REX American Resources Corp (REX) 2019 Q4 法說會逐字稿

Welcome to the REX American Resources Fiscal 2019 Fourth Quarter Conference Call.

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

Please go ahead.

Thank you.

Good morning, and thank you for joining REX American Resources Fiscal 2019 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 risks and uncertainties within the meanings 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 increased approximately 6.7%, primarily reflecting higher year-over-year ethanol pricing.

Sales were based upon 65.9 million gallons this year versus 72.6 million in the prior year fourth quarter.

Sales for the full year were based upon 235.3 million gallons this year versus 285.8 million gallons in the prior year.

The reduced ethanol gallons were primarily at the NuGen plant due to the impact of the wet weather interrupting rail service in the spring and ultimately fewer corn acres planted near the facility and the resulting impact on affordable corn in that area.

Gross profit for the ethanol and by-products segment increased for the fourth quarter from $5.4 million to $8.1 million, primarily due to improved crush spreads in the early part of the fourth quarter, which fell off as the quarter progressed.

The refined coal segment had a gross loss of $1.5 million for this year's fourth quarter versus $3.2 million for the prior year with the decrease reflecting lower demand at the facility.

SG&A expense increased for the fourth quarter from $4.5 million to $5.6 million, largely due to higher ethanol freight charges recorded in SG&A due to certain contract terms.

The company recorded income from its unconsolidated equity investment of $1 million for the fourth quarter of this year versus a loss of $646,000 in the prior year.

This improvement is consistent with ethanol industry conditions during those quarters.

We recognized a tax benefit of $3.4 million in this year's fourth quarter versus the benefit of $4.6 million in the prior year's fourth quarter.

The refined coal segment contributed a benefit of $1.5 million this year versus $4.8 million in the prior year fourth quarter, reflecting the aforementioned lower demand at the facility.

This resulted in net income for the fourth quarter increasing from $1.4 million to $4.4 million and the diluted earnings per share increasing from $0.17 to $0.70.

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

Thank you, Doug.

During the current quarter, ethanol -- the whole operation is running at a loss, mostly caused by ethanol.

Among the reasons that ethanol is running at a loss was a bad harvest in part of the country, as Doug explained; low oil prices; low ethanol prices; COVID-19 outbreak; resulting in low crush spread -- sorry, let me take a minute.

Something in my throat.

In terms of refined coal, the plants are running -- are currently running idle.

We believe that's due to low natural gas prices and lower-than-expected demand.

The price of coal now, in our opinion, is making it uneconomical to run the refined coal operation.

On the good side of that, we have no need for the tax credits at this time.

So it's not something that we'd definitely need running.

In terms of our company itself, we saved our cash, which currently looks like a very, very good move.

Consolidated cash is about $205 million.

Uses of this cash, which we are now at -- we're certainly now actively looking at include possible buybacks, about 350,000 shares remain authorized.

Right now, our stock is selling at a price that possibly makes that attractive, depending where it is on any given day.

We're also looking at carbon capture possibilities in Illinois.

We're still always looking at new businesses.

This is the same company that 10 years ago sold TVs.

So we're certainly capable if this is prolonged in the ethanol business of making a pivot.

And we're looking -- if an ethanol plant, a very good one, comes along at a very bargained price we would consider it.

Zafar Rizvi, our Chief Executive Officer, will now discuss further the ethanol business and the overall business.

Thank you.

Hello, hello?

Yes.

Thank you, Stuart.

Good morning, everybody.

As I mentioned in our previous 3 calls, a challenging environment has continued throughout the last year.

The company faced several issues due to weather-related problem, which delayed the planting of corns and resulted in an unexpected delay in the harvest.

Commodity prices in 2019 were subject to significant volatility, which struggled to obtain an adequate supply of corn at NuGen facility in South Dakota, where production has fallen off historic levels and resulted in higher last corn basis, our production at this plant was interrupted, including no operation in October due to corn availability.

We entered fiscal 2020 facing continued challenges, including a recent decline in the crude and ethanol market, a decline in the price and the emergence of the COVID-19 pandemic, all of which resulted in decrease in the fuel demand and an active impact on the crush margins.

The federal government and various state governments are issuing advisory for social distance and working remotely from home, if possible.

We are taking every steps to keep our employees safe and are following Center for Disease Control and Prevention and state and federal guideline.

As I mentioned previously, our NuGen plant faced many challenges last fiscal year.

In response to COVID-19 and the challenging industry environment, we decided last week to keep the plant on -- at hard idle until the threat of COVID-19 is reduced and the crush margin increases.

We are in the process of evaluating further to take similar steps for One Earth Energy since the Governor of Illinois has issued stay-at-home orders and the crush margin has declined.

That's largely, we are expecting a loss in the ethanol segment in the first and probably second quarter of 2020 if the threat of COVID-19 is not diminished and market conditions will not improve.

On top of these challenges, we are experiencing continued uncertainty because of the trade disputes and the small refinery exemption in 2009 (sic) [2019] as ethanol export decreased to 1.5 billion gallons compared to 1.7 billion gallons in 2018.

Total ethanol production in 2019 was 15.8 billion gallons compared to 16.1 billion gallons in 2018.

U.S. export of distiller grains in 2019 was 10.79 million metric tons, down 9.23% from 2018.

Let me discuss a little bit about what we are doing, as Stuart mentioned earlier.

We are working with the University of Illinois to explore a carbon sequestration project at One Earth Energy.

The plant produces approximately 500,000 ton of very clean carbon at that site.

Geologically mapping characterization and modeling have been demonstrated that storage potential in the Mt Simon Storage Complex in the [vicinity] of the One Earth Energy facility is expected to have excellent reservoir quality.

The Mt Simon stands upon our approval storage reservoir according to University of Illinois analysis.

We have completed a feasibility study, contacted seismic testing and have purchased extra land for the project.

However, we are in the very early stage of this project.

The University of Illinois has applied for the grants, and we are in the process of moving state and federal laws for permitting.

At this very beginning stage, we cannot predict that whether we will be able to implement this carbon sequestration project.

In summary, in spite of very difficult and challenging environment, we were still able to produce a net profit for the year as well as the fourth quarter for the ethanol segment.

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

Stuart?

Thank you.

In conclusion, we're going through difficult times.

It's probably as bad as I've ever seen in the ethanol business.

With corn prices and corn availability, oil, oil going down, COVID-19, a lot of things hitting us at the same time.

But we have an experienced management team.

We know how to pivot when we have to.

We have lots of cash.

We have what we feel is the best people to handle these times, and we will do our best to handle these times.

We hope to come out of it better than ever.

We should -- but we'll see.

In these uncertain times it's, like I said, very difficult right now.

Now I'll leave the floor open to questions.

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

These are interesting times, to say the least.

Since everything seems to revolve around the pandemic these days, I thought I would ask about what several other ethanol companies have started to do, which is repurpose or at least partially begin to use their ethanol plants to supply industrial alcohol for the manufacturing of sanitizer as per the treasury's emergency authorization from last week.

Do you have any interest in doing that at your facility?

Zafar, you want to answer?

Yes, Pavel, I think, let me say that we are looking into this, but we need to make sure we follow the FDA, as I speak, which clearly there is the guideline, and we have to register with FDA to make sure to get the license.

We are also looking some of the pharmacy founders who can produce this under their license, but -- and also, we have sold approximately 8,500 gallons to some other third-party to produce sanitization for the hands.

But at this stage, I think, certainly, there is some demand, and we are looking into it.

But as far as concerned, a lot of gallons will be utilized, I don't think there is going to be so many gallons of ethanol will be utilized.

Because you can see we -- I mean, One Earth Energy, which we sold these gallons, at this time, is an 150 million gallon plant, and we just sold 8,500 gallons so far.

So yes, we will be looking into it, but at this stage, we do not know how that business is going to be turn out.

We will do what we can, if needed, if any, and we are working on talking to hand sanitizers companies.

But as Zafar just said, anyone that thinks that's going to make any difference on the bottom line, I would caution them that it will be very, very minimal.

We make millions and millions of gallons.

They're talking about buying about hundreds and thousands of gallons at most.

There is no shortage of ethanol volume and people that will sell it.

And the real problem is getting the bottles and getting the licenses and all the stuff Zafar just described.

And we are -- we want to do what we can to help, and we do -- we will do, but don't expect that to have any significant material change to our forecast, which we just went over.

Understood.

One more on kind of COVID-related questions.

So you guys, of course, are in Ohio, which is one of the states under lockdown.

And more and more, we are seeing these lockdown and stay at home orders at the state level.

To your knowledge, are any of the ethanol production facilities, either the ones you operate or other plants, are any of them forced to shut down because of a lockdown just across the industry?

Zafar?

I think that basically, there is some of the reason we are considering at One Earth Energy because there is -- Illinois has locked down.

But on the same time, the margins are affecting due to COVID-19, and it's not also economically to produce ethanol at $0.99 or $0.85 when the corn is $3.51.

So I think there is no margin also, but we are also trying to follow the guideline what exactly every state or every even cities are issuing those.

So in our -- both the location, we have clear-cut instruction and guideline where there should be distance they had, and how close they were working and what policies are implemented because safety of our employees is most important than anything else, and we are taking all of those steps.

Yes, certainly, this is affecting, but the major impact of not only COVID-19, it's all of the ethanol pricing and the gasoline pricing and that leading to the shrinking margin.

So that's the really happening.

Also Pavel, as you know a lot of companies have announced shutdowns and many others, I'm sure, are considering shutdowns.

At this point, whether it was the state question for shut down or the margins, it's the same effect.

We can't make money at this cycle, period.

Yes.

Last question for me about this one on a separate topic.

So it's been about 3 months since the phase 1 trade deal with China.

Obviously, a lot has happened since then in China and everywhere else.

To your understanding, is China buying any U.S. ethanol at this point?

No, we have not seen really any even rumor in the market that China is buying any ethanol or DDG.

But we've heard previously one time that China is buying DDG, but later on find out that was not Chinese who were buying that DDG.

But there's certainly rumors of -- going on, too, that China is buying the corn.

And that's the reason, yesterday, I think the corn price was a little bit gone higher because there was -- the China is trying to buy 1 million tons -- metric ton.

And -- but as the corn price goes up and ethanol price is decreasing, consistent with crude, it really does not help unless we can also sell -- ethanol price also shoot up in the same way.

But it's really -- no, we have not seen any ethanol purchase from China at this stage.

(Operator Instructions)

If there is no more questions, I thank everyone for listening today.

And hopefully, things will get better in the future.

We appreciate your sticking with us, whoever is sticking with us.

Thank you very much.

Bye.

Thank you, everyone.

Bye-bye.

Thank you.

That does conclude the call for today.

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

Have a great day.