REX American Resources Corporation (REX) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the REX American Resources' Fiscal 2017 Second Quarter Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Wednesday, August 30, 2017. I would now like to turn the conference over to Mr.Doug Bruggeman, Chief Financial Officer. Please go ahead.

Good morning and thank you for joining REX American Resources' fiscal 2017 second quarter conference call. We'll get to our presentation and comments momentarily as well as your question-and-answers 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 risk 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, the 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 Rose for his comments. Sales for the quarter decreased approximately 6% to $108.7 million. Sales were based upon 61.3 million ethanol gallons this year versus 60.9 million gallons in the prior year. We had a 2.7% reduction in ethanol pricing which resulted in lower ethanol sales of $2.1 million. Similar to the first quarter, we experienced a significant reduction in DDG pricing year-over-year which resulted in approximately $5.5 million reduction in DDG sales for the second quarter. Gross profit declined from $17.3 million to $10.8 million for the second quarter, principally due to the aforementioned oil pricing and high year-over-year natural gas pricing, as well as maintenance cost. SG&A for the second quarter was slightly reduced from $5.2 million to $4.8 million with a reduction due to lower incentive compensation. Equity method income was $137,000 this year versus $1.2 million in the prior year. We've got a slight uptick on the interest and other income reflecting slightly higher interest rates which resulted in the increase from $97,000 to $334,000. Income before tax non-controlling interest is $6.5 million versus $13.5 million in the prior year second quarter. Our year-to-date tax rate for fiscal 2017 was approximately 38.5% net of non-controlling interest. We expect this to be significantly lower for the remainder of the year based upon the refined coal operation we acquired after the end of the second quarter. Our net income for [indiscernible] orders for the quarter was $2.9 million versus $8.2 million in the prior year, and diluted earnings per share for the second quarter was $0.45 versus $1.24. Stuart, I'm turning the call over to you at this point.

Thank you, Doug. Going forward as Doug alluded to; we recently have entered into a refined coal transaction which we expect to be accretive to earnings per share. The plant was purchased for $12 million in cash excluding transaction fees. REX expects that the revenue from the refined coal produced in these facilities will be subsidized by federal production tax credits subject to meeting qualified emissions reductions as governed by Section 45 of the internal revenue code. Within our 10-Q to be filled for the second quarter, we discussed the risk and uncertainties related to this transaction. Earnings, next quarter, the third quarter in ethanol currently are running at a rate above first and second quarter this year but below third quarter of last year with tax credits related to the refined quote transaction. We are currently running at a rate that could hopefully put us slightly ahead of last year's earnings per share in the third quarter. Earnings across spreads have expanded in recent weeks as corn prices have declined; currently we expect a good corn crop which would be beneficial for next year. EPA has issued guidelines for this year's RIN, requirement for finance to purchase 15 billion gallons of related RINs [ph] which we can set a beneficial to the industry. And we currently that 15 billion RIN number to be in place for next year. Natural gas has been steady, and again we expect it to stay that way. DDG prices stayed steady also and we expect them to stay at 80% to 85% at current corn value for the next quarter. We expect increase in demand right now from -- for the whole ethanol product as refiners go to meet their RIN requirements, we think they are behind and we think there -- will have to be some catch up, well let's say. In terms of negative, there has been a lot of expansion in ethanol plants; so even though RIN prices have gone up, supply has also gone up and consequently we've been limited in pricing power and ethanol has not gone up significantly over the quarter even though RIN prices have gone up. It's also impossible to sell in the future market which we very seldom did but future ethanol prices looking at the board are significantly below current prices, it's not unusual in the industry but that's one of the reasons why we've always tried to match our ethanol sales to our corn purchases and go out -- did not go out too far, in fact tried not to go out past maybe a month on our ethanol sales. And again, that's because prices are higher; and usually our ethanol business is currently higher today than the future market. Also corn is lower to-date in the future market, so that's always worked well for us. In terms of cash, we keep generating large amounts of cash, we have good earnings, no debt; we currently have cash on the balance sheet of $186 million, $76.2 million is at the parent level and $109.8 million is at the plant level; again, we have controlling interest in those plants. We just bought -- used some of that money to buy 95.3 [ph] -- 0.35% interest in refined coal plant which cost $12 million -- the total transaction was $12 million before transaction fees. We continue to look for other opportunities in the energy field where we can use our management expertise and hopefully be accretive to something -- if we do look for anything we hope that it's accretive to earnings and as we hope this refined coal transaction will be. We continue to look to acquire ethanol plants, we're only looking for the very best in the industry, we have a proven formulae that we have great plants, great locations, great management, we can do consistently better than the industry and that's worked for us and I see nothing that will take us away from that strategy. Again, we have nothing imminent and either acquisitions in the energy field or in the ethanol field at this current time. We're currently expanding both of our ethanol plant. Zafar Rizvi, our CEO will now talk about our expansion and maybe a little bit about the industry. Thank you. Zafar?

Good afternoon everybody. I will go briefly on where the construction is at this time. During the last two quarter of 2017 we made a total capital investment of approximately $14.4 million, so we used that cash which as Stuart mentioned earlier, $14.4 million also to increase our production. Some of the construction work is still not completed yet, meanwhile we are working on bottlenecking and waiting for construction to complete. We have been able to produce approximately $135 million to $140 million, plus annual rate but not on consistent basis. Hopefully, during the fourth quarter we will be able to achieve our goals but it all depends on the cash margin, completion of all construction work, and no surprise bottlenecking which can be restrict the production levels. So I think hopefully that's our goal and we will be able to achieve but as I mentioned earlier but it all depends on how the cash margin will lead and bottlenecking, and some of the equipments also own back -- not received yet, like boiler and other equipments which we are awaiting, hopefully we will receive those soon; that's one of the reason the construction is delayed. As far as concerned about the industry; seems to be we have seen improvements in the crush spread during the third quarter and we expect to perform as Stuart mentioned, better than last two quarters, that's where we are at this stage. Thanks, Stuart.

Thank you, Zafar. In conclusion, we have entered into a new business, refined coal which we expect to be accretive to earnings and to earnings per share where we remain profitable and run in at a better profitability right in the third quarter than the first and second quarter. We continue to expand our ethanol plants which standout and have -- and continue to do better than virtually everyone in the industry. And again it's due to great locations, we're in good corn markets, we have very good fake and ICM [ph] large-scale plants, most important and we really consider this as what makes the big difference between us and the other people in the industry. We have top people that have been with us at long time, we consider them to be not just among the best in our industry but among the best in the industry, and that's what truly sets us apart. I'll now leave the forum open to questions. If anyone has any questions today?

[Operator Instructions]

If we have no questions, I'll move onto -- and we will talk about -- do we have a question operator?

We do have a question from the line of Craig Irwin with ROTH Capital Partners. Please proceed.

Hi, good morning and thank you for taking my questions. Others in the industry appear to be moving forward on probably building new plants, and in the past you have messaged that this is something that you're considering something where you clearly have enough capital to do it and the experience with a wide fleet of plants? Can you say what you would look for specifically before you actually move forward with -- the construction of a new facility? And can you maybe talk about the diversity of potential plants that you're evaluating at this moment?

In terms of new plants, we did look at it, and we looked at it pretty closely -- closer than just about anyone. And it's still up, no question, it would have to be in a great corn area and it would have to be -- for me -- at least for me to consider it successful, it was -- when we looked at it, it was significantly more to build a new plant than the last time we built a plant. And so one would have to be very careful with the RINs, it's an important part of our business and if you can't get RINs I think it would be very, very hard to make money and sell all those gallons. So there is a pathway to get there, it's doable, we looked at it and currently don't think it's the best use of our shareholders money. The things that I mentioned earlier looking at possibly, we think there might be opportunities over the next few years to maybe -- and we always are looking, we haven't embodied anything in the long time but that's how we've built our company, we know how to buy ethanol plants and build -- buy and build ethanol plants. So I think there might be a little better way to go for us but building more plants as out there and I imagine some people would do it, the industry currently doesn't have a return to justify it but historically has a return that might justify it and if they can raise the money I think there are people out there that would built plants. Again, we looked at it very closely, probably like I said closer than anyone and we decided it wasn't for us at this time. Any other questions?

Our next question comes from the line of [indiscernible]. Please proceed.

Can you just repeat what you said in terms of the Q3 outlook? I think -- did -- I…

We've said that we're running better than first and second quarter currently, any other rate better than first and second quarter -- worse than third quarter of last year but with refined coal we're hopeful, we're just starting that operations; we're hopeful that earnings per share will be slightly better than what they were last year's third quarter. But again, we're just starting the quarter, we'll see what happens but that's the rate we're currently running at.

Okay. Just to put that in context, I mean you guys on average did something in the mid-50s of earnings per share per quarter, it's like average Q1 and Q2. I think last year was like $1.36 in Q3 of last year; so to get to where you're sort of at now versus that $1.36 you're saying -- the coal operation would help; I mean that sounds like a pretty big…

Well, again if you listen to what I said -- I'll say it again so you understand; I didn't -- I said we're running between which is a large range, second; for -- the higher first and second -- we're running better than first and second quarter and currently running less than third quarter but that's a very wide range as you just pointed out. So, that's -- and it's again just a beginning of the quarter, we'll see what happens, of course spreads have been going up as you probably know, as you follow the industry really well. So, we'll see what happens. It's way too early for me to tell you we're definitely going to do anything but we have -- I did say we expect that refined coal be accretive and that could be the difference between soon better than third quarter doing worse but it's way-way before we say anything.

Than to be actually above Q3 of last year if things go up.

Yes, potentially possible and again, we're just starting that business but that…

Can you just give us some context on how we should be looking at the coal in terms of its earnings accretion, just so -- I mean how -- what…

It's really hard to do it since we just started. Everything we can say about this we'll say in the 10-Q but there is a lot of -- there is a lot of restrictions on what can be said and can't be said, so I would advice everyone related to refined coal; including risks and uncertainties to look in the 10-Q which will be out shortly.

Thank you.

Sure.

[Operator Instructions] There seems to be no further questions at this time.

Great. I would like to thank everyone for listening and appreciate your support very much. Thank you. Bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.