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REX American Resources Corporation (NYSE:REX)

Q4 2013 Earnings Conference Call

March 26, 2014 11:00 ET

Executives

Doug Bruggeman - CFO

Stuart Rose - CEO & Chairman

Analysts

Ariye Cole - Cole Capital

Paul Resnik - Uncommon Equities

Katja Jancic - Sidoti & Co

Jay Goldstein - JBG Capital

Michael Cosgrove - Vectra Capital

John Segrich - Lorum

Operator

Welcome to the REX American Resources fourth quarter Conference Call. (Operator Instructions). I would now like to turn the conference over to Doug Bruggeman, Chief Financial Officer. Please go ahead, sir.

Doug Bruggeman

Good morning and thank you for joining REX American Resources fiscal 2013 fourth quarter conference call. We will get to our presentation and comments momentarily as well as your Q&A but first I will do 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 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 would like to now turn the call over to Stuart Rose, Chairman of the Board.

Stuart Rose

Thank you Doug and I would like to welcome everyone on the call. We’re pleased to report record net income for the quarter of 15.9 million versus a loss last year during the quarter of 4.4 million earnings per share were also a record of $1.95 for the quarter versus a $0.54 loss last year during the quarter, net income for the year again record income 35.1 million versus a $2.3 million loss, earnings per share again record for $4.15 versus a $0.35 loss.

Cash at the end of the year on the balance sheet was a 105.1 million, 63.3 million of that was at the parent level, 41.8 was at the plant level. That compares to 105 million this year versus $69 million in cash last year. Our debt has gone down to 63.5 million from 91.3 million, sales were up slightly to 6.1 million and on our real estate segment we sold six stores and one warehouse and that real estate exposure has been reduced from 13.3 million to 4.7 million.

Terms of our industry, we’re in the ethanol industry, proud to be in the ethanol industry and we’re finally glad to see the ethanol industry getting it still not just for what we do for what we feel we do in terms of our business but it's finally glad to see shareholders in the industry getting some credit for the industry therein. It's a great industry it helps our country in so many ways. Cars burn cleaner because of the ethanol, the air quality is cleaner. We receive no direct government subsidies, we pay huge amount in taxes both at the local and federal level, our farmers are paying more taxes, they are making more money on their crops. We receive less aid and large part of that is thanks to ethanol.

There is no bad economies that I know of in the farm areas, unemployment is not a problem, the balance of trade improves because of ethanol we import less oil. Our national defense, our security at the country is more secure because of ethanol; less money is going out to oil producing countries some of which are not necessarily our friends and possibly our enemies. So again we’re in what we feel is a great industry and proud to be in the industry.

In terms of the fourth quarter the industry became increasingly more profitable, crush spreads rose during that quarter and through last month continued to rise. Corn prices are down significantly versus last year, that’s helped our margins, there has been good demand for DDG’s and industry wide especially from China and corn [ph] continues to be profitable product for the industry.

REX as usual drastically outperformed the industry. Again we have some advantages that we’re really able to take, that really helped us during this quarter that do better than the rest of the industry. There was a good corn harvest in our market so we were able to buy corn at a very attractive price sometimes below CBOT. We continue to get rail cars at least to-date, we have not had the problems, other have had others in the industry have had. There is a significant rail car shortage or a bit problem getting the rail cars back to the plants because of where our plants are located and the good rail service we have been lucky so far.

We don’t go too far out, we try to match our ethanol sales with our corn purchases and we usually try to stay within 90 days in terms of how far out we will make our ethanol sales and generally have kept close than most people in the industry, at least we have kept better control of matching our corn to our ethanol sales and most people in the industry do not take long, long hedges at least on our company owned plants.

In terms of the technology, we’ve the best technology in the industry. Fagen/ICM it's recognized as a best. It's proven itself to be the best and hasn’t had the issues that other plants have had and that’s been a huge advantage in that having high quality plants, we have actually been able to upright over name plate [ph] again those are considered by most to be the very best in the industry.

Now the only negative during the quarter was natural gas prices, it spiked up. In some cases we had significant spikes in natural gas caused by some fine warning in the natural gas contracts but we overcame that. Don’t expect that to be a problem going forward. Going forward we do expect the current quarter to be a record quarter, we expect it to be a slightly above and this is a quarter that we’re currently in, we expect it to be slightly above the quarter that we just reported and many times more than we’re up against the very, very you see number $0.43 last year and we expect it to be well above, way, way above that and again slightly above what we just reported quarters only 2/3rds, not even 2/3rds first we don’t have final numbers but things continue to go very, very well.

Cash continues to come in at a very, very strong pace. This is a business and when it's going well it generates loads of cash and that continues to happening right now. We continue to have the good rail access which should continue to be a benefit for us; corn supply is great in the areas we’re in, that’s not an issue. We hope to be able to continue to buy at or below CBOT pricing. Very, very good cross spreads relative to the norm of the industry is what’s going on now. So things are probably about as good as at least - I would say they are as good as they have been since up in the industry. Potential problems on the horizon, the rail car I mentioned earlier that’s a real problem, it's a serious problem getting the rail cars back to the plants with coal coming on board because if higher natural gas prices with oil and gas being such a boom product and no real pipelines out there, the demand for rail and rail car shortages is a problem in the industry. We have avoided it so far, but at any time that could crop up and be a problem.

Natural gas prices was a problem during, a little bit during the quarter. Now in the first quarter again during the summer quarters if there is a huge heat wave or something. We found that spike in natural gas prices happens in our markets.

The potential EPA RIN decision we think we’re fairly comfortable that it's going to come in pretty close to what they said it would and we’re comfortable with that number if it comes in drastically lower, that could be a problem but again we don’t anticipate that. The other thing is there could be potentially less exports and even some imports if our prices keep going up if the price of ethanol relative to gasoline the difference is shrunk and again that makes other products more potentially like you said the products are more potential and that’s potential problem for us but so far it has not affected us.

Currently we’re generating large amounts of cash, I mentioned that previously it has allowed us to pay our debt down so allowed us to raise our cash balances in the company to over a 100 million while paying our debt down significantly, we continue to look for other properties to use our cash we have nothing that we’re negotiating, we’re on the horizon now but we do look. We will add -- try to add more corn storage and ethanol storage to our plants just to take care of possible (indiscernible) related to lay our possible opportunistic buying opportunities. There is always a chance that we can find additional shares in the ethanol plants that we own a minority of. We have done that in the past and we continue to look for that but again there is nothing with the industry doing so well and us being opportunistic buyers, there is nothing that we have currently in the pipeline to tell you about on that.

The other thing that we’re looking to do is look for other alternative energy products that have a low investment and very, very high potential return. We found one that possibly meets our criteria in the heavy oil business, made a small investment in heavy oil technology. There is billions of barrels of heavy oil throughout the world that can’t be reached if it's steam we can’t reach below a couple 1000 feet. Our technology if it works and I would say if that’s a potential to get to steam below 2000 feet and make that oil recoverable. We don’t want anyone buying our stock based on that technology, it is not at this stage proven technology but we’re slowly working towards try to prove it up. We leased a small plot in California; we currently are waiting on permits. Permitting in California is an extremely slow process but we hope to get the demo plant by the end of the year.

In conclusion we just completed our most successful quarter ever, earnings per share $1.95 versus a loss of $0.54. Credit has to be given to our locations, its safest [ph] with the rail. Our corn belt location allowed us to buy corn fairly inexpensively ICM/Fagen technology allow the plants to go at a great clip [ph] to make money and we expect the current quarter the one we’re in now to even be slightly better than the last quarter and significantly better than comparative quarter which was $0.43. Most importantly I really want to thank our employees; we have the best employees in the world. Our real advantage even though we have the best sites, best plants, we have the best employees who have stuck with us for losses last year.

They have been with us from the beginning. We’ve virtually no turnover at the upper end, we really have the brightest employees that I know of in the world and that’s a real secret to our success and they are the ones that deserve the full credit.

I will now leave it open to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Ariye Cole with Cole Capital. Please go ahead.

Ariye Cole - Cole Capital

I have a question for you about ethanol inventories in the industry. Data, I think, this week released by the Energy Information Administration showed that there is about 15 million gallons of inventory of ethanol in the U.S. Do you know approximately how many weeks of supply that would be equivalent to?

Stuart Rose

I will have to get back to you on that. I’m not sure, no.

Ariye Cole - Cole Capital

Okay.

Stuart Rose

I would think that the same source who gave you that will give you the supply - I don’t want just throw a number off the top of my head but I know what you’re quoting from and I believe they will also give you a week’s supply in that number, in that report.

Ariye Cole - Cole Capital

Secondly, in your press release, you mentioned that your average selling price for ethanol in the quarter was $1.86 per gallon. Can you give us an update for your hedging efforts, what sort of prices you have hedged for the April quarter?

Stuart Rose

While we’re comfortable in saying like they said in the April quarter we expect to -- the earnings per share to be slightly better than the earnings per share this quarter. So you can work back and you can just pretty much take the same numbers and it's going to be working backwards, it's going to be the same spread. A little better.

Ariye Cole - Cole Capital

The reason I ask is, if you look at the futures prices in Chicago, I guess at Argo today, ethanol is being sold for $3.50 per gallon, which is obviously much higher than what you sold in the January quarter. So I'm just trying to understand…

Stuart Rose

We saw that yesterday and that’s the last drop of ethanol. There is -- what's going on currently on the spot market which we’re more -- we don’t sell -- like I said we match when we buy the corn and sell our ethanol as close as we can get to that. So we’re never getting the last drop. But what’s happened is that a lot of plants have not, have contracts they have to supply their contracts and they do not and this has not happened to us but they have to buy the ethanol now to supply the contracts because they cannot get -- because they cannot for whatever reason get the rail car, there are some rail issues going on right now.

Ariye Cole - Cole Capital

Right, but what I am trying to understand is what are the ethanol prices that the plants are realizing and how different might they be from the spot prices we see in the future?

Stuart Rose

Well again I’m telling you on a quarterly basis and that’s as far as we’re willing to go that things are humming along and we have record quarter last quarter and we will do a little better this quarter so that should give you a pretty good idea.

Ariye Cole - Cole Capital

Okay and then looking into the summer with inventories relatively low and this rail car problem persisting for the time being, to what degree, as you talk to colleagues in the industry, is there a fear that ethanol shortages will remain here into the summer as I guess the driving season starts and the demand for ethanol rises while production is still constrained?

Stuart Rose

That’s interesting and also there is REN requirement so people like to buy the product for the REN and so like you said driving season started it could be, we hope it continues, we hope it's the new norm of the industry but we will see that’s our hope. We’re in the ethanol industry and we have been in this long enough to know we can change in a second in any direction. This is not a business that’s especially stable and we’re well aware of it, manage it that way. Go ahead. Thank you.

Operator

Our next question comes from Paul Resnik with Uncommon Equities. Please go ahead.

Paul Resnik - Uncommon Equities

Just to follow up on what you just said about the high prices being paid, so at least some of those high prices are actually even paid by ethanol producers who are short of contract commitment?

Stuart Rose

It maybe that and it maybe I’m not sure if it's producers, it could be marketers. It could be again I am not going to speculate, all right I don’t know it could just be speculators doing this, that’s what happened with RIN prices last year so again that was just my personal opinion that that could be the problem because there are definitely rail car shortages going on which -- and the people have sold out, they have to find the product somewhere but I can’t tell you. I’m not smart enough to know why it spiked where it is. It's great for us because even though we don’t sell on that index that allows us hopefully to increase our margins in the upcoming months, but we will see.

Paul Resnik - Uncommon Equities

On the EPA and the RFS mandate, again, what is your current thinking on how it is going to play out?

Stuart Rose

Since about the time they come up, I think the year is going to be over and it's going to be irrelevant when (indiscernible). I assume it's going to be what they said, what they originally said it was going to be. Maybe a little more because people are driving a little more and they want to keep at 10% so they may give a little bit but right now the industry seems to be running on its own economics irrelevant of that.

Paul Resnik - Uncommon Equities

So one question is for the high prices. Do you see any capacity coming onstream? Of course, with the rail problem, that is kind of problematic.

Stuart Rose

Well everyone is trying to increase their capacity a little bit, I didn’t go over this very much in the call but we’re if we can give RIN’s for up to a 120 million gallons, if we can produce a 120 million gallons and we work on little things to increase the capacity of our plant every day and I assume everyone else is doing the same thing. We would like to produce a little more but as far as new plants coming online I don’t know if any new plants coming online and I would expect -- I don’t expect any new plants coming online because generally people are -- banks are afraid to lend to new plants because the industry of the ethanol business over it's life.

Paul Resnik - Uncommon Equities

I was thinking more in terms of plants that have either reduced production or have been idled.

Stuart Rose

Some of that is coming online and those were the marginal plants you would expect to come online when things are really good now. So yes some of that has happened and some of that will continue to happen, there is still like I said balancing that out is it's hard to get product out at certain parts of the country right now and that’s causing a slowdown in products in certain areas.

Operator

Our next question comes from Katja Jancic with Sidoti & Co. Please go ahead.

Katja Jancic - Sidoti & Co

What is your plan regarding debt repayment? I know you have been saying you're going to focus on that. Is that still the main focus and could you just provide maybe a plan or how you look at it?

Stuart Rose

Well we generally -- its very well priced at but we paid down last year long term debt went from 91.3 million to 63 million. So if we continue like that you’re looking at roughly two more years of still having some debt on the balance sheet. On the other hand if we wanted we could pay it off tomorrow. And that’s a decision for the Board to make whether it would just pay it off and be done with it or not. The banks would certainly like us to keep it.

If we do pay it off and use our cash to pay off debt that would limit our ability to possibly to some of the other things I talked about and so we like to have that flexibility, we were very fortunate to be able to buy plants at good prices in the past. We have this heavy oil investment and if it works and that’s a big if and again don’t buy our shares based on that but that could be huge and so it's good to have cash. If it is huge to be able to take advantage of the opportunity.

There is never a harm in my mind of having good cash levels, that being said our debt if things continue just going the current pace it will be and be paid off in two years.

Katja Jancic - Sidoti & Co

Now I know you mentioned you’re looking at potentially investing in other facilities or increasing your share. When you look at that, what specifically are you looking at? What is your criteria? How much would you be willing to invest in?

Stuart Rose

All you can do is go by our historical and we have put in when we bought One Earth we put in approximately, it has turned out to be a fantastic investment but we invested in equity about 60 million in that one. NuGen we invested probably 20 million to 30 million, some of these other investments 15 million to 20 million. So those are the type sized levels so we look forward to making it. I will say on the (indiscernible) plant, one of the shareholders wanted to sell some shares a few years ago and we bought fairly good amount of him, increased our ownership about 3%. Again we’re opportunistic, there is nothing out there right now. Everyone is really happy that I know of with their ethanol investments and so this is probably the worst time to go out trying to solicit shares but if something were to come our way we certainly have the cash to do something.

Katja Jancic - Sidoti & Co

You also mentioned that you are looking at increasing production. Are you looking at yield increasing technologies and how are you investing more in that, would that increase your capital expenditures?

Stuart Rose

Again we’re minority owners in some plants and majority owners in some plants, some of the minority owned plants are looking at that type of stuff. We will follow, if they do it and if it's successful like we do with corn oil then we will follow their yield. Well basically just looking to get more production, to any little log jam [ph] in the plant or any little thing to increase production. We can only increase it a little bit. Anyway we only have the RINs to go up a little bit anyway. So we think we can do that internally.

Katja Jancic - Sidoti & Co

Okay that’s all for me. Thank you.

Stuart Rose

Again you only get a certain amount of RINs -- and you try to increase that but everything goes slow with the government. Thank you Katja.

Operator

Our next question comes from Jay Goldstein with JBG Capital. Please go ahead.

Jay Goldstein - JBG Capital

There has been a lot of talk obviously with China and their air pollution and one of the popular news letters talked about China potentially introducing a 5% ethanol blend. Could you maybe speak to what you are hearing about that in the international markets in terms of how that is going to impact the demand as you guys see it?

Stuart Rose

I was just in Brazil and Brazil has probably more crowded highways than China because they use so much ethanol. There is not near to air pollution problem that China has. Okay I’m not the Chinese government but I think it will be smart if they did introduce something like that but I have no knowledge if that’s eminent and no more knowledge than you do but that’s eminent. I just think it would be smart on their behalf to do it. In terms of exports, China is a new market, the biggest market for exports is Canada. But China is starting and we’ll see what happens, that could be -- if that really happened where they introduced the 5% level that would be fantastic I think for us but I don’t know any more about that than you do.

Operator

Our next question comes from Michael Cosgrove with Vectra Capital. Please go ahead.

Michael Cosgrove - Vectra Capital

We have been looking at the weekly USDA surveys to try and get some sense of the price of corn paid and the price for ethanol sold and so forth. In your previous seven quarters, it seemed that your ethanol sales price pretty reliably correlated to those USDA survey prices and in the most recent, it sort of meaningfully diverged and I wanted to ask if your plants participated in that survey and if you noticed the same divergence and if you had any comment at all on that.

Doug Bruggeman

I can’t say if we participated in that survey or not. I’m not aware that we did or did not. The company does lock in a crush spread at times it may have cost some of the divergence but and I can’t be real specific on what would have caused it.

Stuart Rose

And I’m not sure of what -- I assume, all I know is that our numbers relative to the industry continue to be we have the best plants in the industry in my opinion and we continue to outperform the industry and relevant return on sales numbers things like that.

Michael Cosgrove - Vectra Capital

I assume from what I've heard in the call so far that there has been no change in the way that you sell ethanol and purchase corn, that whatever policy you have had in the past in terms of locking in margins or you have remained consistent with in the current quarter. Is that correct?

Stuart Rose

Yes it is correct. There has been a better chance to profitably lock in maybe a month or two longer than normal and we have taken advantage of that but and both again we don’t go far out but we have locked in. You can always buy the corn, the ethanol market is strong enough now and it's maturing enough that you can lock in a month or two longer at what we consider for us extremely profitable level. So when that opportunity takes place we have done a little bit more of that.

Michael Cosgrove - Vectra Capital

Okay. And then I guess my final question is, in terms of your exposure to natural gas prices, do your plants generally buy natural gas on a fixed rate or a combination of blended and spot or is it all different? Can you kind of give us a sense of how you purchase natural gas?

Stuart Rose

It's been on a combination and we have got hurt really badly, I mean it was during this quarter but we have had some bad times where we had to slow our plants down because the spot market natural gas for a few days, when it got extremely cold it went towards the roof. Way, way more than what you see on CBOT. I mean many times more so -- that is an issue, you were thinking South Dakota it wouldn’t be an issue because there is so much oil and gas exploration in that part of the country but it absolutely was an issue for us and it's a lesson I guess we have learned that it's better to lock it in and buy it even if it seems like high prices when you’re locking it in.

Operator

(Operator Instructions). Our next question comes from John Segrich with Lorum. Please go ahead.

John Segrich - Lorum

You gave a little bit of color just kind of with the last question -- I was just wondering -- typically how far out are you guys locking in kind of the ethanol and corn? Are you two, three months out or -- I couldn't find your hedges on your balance sheet, so I want to understand your policy.

Stuart Rose

Our policy is to buy the corn and lock in the ethanol and -- or maybe right now roughly a month out we have locked in roughly through April.

John Segrich - Lorum

I just want to understand the comment you made earlier where you talked about how I think the earnings would be up a little bit over kind of the prior quarters. I think that is what you said, right?

Stuart Rose

That’s over the prior quarter and many, many times over the comp of last year.

John Segrich - Lorum

Right, of course, but help me understand, because when I look at the crush spread and even if I run it out the curve, the market really didn't start to move until January. So when I look at where this quarter has been tracking and even if I worked backwards and said you are locking one month out, you are not getting spot, but you get one or two month forward, your crush spread has got to be up over 100% from prior quarter. So what am I missing?

Stuart Rose

I think you’re probably going by the spot not -- I think the only thing you’re missing is you have to go the CBOT is not necessarily I don’t know what you’re using for your ethanol, your corn is probably a good number. I don’t know what you’re using for your forward ethanol.

Doug Bruggeman

There is a couple of things that has come into play in my opinion. The company can and has locked in anywhere from 90 to 120 days out. So that maybe a little different than what you have used, February is a short month of production so you’ve got when crush spreads are as good as they are that makes a difference and then as we talk about the natural gas pricing that spiked in the first quarter that has a real dollar impact on earnings and with the number of shares we have out there couple of million dollars makes a difference. So I think those were the three factors are maybe a little different than what you maybe expecting.

John Segrich - Lorum

Right, but if the curve holds, and I roll your numbers forward on where you are hedging now, you've got to be hedging out at margins that are considerably better than what you just revealed for the last quarter as you go forward. Not just a little better.

Stuart Rose

No again what you’re saying we hope is right but we will see what happens. But we’re again for the current quarter we’re seeing slightly better than the quarter we just reported just to make that very clear.

Operator

And we appear to have no further questions at this time.

Stuart Rose

Very good. Everyone thank you for listening. Thank you for your support and we will talk to you again next quarter. Bye.

Operator

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

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