REX American Resources Corporation (REX) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the REX American Resources Fourth Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer of REX American Resources. Please go ahead, sir.

Good morning and thank you for joining REX American Resources' fiscal 2014 fourth quarter conference call. We'll get to our presentation and comments shortly, 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 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 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. REX is proud to report record fourth quarter and fiscal year earnings and diluted earnings per share. Diluted earnings per share for the fourth quarter increased 31% from $1.95 to $2.55. And the full year diluted EPS increased 151% to $10.76. Net sales and revenues for the fourth quarter declined 13% to $127.7 million compared to last year's fourth quarter, primarily reflecting lower ethanol and distiller grain pricings for the quarter. These prices declined for the full year as well, but the distiller grain pricing decline was more significant in the fourth quarter as trying to head back away from the market during that time. Our plant production rate for the fourth quarter remained relatively consistent with year-to-date production rates as we ran about 10% to 15% above nameplate capacity. The production rates continued to substantiate our belief that we have amongst the best quality plants in the industry. Gross profit increased 14% for the quarter to $30 million versus $26.3 million as lower corn pricing more than offset the lower sales prices. REX benefited during the quarter as the spot ethanol pricing was stronger than CBOT during November and December, and we were able to get a better price, but not locking in our ethanol. In addition, on average, our corn pricing was below CBOT as we were able to take advantage of our plant’s proximity to the corn. Selling, general, and administrative expenses declined on a quarter-over-quarter basis from $5.3 million last year to $4.1 million this year due to lower incentive compensation in the current year as bonus caps were hit earlier in the year, and lower expenditures related to the deep heavy oil project. Equity income from our non-consolidated plants increased slightly from $7.6 million to $7.9 million. As we mentioned on our call – at our last earnings call, we completely paid-off our bank debt during the fourth quarter on the consolidated plants which as resulted in lower interest expense. The above items contributed to an increase of 28%, and our net income attributable to REX shareholders to $20.3 million, and an increase of 31% in diluted earnings per share to $2.55. During the fourth quarter, we used cash of $9.8 million to purchase about 161,000 shares and $33.5 million in the retirement of the consolidated debt. We now have 497,582 shares remaining on our current buyback program. For the full year, we spent about $10 million on capital expenditures, $7.6 million of the expenditures occurred at the NuGen plant to expand their ethanol, corn, and dry distiller storage. We now have storage of 2.2 million to 3.2 million bushels of corn and 4.3 million to 5.2 million gallons of ethanol at the two consolidated plants. I would now like to turn the call over to Stuart Rose, Chairman of the Board for his commentary.

Thank you. The ethanol industry, it's a cyclical industry. Currently, it's a struggling industry. In the first quarter, many, many plants in the industry are struggling to turn a profit, oil prices are probably the biggest cause of that. During the fourth quarter as everyone knows oil prices dropped drastically. It's made the export market more challenging, because we are priced less competitive to oil, also made E85 and E15 less competitive. Another issue is there has been no finalization of blending requirements from the EPA, the uncertainty effects and does affect the industry. In terms of ethanol inventory levels, there is high, many plants came on last year that maybe shouldn't have come on or aren't as efficient were previously closed. They are currently still running and that's created a glut on the market and has drastically reduced the crush spreads. Going forward, the industry will continue to face heavy lobbying pressure probably as greatest ever from the oil companies. They refuse to pay any attention to the benefits of ethanol, air quality, national defense deficit reduction, balance of trade, energy independence, and totally focused on their market share and the lost market share to ethanol. And again, they will continue to do that. However, with Iowa caucuses coming, it is our belief there will be no more major legislative changes in the near future. In terms of EPA, there seem to be no greater urgency to set funding limits, and we don't think that they will cause great harm to our industry in the near future, maybe even will benefit the industry, if they ever do come out with their blending limits. Oversupply issues should ease somewhat, inefficient plants have already started to cut production, thriving season is about to start, demand will pick-up, it was a rough winter that limited demand, but we do expect with driving season gasoline to increase in simultaneously ethanol consumption to increase. DDG prices also are looking better right now that Chinese market has again reopened and that should help DDG prices in the future. REX continues to have great plants. We have Fagen built ICM technology, good rail, solid corn belt locations, because of this even with a narrowing crush spreads, even with crush spreads down a little bit, our plants are still running at a slightly better than breakeven pase. The margins in the last couple of weeks have gone up. We have done this a little bit not anywhere near last year, but we hope this is a positive trend although until production goes down and until the glut gets heated up a little, we will remain wary. DDG prices, like I said earlier for REX like the rest of the industry with the entry of China back into the market should help us in the future. Cash at year-end, we hit $137 million in cash. We had no debt and no debt again is something that will help us in the future in terms of increasing or doing better than the rest of the industry. The biggest reason we feel we will do better is our plants’ location, people et cetera, but having no debt is also a big benefit. Our share buyback continues. We have 497,582 shares currently authorized. The current price of our stock means that our plants are selling well, well below the replacement cost of the plants. These plants have had great returns and so we look at our shares and this one great share buyback program, it's one great way to spend our excess cash, again, we buy on debts and we are very wary, we don't buy – we buy to lower the share count, not to replace options and that type of thing. Our strategy has always been – it's currently to buy to lower the share count. We also or continued to explore building a new plant. We believe that permitting now is possible, but a go – no go decision would have to wait till the industry has better economics. We also are looking at opportunities to buy plants and with industry doing a little worse those opportunities may come, we have nothing imminent. But again, we buy opportunistically and we look to – if the industry goes into a prolonged slump there maybe that opportunity like there was in the past to buy plants and we plan on being there, we are true believers in the ethanol business, if we can buy plants at an opportunistic price. Looking forward, in terms of other things that – other energy businesses we continue to look for other alternative energy businesses to go into, so far only the oil shown up on our radar. We have nothing imminent other than that. In terms of our heavy oil technology, we continue to explore. They have a pilot planned up this year. There are billons of barrels of heavy oil out there that's unrecoverable. It's our hope that we can create a process to recover this oil. It is unproven technology. We do not recommend people buying our shares because of our patterns in this technology at least not at this time. But, we are going to see what we tend to see if this technology works. In conclusion, we are proud to report a record year, net income of $87.3 million, earnings per share of $10.76. And again, all of this can be contributed not just to our great plants, which we think are the best in the industry. But more importantly the great employees which we feel are the best in the industry that really what makes us a really, really great company in the ethanol industry. I will now leave it open to questions. Any questions?

Thank you. [Operator Instructions] So our first question comes from Katja Jancic with Sidoti & Co. Please proceed with your question.

Hi. Thank you for taking my call. First, can you talk a little bit about capital expenditures for this year, what are your expectations?

Doug, you want to have that –

Yes. We don't currently have any major expenditures planned. I would tell you I would expect it to be anywhere from $2 million to $5 million, and no major projects on the plate right now.

And regarding dry distiller grains, do you see this really helping in this quarter, or are we going to see this more in the next – the second quarter, the benefit from increase?

I think it will help a little bit this quarter. But, I expect a bigger benefit next quarter. The dry distiller grains, there is a little bit of a lag between – you have to go out a little bit further selling the product, but prices definitely have gotten better since Chinese got in the market.

So Stuart, you mentioned possibly acquiring, are you looking at acquiring other producers, or are you looking to increasing the shares, the equity stake in the facility you already own?

We have looked at acquiring other producers. One thing that we are looking that I didn't talk much about is increase – slowly increasing the capacity of our existing -- not necessarily buying more shares in the company, so we own minority positions, but increasing the capacity of our existing plants and that's probably the most efficient thing we can do, in terms of growing the company is just gradually grow our existing plants. We have looked at – with one Fagen ICM, Corn Belt plants, and we have looked at them, but the pricing that we have seen has been greater than –the pricing that other people have been willing to pay is greater than we are willing to pay. We are opportunistic buyers.

You mentioned increasing capacity, are these projects in -- because you have previously said there is no major capital expenditures, so I am guessing this is not yet planned or –?

You try to increase a little bit as you can get more, basically it's – you do little things, we wanted a few – couple of our plants were one of the few that the EPA's were extremely efficient and a lot more rents. But there is nothing that I can report today that is not in Doug's numbers. But that could be something that comes up, if we are lucky later in the year.

Okay. That's all from me.

It will be a little more capital expenditures should that come up, but it's nothing we can talk about today.

Okay. Thank you.

[Indiscernible] of capital expenditures.

Our next question comes from Shannon Collins with Water Street Capital. Please proceed with your question.

Hi, Stuart.

Hi.

Just a quick question, I know that you discussed this briefly, but your pricing both on an ethanol basis and a corn basis was better than – would be available on the CME. I know in the past that's not always been the case. And can you just give me a bit of a hint as to why that is? And then also if you think that that's sustainable going forward?

One of the beauties of our company in the fourth quarter was we did very little hedging out and we were on the spot market. CME is not the spot market, even the most current month, it is not the spot market. The spot market had a nice spike during part of the fourth quarter, which allowed us to get an average price, pretty significantly above this CME price. Today, the spot market is not above – it's not significantly above CME, it is pretty much right. It's not anything. CME would be a good barometer of where we are selling our product at. We are actually selling it a little below CME because of the transportation and things like that. But, fourth quarter was unusual because the spot market was extremely strong.

Was that a railcar issue on the spot market or –?

No my feeling is someone who had sold something out and we don't know someone who has committed something, but wanted to sell one and got caught, may have to buy the product at a higher price than CME.

Good for you and too bad for them.

We do not know who that is and that’s just right. My gut feeling it would happen.

Good. Well, thanks very much. And I appreciate the insight. That's all I have got.

Sure.

[Operator Instructions] And our next question comes from Jeremy Hellman with Singular Research. Please proceed with your question.

Hi, good morning, guys.

Hi.

Hi. Just a follow-up on the initial question that you were wrapping up. In terms of capacity expansion on the existing plants, can I get some sense of maybe as a percentage of current volume that you might be able to increase, and also what boxes you in, is it just simple physics and engineering or do you – at a certain point, do you run into the EPA having to come stick their nose into it?

We would like to do about 10% more in a certain point in EPA, RINs haven’t become a factor, but we would like to get it up about 10% more. And we don't – we think the EPA would cooperate with that. So, we are not – I can't say a 100% sure, but that's probably what we are shooting, what we would like to do, so let's see what happens.

Right. So that 10% is more driven just by physics if you will, physics and –

Right. It's improving. You get better as you go down the experience curve, you get better each year what you are doing just better efficiencies, change some pilot and see where we can make things a little better, and as you can see we started with 100 million gallon nameplate on these plants, we are running well in excess right now of 100 million nameplate. So, we have already raised our past what originally these plants were planning to do. So that should give you some idea.

Okay. And congrats on getting the balance sheet down to a debt free state and I know you still got some remaining room on your share repurchase program and given your comments in terms of new build or purchase, do you have kind of a number or a range in mind in terms of when you get that too much cash on your balance sheet?

Right now because – right now we have what we have, I don't think that's an issue at the moment because the industry is in such – is on a downside of a cyclical industry. But too much I don't think – I think we continue to buying shares and never let that happen. But that's again that's a Board decision not my decision. But that's been our historical – what we have done historically.

Okay. Thanks.

We have no further no phone questions at this time. So I will turn it back over to your Mr. Rose of your closing remarks.

Well, I would like to thank everyone for their support. And again, it's very much appreciated and even if the industry is in a little bit of a tough time right now. We are very, very big believers in the ethanol industry long-term, have great hopes and faith that it will continue to do very, very well over the long-term. Thank you for listening and appreciate it. Bye.