REX American Resources Corp (REX) Q1 2019 Earnings Call Transcript

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REX American Resources Corp (NYSE: REX)Q1 2019 Earnings CallMay 30, 2019, 3:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the REX American Resources Fiscal 2019 First 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. Please go ahead.

Douglas L. Bruggeman -- Vice President of Finance, Chief Financial Officer and Treasurer

Thank you. Good morning, and thank you for joining REX American Resources Fiscal 2019 First Quarter Conference Call. We'll get to our presentation and comments momentarily 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 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.

Sales for the quarter decreased 13.4%, primarily due to lower production levels as a result of weather-related logistical issues from flooding in the Midwest as well as lower ethanol prices of $0.06 per gallon. Sales for the quarter were based upon 61.3 million gallons this year versus 69.2 million gallons last year. We did use this as an opportunity to have an earlier plant shutdown at NuGen to try to minimize the loss production. These same factors primarily led to gross profit for the ethanol by-product segment, decreasing for the first quarter from 13.5 million to 6.1 million.

The refined coal segment had a gross loss of $2.5 million for the first quarter of fiscal '19 versus $2.7 million for the prior year. These losses are more than offset by tax benefits recorded under the Section 45 credits of $3.9 million and $4.0 million for the first quarter of fiscal '19 and '18, respectively.

SG&A was similar between quarters at $4.7 million versus $4.6 million in the prior year. Equity in income of unconsolidated ethanol affiliates was down to $126,000 from $700,000 in the prior year, primarily reflecting industry conditions.

Interest and other income moved up from $654,000 to $1.1 million, primarily due to higher interest rates on our cash and short-term investments as well as higher balances. We booked a tax benefit of $3.5 million for the first quarter of this year versus a tax benefit of $2.7 million in the prior year, again, reflecting the aforementioned Section 45 credits from the refined coal operations. These factors led to a net income decrease from $9.5 million to $2.8 million, and an earnings per share decrease from a $1.45 to $0.45 per share.

Stuart, now I'll turn the call over to you for your comments.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Thank you, Doug. Going forward, we currently are -- in the ethanol business, our current projection is somewhere between a small loss and breakeven for the current quarter, for the second quarter.

Refined coal, we expect to be -- the income to be down significantly from last year's production is down. This won't be particularly significant to the company, so we're currently carrying lower tax credits, a significant amount of tax credits.

Crush spread in the current quarter is low, as Doug mentioned. It's similar to the -- impacted by similar things in the first quarter, in particularly, wet weather in South Dakota, which is protecting our corn supply. Crush spreads have also been affected by RIN low prices, which we believe is a result of the EPA issuing hardship waivers to -- a significant amount of hardship waivers, causing the requirement for less RINs overall.

DDG prices are soft. A lot of that might have to do with China not importing DDGs. They, one-time, were a big part of our market. They also -- that also might be a reason for ethanol prices being soft, China not importing. We continue to have a large cash balance, roughly $200 million on a consolidated basis and very little or no debt.

Our uses have been -- continued to be to look to buy and shares 349,861 as our current authorization. We do that on dips, and we look for opportunistic buys. We don't just buy it because we have an authorization. We try to buy it to support the stock when it's low. We continue to look for opportunities in the ethanol field. There's nothing imminent that we're looking at currently.

We look for opportunities outside of the ethanol field, preferably in energy or some compatible business to the ethanol business, some environmentally compatible business that might fit into what we currently do. And we're also currently invested in short-term securities, which continue to pay interest, significantly more interest than it was a year -- a little over a year ago. So, that's been a benefit.

I'll now turn the conversation to Zafar Rizvi, our CEO, to talk a little bit more about the ethanol business.

Zafar A. Rizvi -- Chief Executive Officer, President and Director

Good morning. I will keep my remarks brief. As I mentioned in our previous call, the first quarter challenging environment has continued in the second quarter. The company is facing a number of logistic issues due to weather-related problems and unpredictable performance of the railroad company in our location in South Dakota facility. (Technical Difficulty)

Our plant production was interrupted 18 days in March, 14 days in April and continued with some interruption in May at South Dakota facility. For all those reasons, we could be facing a loss or breakeven in the second quarter of 2019 as Stuart mentioned earlier.

On top of that, we are experiencing continued uncertainty because of the trade dispute and the small refineries exemption. Overproduction of ethanol has led to a decline in the crush margins. Ethanol producer produced over 16 billion gallons in 2018 according to EIA. Ethanol exports was very healthy last year, 1.7 million gallons, but during the first three months of 2019, exports fell to 382 million gallons compared to 512 million gallons during the same period last year.

Brazil, Canada, India was the top three importers. Although exports of ethanol are running behind last year's volume, we expect ethanol exports will be close to 2018 level as more countries begin to blend ethanol into their fuel supplies due to -- because of their growing concerns about air quality. Hopefully, the European market will open up soon for ethanol exports.

As far as concerns about distiller dried grain as Stuart mentioned earlier, export of distiller dried grain of 2018 were 11.88 million metric tons compared to approximately 11 million tons in 2017. But in the first three months of 2019, exports fell slightly to approximately 2.5 million metric tons compared to 2.6 million metric tons in the first three months of the 2018, according to USDA.

However, March DDG export were about 6% above the 905,000 metric tons exported in March 2018. Mexico, South Korea, Vietnam, Indonesia and Turkey was the five top destination. We believe the DDG market will remain the same in the near future, unless China's tariff is reduced or eliminated.

As far as concerns about the corn, the crop is projected to yield approximately 15 billion bushels according to May 2019 USDA forecast report. Farmers are expected to plant 92.8 acres of corn, and the estimated corn yield is 176 bushels per acre. The carryout 2019, '20 is expected to be 2.5 billion bushels according to USDA. But due to continued heavy rain and floods, the planting season is delayed and only 58% of the corn is planted compared to 90% at same time last year.

For instance, Illinois planted only 35% compared to 99% last year. South Dakota planted only 25% compared to 90% last year. It's been very difficult for farmers to transport corn in the same back roads of South Dakota because of heavy rains. The Federal farm aid package also makes final planted acreage uncertain at this time.

Let me give you a little bit about our capital expenses. During 2019, we made a total capital investment of approximately $600,000 at our consolidated ethanol plants. We estimate $4 million to $6 million of capital improvements, excluding any maintenance and scheduled shutdown this year. At this time, we have no major project scheduled. As I mentioned previously, in spite of very challenging operating environments; floods, logistic problems and trade dispute, REX delivered another profitable first quarter after tax.

I will give back the floor back to Stuart Rose for any additional comments. Thanks, Stuart.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Are you there?

Operator -- Executive Chairman and Head of Corporate Development

Let's just open it to questions at this time.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Sorry. In conclusion, we dramatically outperformed most of the industry in difficult times. We are dealing with a period of low crush spreads caused by lower end -- this effects all -- lower end pricing, higher than normal basis, corn pricing. And we still, like Zafar said, managed overall an after-tax profitable quarter. We have among the best plants in the industry. There are Fagen, ICM plants, good rail, and that's allowed us to outperform the industry.

But the most important thing in -- and it's going to become even more important over the next year is our people. We have good relationships with the farmer. We have the best people in the industry who have maintained great relationships with farmers. Some of those farmers are shareholders in our plants and that's going to, in my opinion, be a huge benefit going forward. Our people will set us apart and what make us, in my opinion, even better than we are now.

So again, I think -- I applaud our people and that's what really sets us apart from the rest of the industry.

I'll now leave the forum open for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. Good to connect with you guys as always.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Thank you.

Pavel Molchanov -- Raymond James -- Analyst

Let me ask about M&A. Hi. I think in your comments, you said that you do not have any imminent ethanol plant acquisitions. But you also talked about how the entire industry is struggling and your margins are holding up better than the rest. In that context, would it not make sense to gobble up some of the plants that may be struggling in particular, or are even facing some distressed situation? It seems like this is very much a buyers market at the moment.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

To answer your question, it is a buyers' market, but we don't believe in gobbling up plants that have historically not been profitable. It's a regional business. It's tied to corn prices. It's tied to rail. It's tied to a number of different things and we don't believe just by consolidating an industry, you can improve margins. We believe that to make money in this business, you have to have the very best -- the best plants and those don't come on the market very often. If one did come on the market, we would absolutely try to gobble it up and we have in the past and have been unsuccessful in those efforts. But that doesn't mean that we don't try.

We also don't want to pay. We're pretty -- and I think our shareholders appreciate this about us. We don't -- if we are going to gobble up someone, we're not going to overpay to do it. And maybe some -- one of those great plants came on the market now, we might have the opportunity. But to my knowledge, there is no plants that are on -- the people -- the plants that people are trying to sell today, to my knowledge, at least what's been brought to me have not been their best plants. They have been marginal at best.

What we can say -- I wouldn't say marginal at best, but plants that only make money during high crush spread periods or higher crush spread periods, we are not -- we're interested in having the best of the best. That's been our formula. It's worked all this years and I can't see us deviating from that.

Pavel Molchanov -- Raymond James -- Analyst

Okay. And then more about just the macro landscape. Obviously, China has not bought any US ethanol before year and a half since, I guess, April of 2018. But the embargo on US corn or the restrictions on US corn are a lot more recent. So if the lack of Chinese demand for US corn is pressuring corn prices but with ethanol, it's essentially a status quo. Does that year-over-year comparison in terms of margins actually -- should it look better at some point because you are one the same as (Multiple Speakers)

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Yeah. Theoretically, corn prices should be going down, but they're going way up bigger and Zafar can comment (ph) on this after me. But a bigger impact has been the weather and the lack of corn planting that's caused corn prices to skyrocket.

Zafar, you want to comment more on this?

Zafar A. Rizvi -- Chief Executive Officer, President and Director

Yeah. Pavel, as you know, I've mentioned earlier, only 58% is planted compared to 90% and five-year average is also about 90%. So, I think the major problem we see it in, as I mentioned, South Dakota, the back roads are certainly -- is making difficult to transportation. And then, river is making difficult. Railroad is not performing. And farmers are really concerned what's going on at this time. And so if the planting season is not very successful, that's what farmers and the funds (ph) are looking into it and that's the reason the continuously prices of corn is -- to go up.

And ethanol is moving in the same direction. Some -- we are really not major concerned about corn pricing going up and ethanol pricing going -- it goes the same time. It's all about margins. But the main problem is the DDG market, DDG market due to the China situation and the movement of the river and railroads and trucks is really making the DDG price not really as good as previously we have. So, those are the reasons. It's -- basically the margins are more shrinking due to the movement of DDG and due to the demand of the DDG.

Pavel Molchanov -- Raymond James -- Analyst

Okay. And lastly, what are your expectations for E15 implementation? Is it going to happen this summer or will it take another year?

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

I think whether it happens or it doesn't happen, I look at it as a non-expense. I think it's -- there's so few pumps out their pumping E15, and everyone acts like EZ10 (ph), like all of a sudden, they're going to start planting new E15 immediately. That's not the case. And maybe in a year or two, there may be more pumps with E15 and it can make a difference. But anyone that thinks that it's going to make a huge difference overnight is, I don't think is right. It's just not going to happen.

If 2% -- and I don't even think it's 2% of the pumps of E15 and 10%, those 2% of their sales are E15. And I don't think it's that, when you're talking about such a negligible amount and that it's relevant, in my opinion, or rounding there. So, I think everyone's -- I think the administration is giving that in place of really hurting us on the RIN side and acting like it's helping us a lot and maybe will help us a lot a long way down the future. But if they think there's going to be instant help on that front, I don't believe it.

Zafar, do you want to comment and give a little more flavor on your opinion?

Zafar A. Rizvi -- Chief Executive Officer, President and Director

Yeah. The only thing which I see is the -- basically the -- right now most of the gas pumps cannot -- they have to change every nine months. So three months, four months they cannot use the same pumps. So it's going to make difference little bit. Now if they are able to sell E15 all year around and they don't have to change the pumps or idle the pumps, so that will may help to increase the incentive for this gas station to add more E15 pumps over there. That may help to increase it. But I agree with Stuart, it is not going to happen overnight. It's probably -- if it's continue at least six months out of year and after that we may see some changes. But in the beginning, it's not going to be a major impact.

Pavel Molchanov -- Raymond James -- Analyst

Understood. Appreciate it, guys.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Thank you, Pavel.

Operator

(Operator Instructions) The next question comes from line of Chris Sakai with Singular Research. Please proceed.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Hi, Chris.

Robert Maltbie -- Singular Research -- Analyst

Hey gentlemen. This is Robert Maltbie in for Chris Sakai.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Hi, Robert.

Robert Maltbie -- Singular Research -- Analyst

Chris is -- Hi, Stuart. Chris is tied up at our Spring Select Web Call at present. I'm traveling. So apologies if I missed some of the inputs earlier. Question relates to the impact of the current weather on the crush spreads.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

It's hurting us a lot, especially in South Dakota. Farmers can't get it to our plants. And so it's going to -- it's hurting us. And I'm sure it will dry out at some point in time. And basis will go back to where they were. But at the moment, the weather and also with the planting season, people are like planning (ph), so as Zafar and I both mentioned earlier. So, it's both. Both of those things are an issue.

Robert Maltbie -- Singular Research -- Analyst

And I may have missed it. Could we have kind of a little bit of a background or a update on the coal business?

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Yeah, I gave a quick overview. It has generated after-tax profits. It's slowed down the plant where we have our operation, has slowed down. I think it has to do probably -- I don't want to speculate why that slowed down, but they've slowed down. So, we will be generating less credits. We believe in the second quarter, running at current rate of last credits in the second quarter than we did last year.

All that being said, it really doesn't make much difference because we have more than enough tax credits to cover. We're carrying forward tax credits right now. So it's not -- it really doesn't -- it won't, from a cash flow standpoint, it shouldn't make much difference. Maybe even help it a little bit, having less production.

Robert Maltbie -- Singular Research -- Analyst

Thank you. I'll go back in the queue. Thank you very much.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Thank you. Thank you, Robert.

Operator

There are no further questions. Mr. Rose, I'll turn the call back over to you.

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Okay. I'd like to thank, everyone, for your support and we'll talk to you again next quarter. Thank you very much. Bye.

Zafar A. Rizvi -- Chief Executive Officer, President and Director

Goodbye.

Operator

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

Duration: 24 minutes

Call participants:

Douglas L. Bruggeman -- Vice President of Finance, Chief Financial Officer and Treasurer

Stuart A. Rose -- Executive Chairman and Head of Corporate Development

Zafar A. Rizvi -- Chief Executive Officer, President and Director

Pavel Molchanov -- Raymond James -- Analyst

Robert Maltbie -- Singular Research -- Analyst

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