today because they have not -- for the -- with these exemptions, they've very badly hurt our industry.

So I don't know which way it will go.

I know that we get a lot of talk that the government is going to help our industry, but we really haven't seen anything, in my opinion, of substance.

Zafar, you may want to add to that.

Yes.

I think as I mentioned in my prepared remarks that we have not received any subsidy.

And also, I think the promise, as Stuart said, the May 2 huge package, we have not received that huge package also.

So as you -- as I mentioned also, there's 10 refineries already applied for -- that's doubled -- waiver 5 -- doubled then since September.

And it can go either way, but I think they probably will keep it 15 billion, and there is some rumors that they may add the previous exemption, some of them, to redistribute to some of the people who -- refineries back to that.

But to be honest with you, it's hard to say which direction EPA will go and which direction Trump will really go out there.

So it's --.

One thing that we've seen, Pavel, is a much lower or not -- I shouldn't say much lower, but a lower rate of production.

Plants are shutting -- plants have shut down.

Plants have slowed down.

And that's increased our crush spread even with all this stuff that's happened to us this year, so even with the government doing basically the exemption.

So that's -- if things do go bad, we're in a really good position because our plants are really good.

So we'll see what happens.

But we prefer a strong -- we prefer the government not to give the exemptions or at least to commit to 15 billion gallons.

But even if that doesn't happen, we think we're in a really good position because we have what we consider among the best plants in the industry.

And I think I'll add that if I -- I wish that we can resolve these trade disputes more because that will help us to export more ethanol on the same time.

So those uncertainty is also really a major factor that was going on in the industries apart from that -- exemptions.

The one thing the government did allow was E15, but that has been because of the pumps that are out there that -- and we've always said that would be not a major improvement, a minor improvement.

It's turned out that it has only been a minor improvement because there are not -- I mean it's not a lot of gas stations relative to the grand total of gas stations that pump E15.

Okay.

Well, you actually answered my second question on the E15, kind of first year with year-round E15.

It sounds like you're a little skeptical about the scale of that?

Better -- someday it may be something, but today, it's very minor in my opinion.

Yes.

I think E15, as you probably know, that all of the costs, which is mostly -- apart from a couple of manufacturers, rest of the manufacturers who are bringing these 2020 automobiles, all of them is approved E15, and that's certainly -- that include even BMW and others.

So that will certainly will [be] some help, but I think Stuart is right, unless we have more of these -- all of these ethanol -- they're starting mixing of E15 blend -- and it's available, blended E15 everywhere, it will not really make -- going to make much difference.

Our next question comes from the line of Chris Sakai with Singular Research.

I have a question for -- Stuart mentioned that you guys are possibly looking for acquisitions outside of ethanol.

Just was wondering if you could elaborate more on that?

Well, the -- I mean, there's a lot of things in alternative energy that could fit our abilities, but we have nothing imminent that I could -- that I -- that we can talk about.

So there's really not a lot to talk about.

But for example, a good example of what we've done in the past, we were a retailer at one time, we became an ethanol producer.

We're an ethanol producer.

We're now in refined coal.

There's a number of things out there and -- related to our expertise in basically handling things like refined coal that -- not that we're going to go in the coal business.

We certainly aren't, but there's a lot of things related to tax credits that -- and energy that we know a lot about, and that would be the type of thing that we're looking for that we feel we could use our abilities to run a successful operation other than ethanol.

And then I guess for valuations and other ethanol plants, like how are they?

Are you seeing anything there?

We've made -- we've talked -- we've tried to talk to some people and the valuations on the really good ones have not come down -- or at least have not come down to the profitability of many company -- almost all have had a rough third quarter.

But everyone is looking at fourth quarter as being hopefully a little bit better and everyone hopes to get the industry on track next year.

And so because of that, no one is really -- of the good plants.

Now there are plants out there that we don't -- that we're not interested in, but of the plants we're interested in, we have not seen anything at a valuation that's attractive.

We have seen a couple, 1 or 2 for sale, but not at a valuation attractive to us.

Okay.

And then I guess lastly, for -- I mean, for the NuGen facility, how -- in this quarter, how is it going there?

Are they still facing same difficulties as last quarter?

Or is it getting better?

I think, as I mentioned earlier, that we have enough corn at this time, but we restarted the plants in the late -- in first or second week of early November when we harvest started, and then we have enough corn for this -- for at least a month.

And so after December, we have some enough corn for at least half of month, month of January.

So I think we -- things have improved, generally speaking, but as I mentioned, there's almost 1 billion bushels are not really harvest yet.

And if you look at that, North Dakota is about, I think, is about close to 30%, 35% was harvest was done.

There is -- Michigan, there is not enough harvest done, and Wisconsin, due to all this weather-related.

So I think I will be very caution up to the time the harvest is completed, but generally speaking, at this time, we have no problem.

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

I will now turn the call back to you.

I'd like to thank everyone for listening.

And we'll talk to you -- our next call will be the year-end call.

Thank you very much.

Bye.

Thanks, everybody.

That does conclude the conference call for today.

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