REX American Resources Corporation (REX) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. Welcome to the REX American Resources' Fiscal 2017 Third 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 2017 third 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 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, 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. The first thing I want to point out is now we have two reporting segments ethanol and by-products and refined coal. We acquired a refined coal facility on August 10, 2017. So, this is the first quarter has been impacted our financial results. Out comments on the refined coal segment are contractually limited, so please keep that in mind for your questions. The third quarter resulted in our best quarter for the current year-to-date for our ethanol and by-products segment. Consolidated sales for the quarter increased approximately 4% to $121.2 million. Ethanol sales increased approximately 6%. Sales are based upon 66.4 million ethanol gallons this year versus 62.8 million gallons in the prior year as we continue to work on ramping up production at the consolidated plants. Consistent with the first half of the year, we experienced a reduction in DDG pricing year-over-year which resulted in approximately $2.8 million reduction in DDG sales for the third quarter. This was partially offset by increased modified distiller’s production and resulted in increased sales of approximately $1 million from modified distillers. I like to point out that the refined coal segment we report sales net, meaning we reduced our sales refined coal by the cost of the coal feedstock. Primarily reflecting the above factors, gross profit for the ethanol and by-products segment declined slightly from 20.2 million to 18.3 million for the third quarter. GP was also negatively impacted from the refined coal segment by 3.4 million. SG&A for the third quarter increased from 5.1 million to 7.3 million, largely due to transaction cost related to refined coal acquisition. Equity method income was 1.1 million this year versus 1.8 million in the prior year. Interest and other income increased from 117,000 to 745,000, due to increased interest rates for the cash on hand, as well as grant money related to work at an ethanol plant. Reflecting the benefits of our refined coal operations, we reported a tax benefit of 5.7 million this year versus a tax provision of 5.7 million in the prior-year third quarter. The benefits reported for the quarter where larger than we expected for a normal quarter as this was the first quarter of refined coal operation. We estimate our expected tax rate for the full-year, which results in a catch up for the first half of the year as no refined coal tax credits were available or recorded in the first half of the year. Net income for REX shareholders for the third quarter was $13.2 million or $2 per share versus $8.9 million or $1.36 per share in the prior year. Stuart, I’ll turn the call over to you now for your comments.

Thanks Doug. Going forward, REX expects earnings to be down in the fourth quarter relative to both last year’s fourth quarter and the third quarter. Ethanol crush spreads are lower than both the fourth quarter of last year and the third quarter of this year, refined coal operating losses are expected to be higher during the quarter as they will be operating for a full-quarter and we have the possibility of greater production depending on weather. This will be offset by tax credits, which will be incremental to earnings per share, but not enough to offset the lower crush spreads we are currently experiencing in ethanol. The crush spread is currently impacted by very, very high record production actually from the ethanol producers, many of them have expanded creating more capacity than before, and also the drop in driving due to seasonality. RIN prices remain very, very high giving refiners incentives to buy our product versus buying RINs, but to date that has not been reflected in ethanol prices. Corn is planning full, and prices are reasonable. DDG prices are up slightly over the third quarter. We keep projecting that because of the low prices of ethanol, exports to pick up, but to date that hasn't been a huge increase over the previous year. They have not gone up significantly over the previous year. Corn oil and natural gas prices have remained steady. Next year, we are optimistic. We are up against, after the fourth quarter we’re up against easier comparisons in the first and second quarter. We have EPA guidelines in place, RINs of 15 billion gallons are required, which is the maximum amount the EPA can require according to the statutes. Corn supply, as I said earlier, is good. Prices, in my opinion seem likely to rebound with spring driving season coming. The is certainly incentives to sell ethanol versus gasoline are priced. In my opinion you could see in E85 sale for a while, as well as $0.99 a gallon, if that happens, I think there will be a lot more demand for our product. Of course, higher demand creates higher prices, the tax rate cut will be good for REX. We would even lower, we already have a fairly low tax rate it will lower it even further, and more importantly we think it would stimulate the economy. Currently if the big part of the new law that could help us is if AMT is eliminated and that currently is in the law to eliminate the AMT, we’ll see what happens. On the downside, production is - we don't see any let up in production, even though a number of plants are probably unprofitable at this time. They don’t seem to be closing down. They should be closing down and there is a number we believe that aren't making money that are not the best plants in the industry, but to date production as I said earlier is at an all-time high. We continue to generate large amounts of cash hit on the balance sheet 190.5 million, 65.5 million that was at the plant level. The 65.5 million was at the parent level and 127 million was at the plant level. We continue to look for opportunities to expand. We continue to look to buy top of the line ethanol plants. We have feelers out there, but nothing eminent, nothing to report on that front. In terms of our - we also are looking like we did with refined coal other energy opportunities. We have nothing eminent on that front, but it is something that we always look at, and we have been pretty creative in finding over the many years of finding ways to finding users of our cash and finding ways to spend that cash. Zafar Rizvi, now our CEO will talk a little bit about where we are on our expansion of our ethanol plants and a little bit about our ethanol business.

Good morning everybody. I will go over a little briefly about the construction during the last quarter of 2017. We made total capital investment of approximately 19.3 million at our ethanol plants. Almost all the construction work at the NuGen facility is completed, and we are working on eliminating any bottlenecks. We received new boilers at [Indiscernible] which had been delayed and we are working on completing that construction work too. We have been able to produce close to 140 million plus annual rate at NuGen, but not at consistent basis. Hopefully during the first quarter 2018, we will be able to achieve these goals. As I stated last quarter, but it all depends on the crush margin, completing of all construction work, and no surprise bottlenecking, which can restrict the production level. As far as ethanol, as Stuart already mentioned that as you know that production level is all-time high and due to the reason certainly consistently ethanol prices are coming down and the good news is same time corn prices are also coming down. So, the crush margin is declining, but we believe that we will be still profitable this quarter. Stuart?

Thank you, Zafar. In conclusion, we continue to outperform the industry significantly, especially in the ethanol industry after-tax earnings grew in the third quarter 47% in terms of a lot of that was related to our refined coal operation, which is off to a good start. In the future, we are currently limited by low crush spreads, but things should - we hope things will improve as driving season comes in, as hopefully with the low price of ethanol exports pick up, and hopefully we will see some increase in E85 sales. The price of our product is significantly - currently significantly below the price of gasoline. We have the best plants in the industry, great locations, good corn supply, good rail, and most importantly, and I can't under emphasize this, we have the best people in the industry and that’s really what has set us apart from the rest of - in my opinion, the best people in the industry and that’s what’s really set us apart from the rest of the industry, and allowed us to show certainly better results than many, many others in the industry. I will now leave it open to questions.

Thank you. [Operator Instructions] And our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Thanks for taking the question guys. You’ve touched on some of the pricing softness in the ethanol market, but just to kind of drill down as I look at today at gasoline versus CBOT Ethanol it’s a $0.40 discount, which I think is the widest it’s been probably since the days of $100 oil more than three years ago. And surely that’s not sustainable, I’m curious what you think will kind of revert that price relationship back to more sustainable healthier levels and how long do you think that process of rebalancing the market will take?

To put further color on what you are saying Pavel is, not only is ethanol low-priced, but RINs are slightly - last I looked slightly below $0.90, so theoretically an independent like Walmart or Kroger can buy our products, sell the RINs, buy our products, so far below gasoline it’s almost crazy how low it’s priced, and if I figure it right under they can buy roughly $0.50 a gallon somewhere in that range. So, it’s ridiculously low-priced. I think the issue might be at this time other storage is full because I can’t imagine that ethanol prices staying so far, not just below wholesale gasoline, but with RINs where they are staying at the price where they are, but I would have said that a month ago too and think prices have even gotten lower. So, to answer your question, I gave color on what I thought would be the logical answer that some of these plants that are losing money and a number of them are just can't continue to operate and lose money forever, and as usually happens supply and demand gets back into the right area, but in the meantime, we’re still making money, our philosophy is to run these plants and it takes running these plants pretty much at full blast to still make money. So, if we can do that and still make money and other people are losing money in the end we might have a healthy - and these plants go out of commission, if they stayed out of commission we might have a healthier business, but in the meantime, as long as there is over supply, storage is full who knows what will happen, I can’t tell you. You probably have better insight on that than me. I just see more and more oversupply lower prices or the same prices until that changes.

Okay. Can I get your perspective as well on the latest - on the export front, I mean there is a lot of headlines about Mexican market opening up and some of the other kind of emerging opportunities, but obviously China has been more of headwind, so any thoughts on kind of the condition?

Zafar, do you want to answer that one?

Yes. I think if you've probably seen the latest news about Japan is also trying to implement the use ethanol about 10%, and as you know today they exported close to 1 billion gallons, but we expect that may be end up close to 1.2 billion to 1.3 billion. Mexico is using MTBE and I believe that soon they will be - sooner or later they have to really eliminate MTBE as you know that cause cancer, and we expect that market certainly will grow, but then again it depends how the NAFTA situation will turn out with Mexico and Canada. And if that worked out, I think we will see that more export will go to that direction.

Okay. Appreciate it guys.

Thank you, Pavel.

[Operator Instructions] Our next question comes from the line of Greg Eisen with Singular Research. Please proceed.

Thanks, and good morning gentlemen. I would like to enquire based on the supply side of this equation, so the ethanol mandate this year is 15.0 billion gallons and the mandate for next year I believe is unchanged at 15.0, so the industry capacity and this is on your own slide deck, you stated it was 15.6 billion at January 2017 what would you, do you have a guess as what you think capacity is for 2018, and to what - I'm trying to figure out what’s the extent of the overcapacity of the industry, in the current situation?

I think we believe that it is - probably capacity is close to 15.7 billion to 16 billion gallons, and the mandate is as you know is 15 billion gallon and if the export, we expect at least to date we have about 1 billion gallons, so if you take the mandate and the exports and if it’s a $16 billion capacity so it’s all 16 billion gallon capacity it’s almost washout, but some of the ethanol plants are still working and trying to increase the capacity depending on how far they can be able to clean up their bottlenecks and improve their production levels. So, we don't see many other plants are coming in except we see there is two ethanol plants are under construction at that time, but apart from that we do not see any more construction coming along, any more capacity is building up.

So, it’s … I'm sorry.

Did that answer your question?

I think that does and I was going to summarize your answer by saying we are very close to the edge if you will, if a little bit of capacity goes off-line percentage wise, it could be meaningful to the supply demand equation, if we saw a few hundred million gallons [indiscernible]?

Yes, but keep in mind that our prices now are so much lower than gasoline. There should be - forget the RIN side of it, there should be a natural increase in exports just because it’s more profitable, simple as that. There should be a natural increase in EAD5 simply because people can buy gas. The biggest argument the oil company has used against us this year is we were increasing the price of gasoline, they sure - now we are significantly in my opinion lowering to the consumer lowering the price of gasoline, and there should be some driving - there should be some natural serious increases because of our low prices. It is normal supply and demand.

So, it seems, you are describing a conundrum, I think it should be this way.

No, I am saying what should happen that doesn't mean it will happen, we are in the ethanol business, so anything can happen.

Right. But I would like to think of - I would like to guide my thinking based upon the rule that if things are not sustainable they won't sustain, so if something seems like it’s not sustainable eventually it changes, but everyone isn’t patient and I realize that. Changing the subject, your four equity investment plans, which obviously are - your small percentage ownership position right now, we have talked about that before, the other part is obviously you have high expectations on what they’d sell out at, but are those plants investing any capital to expand their capacity the way you have been doing at your two consolidated firms?

Yes, recently actually they are evaluating and they are trying to making some kind of budgets to invest, and also hopefully they will be spending their capacity depending on - every ethanol plant is unique and every ethanol plant has a capacity how much they can increase the production and so it depends on how and where they find the bottlenecking and all of those things. So, to answer your question, yes certainly they are looking at it to expand their capacity. That’s why I said, earlier there is few plants that are still out there, which can increase their production, but almost all who could increase the production previously they have already done and they are working on it, so that’s why we’re expecting some other ethanol facilities also may expand a little bit.

Okay, okay. If I could turn to the refined coal business for a moment, will there be any recurring SG&A cost that we should model for in future quarters in the refined coal segment?

There is always a recurring SG&A cost in everything.

But just to point out, specifically we had $1.6 million P&L charge in the third quarter related to acquisition of the refined coal, as well as some professional fees on top of that. So, we don't expect to have this high of a run rate.

Okay. And then turning to the tax rate going forward, you had a credit for the quarter indicative of - that was a catch up for the cumulative effect of RC on your business, but looking at the fourth quarter and then maybe forecasting out to next fiscal year, could you describe the range at which you think you’re consolidated tax rate will be now that you have the refined coal business?

I think that number is so up in the air, we really don't want to comment on it because it’s up in the air, based - we don't know what a fourth quarter production will be at our plant. We hope it will be higher due to the cold weather, but we're not sure - logic would tell that, but logic wouldn’t tell you we’d have higher ethanol plant prices, also the tax bill just throws - it could be significant - who knows what the tax bill is going to be or if there will be a tax bill and so I just don't want to go there right now. Whatever, I told you would be a complete, your guess is as good as mine, so I just don't want to go there at this early time. We will give you more - next conference call we might be able to give you a better answer and I apologize for that.

Understood and [indiscernible] about tax by then.

That's right. We hope maybe.

Maybe. And then maybe they will just push it out until January, February?

One of the bills I think said next year or in 2019 or any way, who knows.

Right. We never know. Turning to your cash level you have strong cash and you reduced cash could you talk about what you see as next for your cash, I realize you just invested money in the RC plant and that’s good, and you are continuing to invest as you just described in the expense - working to expand the capacity of your consolidated plants, but is there anything in particular we should look for in terms of your use of cash or just [indiscernible]?

Well we are just always - out for other energy transactions, so there is nothing eminent, but we're pretty good at looking and we have done and we're pretty patient also, but when we see something that gives the type of room and we like as everyone knows, good returns on our money. So, when we see something that looks right, but at this point with - and I think a lot of people are saying this with at least the public prices where they are is not very much out there that looks attractive that - and we just did the refined coal business. So, we will see what happens here that is a whole new segment for us. So, let’s see what happens there and we can give you better - we will see what happens. We have nothing eminent, we would love to buy a top-notch ethanol plant if one became available at a reasonable price, but again we have nothing imminent.

And just one last question going back to the cost side of the equation, estimated 2017 corn production looks like 14.3 billion bushels versus 15.1 last year in 2016, and how do you see this if at all affecting your crush spread or at least your cost, you can’t predict the spread because you don't know what your sales price would be, but your cost of production so far?

Yes, I think it is 14 point, almost 14.6 billion bushels and as you can see the yield was about 175.4 bushels per acre and carries about 2.4 billion bushels and certainly due to that reason as you can see the corn price is consistently coming down and I believe if these numbers as USDA per bip [ph] are forecasted we believe that the corn price will continue to decline and if the ethanol price stays stable and certainly gross margin will increase, but at this time gross margin would sanction earlier, certainly declined in the fourth quarter, but as you can see this is a commodity market and things can change very quickly.

Right, so it can change quickly, but all else equal reduced corn prices would help your margin?

Of course.

Certainly.

That was the point I was trying to get out there.

I mean, lower corn prices also we think help with the potential for next support market, but as we talked earlier, a lot of countries are looking at it, everybody in our industry things it makes a lot of sense throughout the world as far as reducing their pollution and things like that. So, I really think that’s where the opportunity exists.

Exactly. It all depends on export market. That’s really is the key to this ethanol gross margin. If certainly India, Japan, Mexico, Canada and as you can see there are some other Middle East countries are beginning to import and like Jamaica, Nigeria and I think Oman and several other countries are - even Saudi Arabia several other countries are importing. If they continue to increase their product import, I think certainly the gross margin will certainly will increase.

The other thing that we at current crush on margins will happen, it happens all the time in my opinion, a number of these marginal plants will shut down and they probably won't stay prominently shut down, but they will shut down which then will increase supply for the year and as someone pointed out earlier, it’s pretty tight between supply and demand for the RINs that people need to hit. So, even if they shut down for few months that could alter the supply and demand balance.

Okay great. Thank you very much for answering my questions.

Our next question comes from the line of Joseph Santos with Deutsche Asset Management. Please proceed.

Hi Stuart. Thank you for taking my question. Just was wondering if you guys have evaluated investing in maximize stillage co-products technology that I know some others are currently implementing at the ethanol plants in the U.S. today, any kind of commentary on why this water may be wouldn't be attractive for you, would be helpful? Thank you.

Zafar?

Yes. I think we have looked at it very carefully. We don't really believe at this time, it would be worth investing in that technology because some of them who are producing that DDG after that it certainly increased the protein level, but they are not really getting the benefit of the protein level in DDG and people are not really going out there and paying $20, $30 more or even $10 more for those DDG. So, I think as this technology will dwell a little bit better and then we certainly will review that, but at this time we don't have any plan to invest.

Okay, thank you. And then just, what’s the outlook on maybe any incremental debottlenecking opportunities if there are any and may be sort of what’s some of the puts and takes are there?

I think as I mentioned previously, we have increased the production on our ethanol facilities. Certainly, the bottlenecking process is a very slow process. We do not want to be in situation and compromise any safety of this ethanol facilities, so we continue to increase our production slowly, but surely, but on the same time we are - number one our priority is the safety, and we make sure that we increase our production safely and so it could take longer period, and it could depends on what we find and where the bottlenecking will be, but as I mentioned we hope that by the first quarter of 2018 we will be able to find out what exactly these concerns, which we may have and how do we increase this production.

Okay, thank you.

And there are no more questions at this time.

Thank you very much everyone, and we’ll talk to you next quarter. Appreciate your interest. Bye.

Ladies and gentleman that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.