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REX American Resources Corporation (NYSE:REX)

Q1 2014 Earnings Conference Call

May 28, 2014 11:00 AM ET

Executives

Doug Bruggeman - CFO

Stuart Rose - CEO and Chairman

Analysts

Katja Jancic - Sidoti & Company

Bernard Rabinowitz - Morgan Stanley

Jeremy Hellman - Singular Research

Ariye Cole - Cole Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the REX American Resources Fiscal 2014 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 of REX American Resources. Please go ahead.

Doug Bruggeman

Good morning and thank you for joining REX American Resources’ fiscal 2014 first quarter conference call. We will get to our presentation and comments momentarily as well as a brief question-and-answer session, but first I will 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 report 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. We’re happy during this quarter to report record net income again, 21.7 million versus 3.5 million last year. Record earnings per share for the quarter again $2.67 versus $0.43 last year. Cash balances now are over $125 million. Long-term debt stands at $68 million. Sales did decline over the quarter, 155.9 versus 178.4, that was caused by lower corn prices, but more than offset by higher crush margins.

Ethanol, as far as what’s going on in the country, there is a lot of criticism, and we think it’s totally unwarranted , and I just wanted to go over a couple of reasons why ethanol. In my opinion and our Company’s opinion has been great for both our shareholders and our Country. First as cars burned cleaner, there’s less air pollution because of ethanol. Second, we receive no government subsidies in fact we pay a huge amount in taxes on our earnings and local taxes in the communities we serve.

Third, our farmers are paying more taxes, they are making more money on their crops, they’re paying more taxes and a lot of that has to do with ethanol, again helping our budget deficits. Fourth, there is no bad economies in the farm belt at this time that I know of. Unemployment has gone down, we are a major source of jobs ourselves and then the people who send things to our plants, who work in the towns and community shops, that type of things all do better because of us.

Fifth the balance of trade improves. We are importing a lot less oil, fracing likes to take the credit for it, but a good part of that less importing of oil has to do with ethanol. It’s never mentioned, but we are a major-major part, over 13 billion gallons of gasoline is produced by our industry. But if it wasn’t for our industry we would have to import 13 billion more gallons of gasoline or other raw material to make that gasoline. We have made a major impact on balance of trade.

Next is defense issues, a lot of the money that’s used, a lot of the oil producing states aren’t necessarily our friends. We are buying oil from them, and sometimes fighting wars against them. They’re funding using our money to fund enemies. And again, we are keeping the money in the United States and that money might be going to places that aren’t necessarily friends of the United States. In terms of the industry, it was for this quarter -- was -- for the first quarter, the industry in the first quarter was increasingly profitable, good crush spreads, corn prices are down significantly versus last year. Crush spreads rose, crush spreads is the relationship between ethanol prices and corn prices that got better during the first quarter.

Good demand for DDGs especially from China. DDGs is our byproduct -- we don’t -- that’s a part of the corn that is not used in ethanol which is the highest protein part of the corn and that’s used to feeding animals, but in the United States and it’s a good export product. Corn oil is another product derived from our plants that continues to be a very profitable product. The export market right now appears to be getting stronger and as long as ethanol stays low priced compared to gasoline, foreign countries we expect that to be good for the industry.

In terms of REX, during this quarter we again drastically outperformed the industry. Again we were able to buy corn at below CBOT prices. Last year we were paying way above CBOT prices due to good corn crop our price of corn is relative to CBOT has come way down. We continue to get railcars. Railcars were an issue for some of our competitors. We were lucky, our people did a good job of getting railcars and were able to -- a lot of that has to do with the location of the plants being where they are in the Corn Belt. And we were very fortunate that we did get railcars and did not have that problem. We sell fairly close, we don’t enter into as longer term contracts as others in the industry. So that gives us a chance to take advantage of rising crush spreads a little bit better than some of the other in the industry.

We have the best technology. Most of our plants are 100 million gallon Fagen/ICM plants. That’s the best technology that I know that’s out there. It’s the most efficient technology and it has a lot to do with why we outperform the other people in the industry. The only negative during the quarter, and it was a serious negative for us, was natural gas. And we paid $9.33 on average per MMBtu versus $4.29 to give you some impact on our bottom-line. Natural gas cost us 14.6 million this year versus 6.6 million last year. So we had an $8 million shortfall caused by natural gas spiking up. And that happened during the cold part of the winter.

Going forward, we expect the current quarter to stay extremely strong things are continuing at a very-very good rate. We expect to do well over 100% better than what we did last year, and last year was not a bad quarter. We had $0.71 a quarter during the second quarter. And again we expect to do well over 100% greater than that number. Cash continues to grow at a strong pace. And this is not -- when you’re making money like this a lot of it flows into your cash line giving us a lot of flexibility.

Crush spreads right now are strong. Currently from May we’re on the spot market which appears to be a very good place to be. June production, we have sold about half of our June production the other half is spot. Sometimes we will sell out a little bit forward if we deem the margins to be very good. And we felt that on the June -- on some of our June production. July currently is still on spot, but we will see what happens. Again we sell fairly close and when we do sell out, we like to match our corn purchases to our as best we can to our forward sales and lock-in spreads.

Railcar delivery for the industry is still a problem but we expect it to ease. It was a problem because of the weather but it could still be a problem in the future which I will talk about a little bit later. But today that is not been a major problem for REX. Corn supply has been steady. CBOT prices are stable and we are buying on average under CBOT. So things in that area look very good. Summer season driving is going on now, so there should be a natural demand for ethanol and that should help us during the next quarter. Natural gas currently is stable. We’re not having those big huge rises like we did in the first quarter. And again very good crush spreads relative to normal.

In terms of potential problems in the future railcars could always be a problem. There’s a huge demand for railcars in North Dakota due to the oil industry. That’s always an issue of getting our railcars back on time. We have not had the issue, to-date affect us, but it’s something we worry about and our people have done an excellent job of making sure the railcars get back and we get our product out. We don’t have railcars to ship the product then we can’t make the ethanol.

Second major potential problem is the EPA ruling. They have already preliminarily said that they are going to cut back on their required number of RINs a little bit. We think they are going to revise that ruling and maybe go up a little bit from that. But as long as it is only cut back to the level, that they have previously announced which is about 13 billion gallons we feel, that we feel we can survive, not just survive we can do very well, and continue to do very well. That’s what the industry is pretty much anticipating now. But there is a chance, because more people are driving more that they will raise that number a little. There is also the long shot that they will cut it. But we do not expect that to happen we expect it to either be that number or a little bit higher number on RINs.

Natural gas fluctuations as you saw in the first quarter can make a big difference in our bottom-line. Right now it is stable. If it gets really-really hot during the summer, it could be an issue again, but so far, so good. The final thing and most -- the biggest wildcard is weather. We had a great weather season last year. So far, we have had lots of rain, it’s been a great weather season this year, but the biggest part of the growing season is coming up. We need rain and we need proper corn growing weather. And the next couple of months would be crucial as far as the corn crops. That can make all the difference in the world, in the ethanol business. Currently with the large amounts of cash that we are generating, we’re doing a few things -- we continue to do a few things we have done in the past, one is paying down debt, in the last 12 months we have paid down over 30 million of our debt.

We still are doing that and we are gradually reducing our debt load and our interest expense that goes along with that. We’re gradually trying to increase our production in our existing plants, we’re approved to sell 120 million gallons and we’d like to even our nameplate is only 100 million gallons we’re working to try and get to a little higher level in each plant, we have capital improvements going on in our plants mostly related to storage to allow us to opportunistically take advantage of different markets, and we’re spending about $5 million in our NuGen plant to add 1.2 million bushels of corn storage, spending a $1.5 million in our NuGen plant to add a 1.5 million gallons of ethanol storage, we are spending 300,000 to add 3,000 tonnes of DDG storage and we’re spending about a 1.1 million to add about 1.5 million gallons of ethanol storage in our One Earth facility.

Altogether that’s about $8 million we’re spending to increase our storage which should give us added flexibility. In terms of other things that we’re looking to do, we always look for more plants to buy. We really like the 120 million gallon Fagen ethanol plants. Today we don’t see, none have been are offered to us for sale so at the moment there’s not that opportunity but we certainly have the cash and the financial ability should an opportunistic chance come up to take advantage of it, we also have cash, should some of the plants that we have investments and should people want to sell shares and again with the plants doing so well that doesn’t come along often but it did happen a couple of years ago, where we are able to buy our NuGen plant, so, first we bought half then we were able to buy the other half, so it could happen but again nothing on the horizon.

The other thing that we have, it’s a small investment in heavy oil technology where we, what we have is a patented product that can steam heavy oil that we hope can steam heavy oil, below 2,000 feet there’s billions of millions of unrecoverable heavy oil that just can’t be lifted below 2,000 feet. Lot of it’s in California. We hope to open a pilot plant during the fiscal year. We aren’t going to spend a lot on it probably less than $3 million but if successful it could be huge for our Company and our country but again, this is only a pilot plant, it’s not proven technology we would not encourage people to buy REX’s stock based on this investment. Our ethanol business is our primary business.

In conclusion we just completed the best quarter ever in our history, $2.67 versus $0.43 last year, we expect next quarter to continue at a very-very strong pace, we made $0.71 last year for the second quarter, we’re comfortable in saying that we expect to earn well over a 100% greater than that number this quarter, things continue to be, to go along very-very well. We continue to outperform the industry we have the best plants, we have the best locations, and more importantly than any of that we feel very strongly that we have the best people, and in the end that’s what separates us from the others in our industry and what makes us stand out in a strong industry as in our opinion the strongest player in that industry.

This point in time I’d now like to leave it open for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Katja Jancic from Sidoti & Company. Please go ahead.

Stuart Rose

Hi.

Katja Jancic - Sidoti & Company

Hi, thank you for taking my question. You mentioned that June is 50% locked-in, can you provide more information as to at what levels, what are the margins?

Stuart Rose

Roughly, I’m just talking bottom-line margins, roughly 2.5 million per plant so, and these are only in the two plants.

Katja Jancic - Sidoti & Company

So this is only for the two plants that are consolidated?

Stuart Rose

Yes.

Doug Bruggeman

Katja just taking a look at corn and ethanol, I would say that that was locked-in anything from about $0.30 to $0.40.

Katja Jancic - Sidoti & Company

$0.30 to $0.40?

Stuart Rose

Yes.

Katja Jancic - Sidoti & Company

And why the decision to lock-in June and not May and July or would other, what I’m trying to get is, when do you decide to lock-in the margins, what’s the point, at what point do you decide on this?

Stuart Rose

That’s done by our risk management team led by Zafar Rizvi and he decides when and if he thinks that and in this case it’s very-very strong margins for June relative to spot, so he felt take a little bit of the risk out of June and May, he felt and again this is we leave this totally up to the risk management team, but led by Zafar, May for example he felt we can make more money on spot and June he felt it was too good of a chance to pass up. But again we don’t go very far out, and he has to match the corn to the ethanol purchase.

Katja Jancic - Sidoti & Company

And you also mentioned…

Stuart Rose

It’s what he tries to match it I wouldn’t say it’s an exact science but he tries to match up, he needs everything in place to be able to lock-in otherwise spot and spot is very strong as you know.

Katja Jancic - Sidoti & Company

Yes. You’re going to spending 8 million of capital expenditures, if I understand correctly is this going to be throughout the year or is this in specific quarter?

Stuart Rose

That’s a number for the year I am not sure when the expenditures and that’s 8 million on the ethanol plants and we’ll probably spend another a little bit on heavy oil technology too.

Katja Jancic - Sidoti & Company

So what are you looking at together, what will be the capital expenditure?

Stuart Rose

I would say it would be under 11.

Katja Jancic - Sidoti & Company

Under 11?

Stuart Rose

Yes.

Katja Jancic - Sidoti & Company

And for let’s say next year, is this is a run rate we could look at?

Stuart Rose

No I think this year we’re spending more on storage than we normally expect to spend, so at least on the ethanol side I would not expect this to be a run rate.

Katja Jancic - Sidoti & Company

Okay.

Stuart Rose

We need the storage, we learned specially ethanol storage we were very fortunate not to have railcar problems and we want to protect ourselves for that, we need ethanol storage. And then for that matter corn storage to corn we don’t know how next year’s crop is going to be, so having corn storage gives us a little flexibility.

Katja Jancic - Sidoti & Company

Okay. That’s all for me. Thank you.

Stuart Rose

Thank you, Katja.

Operator

Thank you. The next question comes from the line of Bernard Rabinowitz from Morgan Stanley. Please go ahead.

Stuart Rose

Hi Bernie.

Bernard Rabinowitz - Morgan Stanley

Yes hi Stuart, this is not a question it’s just a comment, I have been in the business for 53 years and I do not remember as much of a remarkable transformation of a company as I see in REX over the last few years and you should be complemented.

Stuart Rose

Well thank you very much Bernie, coming from you that means a lot. Okay thank you.

Bernard Rabinowitz - Morgan Stanley

Thank you.

Operator

Thank you. (Operator Instructions) The next question comes from the line of Jeremy Hellman from Singular Research. Please go ahead.

Jeremy Hellman - Singular Research

Hi guys can you hear me okay, I am on a mobile.

Doug Bruggeman

Yes I hear you fine Jeremy, hi.

Jeremy Hellman - Singular Research

Okay great just going back to the point from the first caller regarding the fact that you have basically hedged half of June and made your own spot. Concerning that we’re pretty much wrapped with May, what can you tell us about how May has net fares versus half of June that you noted?

Stuart Rose

May all I can say it continued a very, very strong trend we don’t have our main numbers to tell you exactly. When you’re on spot you get an average price. So it’s not like the CBOT price it’s an average price, for the months so I don’t have. We’re still in the month of May, I don’t have the final figures but I know the crush spread is good, and again I am comfortable saying that that’s what gives me the confidence to say we’re going to do double of what we did well in excess of double of what we did last year in the second quarter because we started off good. But again in the ethanol business especially when you’re in the spot market, the risk is that crush spreads can fall -- sometimes we’ve seen negative crush spreads and that happens quickly, that’s why it’s -- on occasion lock-in a little bit of the profits and it can happen, we don’t expect it to happen but that’s just the nature of this industry.

Jeremy Hellman - Singular Research

Sure, and then I know you usually put this in the Q and K with that not out yet. How much percentage basis, what percentage of your revenues were ethanol which were non-ethanol revenues in the quarter?

Doug Bruggeman

They remain relatively consistent from the previous quarters; I mean it still runs around 75% ethanol and then the remainder the byproducts.

Stuart Rose

We still, we get a little rental income from some of these properties we have, but that’s basically faded away book value about quarter of a billion I think the real-estate maybe $4 million to $5 million on our books.

Jeremy Hellman - Singular Research

Okay. And then turning to the balance sheet and this is probably somewhat or maybe I am somewhat new to the story that you paid down some debt and you still have $20 million Q-over-Q increase in cash. Is that, should I interpret that as your debt equity ratio is that a level of leverage that you want it to be now or is there something else going on that precludes you from paying down more debt?

Stuart Rose

No, we could pay down the rest of the debt and we choose not to, mostly because it is LIBOR based debt and its very inexpensive debt which is -- we keep it in case it may be hard to raise at that rate again and we keep a lot of fire power in case something opportunistic comes along that we can grab it, say at late it hasn’t come along yet but we look forward every day.

Jeremy Hellman - Singular Research

Okay one last one for me and I’ll jump out. Just back to the CapEx subject and given the railcar issue that many others have seen and certainly make sense what you’re doing to invest in storage, is that where I am trying to look some characterization of your spend versus what could be spent is that everything you can be doing or you’re doing 50% of what could be doing from a theoretical perspective just wanted to get some relative sense of that?

Stuart Rose

Well we could always put in more storage in this but this is what we feel, I mean, if it would get terrible in all of sudden we can’t get it any railcars for a month and we wouldn’t have made and we wouldn’t have enough storage and that would be -- this is what we feel at least at this point in time at raising our storage to whether depend on what happens we can always raise it more.

Jeremy Hellman - Singular Research

Thanks a lot guys.

Stuart Rose

Okay, thank you.

Operator

Thank you. (Operator Instructions) The next question comes from the line of Ariye Cole from Cole Capital. Please go ahead.

Ariye Cole - Cole Capital

Good morning gentlemen. Thank you for doing the conference call. A couple of questions what is asked with one at a time, regarding the supply demand dynamics for ethanol industry you have obviously entered the driving season here for the next couple of months, based on your assessment, do you see the availability of ethanol becoming -- well may I ask the question differently, is industry supply demand going to get tighter you think here in the next 3-4 months as demand builds because of greater driving but supply for the industry on the production side basically being I guess level, so is that going to happen or do you still see an ability for production to rise a fair bit from here?

Stuart Rose

I think a lot of it depends on the EPA decision because I think that what would happen depending on the if the EPA adjusts their number based on the more driving going on then I think here and there is a potential -- in my opinion there is a potential for tightness in the market. But otherwise my guess is that they won’t -- if they don’t change it I don’t think there will be shortage of product I just think it will be a good strong industry if anything then oil companies will adjust and buy a little ethanol will blend a little bit less ethanol this quarter if they can’t get it.

Ariye Cole - Cole Capital

Okay and then regarding the…

Stuart Rose

The hope is that EPA does raise it a little bit over what they have previously announced and if that’s the case and they pretty much have to buy 10% and in your dynamics could possibly happen but we’re not counting on that.

Ariye Cole - Cole Capital

Okay and then regarding the use of the E15 blend, I know there are number of retail gasoline stations in the U.S. who have moved to that blend number, what’s your understanding for why that is not a more common occurrence in the industry I mean most of the cars on the road can handle E15 include it leads to a cheaper gasoline for the consumer so why is it not more common given you think recent cash would benefit?

Stuart Rose

Again the consumer would benefit, the economy would benefit, the country would benefit. The problem is the oil companies who won’t allow the gas stations fight us tooth and nail they don’t want to put in E15 pumps and take their market shares way from their oil product which is what they really in business to do. The other issue is it doesn’t work on all cars so there is a potential liability issue of someone pumps E15 into a car that shouldn’t have it and E85 pumps at every gas station it’s for a lot of reasons, but again the oil companies fight us tooth and nail on that we take their market share. They don’t like it and that’s the issue we deal with every day.

Ariye Cole - Cole Capital

Okay and one last question. I am assuming your natural gas costs have kind of normalized now?

Stuart Rose

Yes.

Ariye Cole - Cole Capital

Is it fair to understand that $14.6 million cost in core you’re reporting would fall back to maybe $6 million or $7 million per quarters so you’d be having I guess the next $7 million of profit falling to your…

Stuart Rose

Yes maybe not quite that much, but yes it will fall back. There were huge spikes during the first quarter where it got very, very cold. Natural gas is up a little bit over the last year but nothing like what that was during the first quarter.

Ariye Cole - Cole Capital

Okay, great. Listen, I’ve enjoyed the profit bounces as long as it lasts.

Stuart Rose

Well, thank you. I appreciate it.

Operator

Thank you. Mr. Rose, there are no further questions at this time. I will now turn the call back to you for your closing remarks.

Stuart Rose

Just like to thank you everyone for supporting our company and we appreciate it very much. Thank you. Bye.

Operator

Thank you 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. Thank you and have a good day.

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