REX American Resources Corporation (REX) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources Fiscal 2018 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 2018 third 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. REX is pleased to report its fiscal 2018 third quarter earnings results. Sales for the quarter increased 2.1% primarily due to higher distiller grain pricing and increased volume in the ethanol and by-products segment offset by $0.17 reduction in per gallon ethanol pricing. Sales for the quarter were based upon $71.4 million gallons of ethanol this year versus $66.4 million last year primarily reflecting the lower ethanol pricing gross profit declined in the ethanol by-product segment from $18.3 million to $11.3 million. The refined coal segment had a gross loss of $3.5 million for the third quarter at fiscal 2018 versus a $3.4 million loss for the prior year. These losses are more than offset by tax benefits recorded from the Section 45 credits. Selling, general and administrative expense decreased for the third quarter from $7.3 million to $5.4 million. The largest impact is commission expense booked in the prior year third quarter related to the refined coal acquisition. Equity and income of unconsolidated ethanol affiliates decreased from $1.1 million to 611,000 for the third quarter. Interest and other income increased from 645,000 to 809,000 primarily due to higher interest rates on our cash and short-term investments. We booked a tax benefit of approximately $10 million for this year's third quarter versus the benefit of $5.7 million in the prior year. Our tax rate reflects the benefits of the Section 45 credits from our refined coal operations and in the current year lower federal tax rates and recording R&D credits related to the ethanol operations. Reflecting the above factors, our net income attributable to REX shareholders and earnings per share both declined for the third quarter from $13.2 million to $11.9 million and from $2 per share $2.86 per share respectively. Stuart, go ahead with your comments now.

Thank you. Going forward in the fourth quarter earnings are running at a rate slightly below breakeven in the ethanol business refined coal which is a process that treats coal in a way that lowers pollutants and thus qualifies for tax credit its running consistently profitable - consistently after-tax profitable. Overall, we are running at a rate that should make the fourth quarter profitable. In terms of uses of cash at the end of the quarter we had $193 million, $49.9 million at the parent level. We plan to use those shares to continue to buy shares on dips. Last quarter we bought back 24,561 shares and we’re still authorized to buy 402,620 shares. We also continue to look for opportunities in the alternative energy business both in the ethanol business and outside the ethanol industry. Profits have come down in the ethanol industry but the price of plants that are up for sale currently are either what we feel is too high are not the tight plants we prefer we continue to look in that area. Higher interest income - we should benefit from higher interest rates with higher interest income and we continue to spend money to keep our plants among the best in the industry. I’ll now turn the call over to Zafar Rizvi, our CEO who will give you a further flavor of the ethanol business.

Thank you, Stuart. Good morning. As Stuart mentioned while we saw crush margin improvements at the end of the second quarter, the crush spread has since declined and a very challenging environment continues to exist. Due to continued uncertainty over the trade dispute with other nation as well as the small refinery exemption decline in RIN price and over production ethanol, the crush margin has continued to decline. Our ethanol producer continue to operate at a record rate according to EIA. The ethanol stock last week was brew about 723,000 barrels and the stock ended 22.79 million barrels approximately 3% down. Even though stock dropped inventory is still almost 4.1% more than last year at the same time. According to EIA, production dropped last week to almost 1.042 million barrels a day which is 2.98% lower than year ago. But I just saw the another report which show the stock and production is both up for this week again. At this production rate, we expect ethanol production will increase to approximately 16 to 16.4 billion gallons in 2018, while the gasoline demand is expected to increase approximately 2% or more compared to 2017. Ethanol export during the first nine-month of 2018 were approximately 1.2 billion gallons compared to 993 million gallons in the first nine-month of 2017. Brazil, Canada, India, South Korea, Netherlands and China was the top six importers. Since then China has dropped out and slapped almost 70% import duty as a result of the growing trade dispute. Brazil imports instead of a number hit the three year low and Peru slapped anti-dumping duty is approximately $48 per ton on U.S. ethanol imports. Peru imported 41 million gallons through September this year, Brazil imported 370 million gallons, Canada 252 million gallons and India 90 million gallons during the last nine-month. There is some hope that the Mexico and Canadian trade dispute will be resolved and Japan plans to buy ethanol from the U.S. next year which is positive sign. If the U.S. and China are able to satisfactory resolve the trade dispute, we could see a meaningful increase in export to China, Mexico will potentially replace MTBE. Once that happen Mexico will be big ethanol importer. We expect ethanol export to increase 1.4 billion to 1.5 billion gallons or more this year. As far as concerned about distilled grain export of distilled grains for the first nine-month of 2018 were 8.9 million metric tons compared to 8.1 million metric tons in the first nine-month of 2017. Mexico the top destination bought 1.5 million metric tons, South Korea purchased 887,000 metric tons and Turkey bought 916,000 ton. Vietnam may come back imported about 858,000 metric tons compared to approximately 2,000 metric tons in the first nine-month of 2017. U.S. export of distiller grain in the first nine-month 2018 increased approximately 800,000 metric ton compared to the first nine-month of 2017 starting to the USDA. Mexico, Turkey, South Korea, Vietnam and Thailand were the top five destinations during the first nine-month of 2018. DDGs are currently trading at approximately 110% to 120% of corn value largely due to the reentry of Vietnam as an importer of this year. We believe the DDG import market will remain the same in the near future unless China tariff is reduced or eliminated. The good news about the corn crops; the corn crops is projected to yield about 14.6 billion bushels according to November 2018 USDA forecast report. The estimated corn yield is nearly 178.9 bushels per acre, the highest yield ever up to 2.3 bushels lower than 2017 and the second highest production on record. The carryout for 2018/2019 is expected to be 1.74 billion bushels. The crop production report shows that Illinois and South Dakota will have record yields this year where our two majority owned plants are located. Another factor in this industry is natural gas prices are expected to stay stable or may drop as storage continue to increase this to will be a factor on our industry overall profitability. Let me give you an update on our capital projects, during the last three quarters of 2018 we made total capital investment of approximately 8 million at our ethanol plants and all the capital projects are now almost completed. We plan to spend 2 to 3 million for capital improvements by the end of this year. Excluding any maintenance and schedule shutdown expenses, at this time we do not anticipate any capital expenses next year other than maintenance and schedule shutdowns. As I mentioned previously in spite of very challenging operating environment this year including increased pressure on ethanol pricing over production of ethanol and trade dispute with other nation REX delivered another profitable quarter $11.9 million in net income and $1.86 per share for the third quarter. I will give it back to Stuart Rose for his further comments. Thank you, Stuart.

Thanks Zafar. In conclusion, the ethanol is going through a rough period but we feel we have among the top ethanol plants in the country great locations, great rail, good supply of corn and most importantly we have - what we feel are the best people and the best must in and a very experienced people in the industry that can handle challenging times. And that's the real reason why we think we’ll continue to outperform the industry continue to be among the very best in our industry. I'll now leave the forum open to questions.

[Operator Instructions] And our first question is from the line of Chris Sakai with Singular Research. Please go ahead.

Just a question on Trump's new E15 policy suppose to come out this summer. Just was wondering what you guys thought about that policy and what do you think it will possibly do to your ethanol net sales and when do you think that will occur?

That's a good question. We don't expect any great changes or improvements in our ethanol sales. There will be some improvement we rather have it and not have it, but most guess, the vast, vast, vast majority of gas stations we do not believe will convert to allow customers to buy E15. So it's not the benefit that - it will be a benefit but in our opinion a very, very minor benefit. The Trump administration the bigger thing that we will see and that it’s a big question mark is whether exemptions will be given on RINs. RINs have helped the industry a lot in the past this year not so much because so many exemptions were put out which in our opinion lowered the price of the RINs to a point that to - by a significant margin to a point where it doesn't help us that much and that will be the question next year. There's a new [EPA Director] and we'll see what he does with RINs. The big thing I think that we have going in our favor right now is ethanol continues to decline in price even if we keep - the trade dispute continues with China, it should be an attractive export product to a lot of other countries so we'll see what happens. Next question?

[Operator Instructions] And there appears to be no further questions on the phone lines at this time.

Okay, thank you very much everyone for listening and we'll talk to you - at the next earnings release. Thank you so much, 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.