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Edited Transcript of REX earnings conference call or presentation 24-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 REX American Resources Corp Earnings Call

Dayton May 29, 2017 (Thomson StreetEvents) -- Edited Transcript of REX American Resources Corp earnings conference call or presentation Wednesday, May 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas L. Bruggeman

REX American Resources Corporation - CFO, VP of Finance and Treasurer

* Stuart A. Rose

REX American Resources Corporation - Executive Chairman of the Board and Head of Corporate Development

* Zafar A. Rizvi

REX American Resources Corporation - CEO, President and Director

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Conference Call Participants

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* Greg Alan Eisen

Singular Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources' Fiscal 2017 First Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, May 24, 2017. I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead, sir.

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Douglas L. Bruggeman, REX American Resources Corporation - CFO, VP of Finance and Treasurer [2]

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Good morning, and thank you for joining REX American Resources' Fiscal 2017 First 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 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 believes, 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 for his comments.

Sales for the quarter increased 12.9%, primarily due to increased ethanol pricing and production. Sales were based upon 63.3 million gallons this year versus 58.7 million gallons in the prior year first quarter. Dried distiller grains sales were down $1.9 million or approximately 11%, reflecting a $25 per ton decrease in pricing. Gross profit increased 48% on a quarter-over-quarter basis. The crush spread was approximately $0.23 in the current year versus approximately $0.10 in the prior year.

The gross profit was positively impacted by ethanol pricing and volume, but negatively impacted by DDG pricing as well as natural gas pricing. SG&A increased in the first quarter from $4 million to $5.4 million, primarily reflecting increased railcar repair costs as well as higher professional fees and incentive comp. Equity method income for the first quarter increased from $233,000 to $700,000, primarily reflecting improved industry dynamics for the first quarter over the prior-year first quarter.

Our tax rate for the first quarter was approximately 34.5% net of minority interests, which approximates to prior year first quarter rate. Our net income for the quarter increased 60% to $4.5 million versus $2.8 million in the prior year. Diluted earnings per share for the quarter was $0.69 versus $0.43.

I'll now turn the call over to Stuart for his comments.

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Stuart A. Rose, REX American Resources Corporation - Executive Chairman of the Board and Head of Corporate Development [3]

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Going forward, although we are still profitable and we're only 1 month into the quarter, we are currently running a rate where we -- where earnings are down from the first quarter of this year and also the corresponding second quarter of last year. We've been hurt by crush spreads that have been narrowing over the last few weeks. Ethanol prices have been coming down a little bit over the last few weeks. There's a lot of ethanol in storage. And because there's so much in storage, it's would would've been -- the ethanol forward prices are -- have been coming down and that is -- and it has hurt our earnings so far during the current quarter. Per Doug, in terms of going forward, the rain that has taken place in the Midwest could be an issue, we don't know yet, but it's something we're monitoring. And if rain continues to go down at the rate it is now, farmers will have a hard time getting the crops in the ground. In terms of natural gas, they've been relatively steady. DDG prices was in the first quarter well below last year. China is still not buying what they were previously, and that has been a problem. In terms of China, the new secretary -- or the new ambassador to China or appointed ambassador, I mean, gets confirmed. Branstad was the Governor of Iowa. So hopefully, we'll get some relief on the DDG, but there's certainly no guarantees. Brazil's instability is not helping anything. The industry exports -- has exported to Brazil in the past. But at the moment, there's certainly great instability going on in Brazil.

In terms of positive, the EPA has not changed the RIN status or the RIN program. And the RIN program this year is higher than it ever was, and the Trump administration has done nothing so far to inhibit that program in any way. And, again, it could happen, but to date nothing has happened. E15 legislation is being proposed. That would help that product. So again, it's a positive that could happen, but it's not happened yet. Exports remain a potential positive. Ethanol is the best product to oxygenate the gasoline, which improves the air quality. So -- and if oil goes up, as it has gone up a little bit, that's a positive for ethanol. That makes our product more competitive. The other thing we have going, like we do every year, is that summer driving usually increases demand for ethanol, causing prices to go up. That has not happened yet, but the summer driving season really just starts this weekend. The other thing that's happened recently is RINs have gone up, and although ethanol pricing has not reflected the increase in RINs, it appears refiners are behind in their RIN requirements. So there is a potential for that to go up. And if history is any indication of what's going to happen in the future, if RINs go up, then ethanol prices should go up. Corn supply right now is still very strong for us, and we're still able to buy corn at lower than -- buy corn on average below the CBOT pricing.

In terms of our cash position, it's growing nicely. We're still looking for other ethanol plants. We have had no success, nothing imminent in that area. Now we're looking for other energy opportunities, especially in making energy cleaner. We have no guarantees that we'll find something, but we are looking at a few things in that area, and there's possibilities we can get something done there. We should have more cash to invest. I mean, we do -- with our larger amount of cash, we should make more money on that cash as interest rates rise versus last year. And we still have our stock program in place should there be any dips in our stock that we -- to make our stock what we feel -- at a level where we can put -- where we can buy large amounts of it. We do buy on dips. To date, we've not -- or this year so far we've bought -- we have not bought any.

In terms of our biggest use of cash, Zafar Rizvi will talk about expanding our ethanol plants. And I'll turn the forum over to Zafar Rizvi to talk about our expansion.

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Zafar A. Rizvi, REX American Resources Corporation - CEO, President and Director [4]

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Good morning, everybody. During the first quarter 2017, we made total capital investment of approximately $5.9 million and to date approximately $9.3 million. We added ferm tanks, boiler, cooling towers, centrifuge and energy-saving equipment. These are the main capital investments we had. The construction work is now rapidly progressing and is expected to be completed by the beginning of fourth quarter.

As we continue to increase ethanol production, we will continue to monitor crush margin. NuGen is also producing export-grade ethanol. NuGen sold more than 19 million gallons of export-grade ethanol this year, compared to last year, we sold about 8 plus million. So as the construction will increase, and I think it also depends on the weather and how the weather, rain, continues, but we expect that by the end -- by the fourth quarter, construction will be completed, and at that time we will start producing close to a 150 million gallon rate.

I think as Stuart mentioned about the exports, since I said we are exporting it, we expect the ethanol export will increase to Brazil, Canada, Mexico and India. Mexico will be potentially replacing MTBE. Ethanol export for the first quarter of 2017 was 387 million gallons, according to Renewable Fuel Association. Export to Brazil for first 4 months of this year totaled 220 million gallons compared to only 59.2 million gallons during the last -- during last year in the same period.

So we expect that this year export will be approximately 1.3 billion gallon or more. Stuart?

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Stuart A. Rose, REX American Resources Corporation - Executive Chairman of the Board and Head of Corporate Development [5]

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Thank you. In conclusion, we continue to drastically outperform the industry. And we had a very good first quarter, 61% rise in earnings per share. Second quarter is currently profitable, but it is running down from what we earned last year during the second quarter and what we earned during the first quarter. Narrowing crush spreads is the biggest reason for that happening. The rest of the year we hope for improvement, and the rest of the quarter we hope for improvement, although there's no guarantees, but driving season is starting this weekend, with Memorial Day. And traditionally, during driving season, there's more demand for our product, which should -- which we hope will increase prices. Also refiners need to fulfill their RIN commitments. And according to Citibank and a couple of other studies, that could cause RIN prices to go up subsequently. And RIN prices have been rising. Usually, when RIN prices go up, ethanol prices go up.

In terms of cash, it continues to grow. And we're looking for ways to use the cash. In terms of our plants, we continue to -- and one of the reasons we outperform the industry is we believe we have the best plants, best locations, Fagen/ICM plants in the corn belt, good rail. And most importantly and the biggest thing that we have that, I think, separates us from the rest of the industry is we have great people. Now people have been with us now. They're experienced. They know what they're doing. They're working harder at expanding our plants. And we remain very optimistic for the future.

I'll now leave everything open to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Stuart A. Rose, REX American Resources Corporation - Executive Chairman of the Board and Head of Corporate Development [2]

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Before the first question, one other thing I did want to mention is related to the exports. A dollar is tied in some ways to the dollar, and a weaker dollar could hurt our exports, so we'll see what happens on that. But the stronger dollar has certainly helped the export in the last few months. Go ahead.

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Operator [3]

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Our first question comes from the line of Greg Eisen with Singular Research.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [4]

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I missed what Zafar said about the capital spending for the rest of the year. It was $5.9 million in the quarter. And did you say that construction will be completed by the fourth quarter? I didn't -- I wasn't hearing well, I'm sorry.

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Zafar A. Rizvi, REX American Resources Corporation - CEO, President and Director [5]

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Yes, that's right. First quarter, we spent about $5.9 million. But I think to date, we have $9.3 million. So construction work continues. And we expect by the fourth quarter, we will be able to start full production. And as you know, again, it depends on a lot of things, also on weather and some of the equipment delays. So -- but that's what we're hoping, by that time we will complete.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [6]

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Understood. Yes, I know. The building isn't -- it takes time to get this built, I understand that. You said $9.3 million approximately to date this fiscal year. Would you have an estimate for what the whole capital spending budget will be for the full year, now that you are this far into it?

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Zafar A. Rizvi, REX American Resources Corporation - CEO, President and Director [7]

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I think we have -- as we said previously, it will about $10 million to $15 million for each location. So we are expecting somewhere $20 million to $30 million for the both of them. And I think that will lead us to production of growth of to 150 million gallon.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [8]

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At both locations?

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Zafar A. Rizvi, REX American Resources Corporation - CEO, President and Director [9]

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Correct. Each, yes.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [10]

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Okay. As you're going through the construction, is this -- how do I say this, is it disrupting operations in any way that might be affecting your margins right now?

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Zafar A. Rizvi, REX American Resources Corporation - CEO, President and Director [11]

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Not really. I think that what we have done this -- this is also our shutdown month because with both locations, we shut down in the month of May. When we shut down during that period, we added extra tie-ins, and when you try to do a tie-in, and then some equipment was added this month, so it took a little bit longer for us to come back into full production than normally, after the shutdown we come back. So that certainly affected some in this month. But we try to do all this tie-in during the shutdown. But otherwise, no, it does not affect overall our production.

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Operator [12]

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(Operator Instructions) Mr. Bruggeman, there are no further questions at this time. I will now turn the call back over to you.

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Douglas L. Bruggeman, REX American Resources Corporation - CFO, VP of Finance and Treasurer [13]

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Thanks you, operator. Thank you, everyone, and we very much appreciate your listening to us. And we'll talk to you again at the end of next quarter. Thank you so much. Bye.

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Operator [14]

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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.