REX American Resources Corporation (NYSE:REX)
Q3 2016 Earnings Conference Call
November 29, 2016, 11:00 AM ET
Doug Bruggeman - CFO
Stuart Rose - Executive Chairman of the Board
Zafar Rizvi - CEO
Aaron Steele - Feltl
Ladies and gentleman thank you for standing by and welcome to the REX American Resources Third 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 Mr. Doug Bruggeman. Please go ahead.
Good morning and thank you for joining REX American Resources’ fiscal 2016 third 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 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 those forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission including the Company's reports on Form 10-K and 10-Q. REX American Resources assumes no obligation to publicly update or revise any forward-looking statements.
I have joining me on the call today Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer. I’ll first review our financial performance and then turn the call over to Stuart for his comments. REX is extremely pleased to report on its fiscal 2016 third quarter operating results. Sales for the third quarter were 116.3 million, which represents approximately a 5% increase over the prior year. Sales were based upon 62.8 million ethanol gallons this year versus 57.3 million gallons in the prior year, which resulted in increased ethanol sales of 7.9 million. We experienced approximately $24 per ton reduction in DDG pricing year-over-year for the quarter, which resulted in approximately $3 million reduction in dry distiller grain sales.
Gross profit increased from 14.3 million to 20.2 million for the third quarter principally due to the improved crush spreads associated with lower corn cost year-over-year and increased production levels. DDG pricing continued to be negatively affected by uncertainty of demand from China amid the previously announced anti-dumping and countervailing duty investigation. SG&A was slightly higher year-over-year increasing from 4.7 million to 5.1 million, primarily due to higher incentive compensation associated with overall higher profitability for the quarter. Equity method income was relatively consistent at 1.8 million this year versus 1.3 million in the prior year third quarter. Our tax rate for the third quarter was approximately 39.1% and for year-to-date was approximately 37.1% net of non-controlling interest. Our net income for the quarter was 8.9 million versus 7.5 million in the prior year, and our diluted earnings per share for the third quarter was $1.36 versus $1.08 in the prior year representing a 26% year-over-year increase.
I'll now turn the call over to Stuart for his comments.
Thank you, Doug. Going forward, earnings in the fourth quarter are running at a pretax rate of over 100% better than last year's corresponding quarter. We have some significant benefits going our way. First, of course is lower corn pricing which followed an excellent corn harvest this year, we have better crush spreads going on right now as Doug previously mentioned. The EPA has given a stability not just for the rest of this year but next year where they’ve called for RINs on 15 billion gallons of domestic ethanol use, which is the maximum. We have continued low natural gas rates and we have increased exports which Zafar Rizvi will talk about later. In the negative side, DDG prices continued to be lower than last year which goes along with lower corn prices. There's also worries about China demand. The other thing that is negative is low oil prices which makes our product less competitive on the world market. The big question marks out there are the new administration which is a big question mark for every business. Trump has consistently supported ethanol and RINs and he is big - a big part of his program is US energy and independence, and we believe we're big component of that US energy independence.
In terms of Trump supporters, people like Gingrich and Huckabee have expressed strong support for ethanol all along and have always been very, very good supporters. Other supporters like Carl Icahn have at times expressed disapproval with the EPA - with the EPA RINs program. We don't expect any legislative changes to take place. The big, big question mark will be who heads the EPA. As shown by the last EPA, it's a wild card and they pretty much can do what they choose which RINs, so that's going to be a big appointment and we'll see how that goes. Other government question marks out there are the Trump tax cut; we pay a full tax rate. So if the taxes are cut, we’ll benefit directly from that. Also our consumers will benefit directly from a tax cut taking more vacations, driving more potentially increasing ethanol demand. Trade barriers could help and hurt us, trade barriers could stop the importing of Brazilian ethanol, but it could also hurt our ethanol exports.
In terms of cash, we continue to generate large amounts of cash. Our cash balance at the end of the quarter - consolidated cash balance was 162.8 million now that relates to 135.8 million at the beginning of the year, 61 million - almost 62 million is at the parent level and over 100 million is at the consolidated ethanol facility level. We're actively looking for other industrial projects and potential acquisitions preferably in the energy or natural resource field. We've proven that we can operate large plants and do it efficiently well over a number of years. So we would consider other industrial acquisitions or other industrial projects. We will improve on technology if possible where we can show - in a relatively short-term we can show increases to our earnings per share should we buy anything.
We're also looking for other top ethanol plants, high-quality ethanol plants. Today, we haven't found - we have nothing eminent, but we're always out there looking to see if any come on the market, very seldom do the type of plants we would like to buy come on the market. We continue to try to buy back our stock but we only buy back opportunistically on dips when the opportunity occurs. In terms of the biggest place where we're showing growth and will continue to show growth is expanding our current ethanol plants.
Zafar Rizvi will now talk about the expansion of our ethanol plants and what's going on in the export market.
Good afternoon, this is Zafar Rizvi. During the financial year 2016, we made capital investment of approximately 12 million to increase production. As you probably remember that we made approximately 8 million to 9 million in 2015. We have completed all capital investment project at our consolidated plants. We increased our production level at NuGen to approximately now 135 million gallons annual run rate. We are also increasing our production rate at One Earth Energy. One Earth Energy is expected to be higher rate by the end of first quarter of 2017. While we are working on eliminating bottlenecking, we have received final pathway approval for One Earth Energy also at this time. As you probably remember, we mentioned previously that we have received for NuGen already. NuGen now has a permit as we mentioned previously about 150 million gallons and One Earth up to 131 million gallons. NuGen also has qualified for carbon intensity for a California ethanol shipment. As we continue to increase our ethanol production, we will continue to monitor our cash margin. We will be soon evaluating how do we take a next step to increase our production to 150 million gallon at NuGen plant. So we're working on some other bottlenecks to reach that stage, which is we believe that probably will be next year sometime or later next year sometime, we will be able to achieve that.
So that's where we are with the construction update at this time. Stewart?
Thank you. In conclusion, we’ve substantially outperformed most of the industry, most companies in general with a 25% increase in earnings per share during the quarter. One thing that we've noticed during the quarter was that exports, even though oil prices have not really risen, in fact in some cases, they've come down during the quarter, exports are going up. We see -- and we see demand from a number of different countries that need clean air and it's been a big -- it's been some help. This quarter we have the ability to export our product and we hope it'll be a big -- we hope it will be good, even better in the future. On the horizon, there’s very few negatives on a short-term horizon.
We are benefiting from low natural gas prices, good crush spreads, strong EPA rent rulings, great locations, very good harvest, put it all together and during the next quarter, we expect we're currently running at a rate of greater than 100% better than the corresponding quarter, fourth quarter of last year. The biggest asset that we have is our people. Our people are -- we consider them the best in the industry and we really, really have great people and that's really when you compare us to not just rest of the industry, but many, many -- most companies in the world. That's what really makes us stand out and makes us look, makes us look a lot better and makes us a better company than most companies that you'll see out there.
I’ll now leave it open to questions.
[Operator Instructions] We have a question from the line of Brent Rystrom from Feltl. Please proceed.
Hi. This is Aaron Steele on for Brent. I was just wondering if you could talk a little bit about the bases opportunity that you maybe have seen in South Dakota and then kind of how that compares to Illinois.
Zafar, do you want to answer that?
Yeah. I think certainly the bases are much better at the South Dakota location than Illinois, although Illinois has a great corn production this year, but as you know, there is a huge competition in Illinois, in Decatur and Champagne and around that area. So certainly the bases are little bit much better at the South Dakota than Illinois at this time.
Okay. Excellent. Thank you. And then –
We tend to make up that difference with lower rail prices. So the both plants do pretty -- in the end, there's no rhyme or reason which one necessarily does better.
Yeah. I think what Stuart is saying that ethanol bases are better at the Illinois plants than South Dakota due to the transportation reason. Yeah. So that’s what really. So it’s one better in corn, the other better in ethanol.
Okay. That makes sense. And then just on DDG pricing in the quarter, can you kind of comment on what you’ve seen and then what you’ll see kind of going forward. I know there has been some difficulty, you mentioned China and then Vietnam as well. Some of the regulation coming out of there.
I think certainly, we see the DDG pricing is consistently coming down at this time, somewhere 80% to 90% of the corn value. And so certainly concerned about Vietnam and China. But on the other hand, we see some other area that DDG price is certainly increasing. We have seen some coming from -- even from Egypt and some other area, the DDG price. So at this time, certainly, we are concerned, but I think we can see some growth coming from other areas in spite of China anti-dumping as you probably know that in September 2016, even the China was still very -- imported more DDG than any other countries, but certainly since that time, it slowed down.
Okay. Thank you. And then just one more question if I could, I was just wondering if you could comment on the EPAs latest, the RFS volume standards, so with the 15 billion gallons of conventional biofuels, just wondering kind of your take in how you see this come back in the industry going forward?
It couldn’t have been a better ruling. It’s the right thing to do. It’s the law and our industry will produce it and the customers can use it. EAD5 should be a much bigger component of what’s going on out there. It’s not -- maybe it will be next year. In our opinion, the people opposing those really don’t have any ground to stand on -- the country can use more ethanol. Ethanol is produced at home. It creates cleaner air. It takes care of our people, our farmers, and which I'm starting to sound like Trump, but it's a very American product, and from our way of thanking, the EPA did the right thing and we hope that continues. We hope the next EPA head will see it the way the last EPA heads sought, and we certainly qualify as a great American product with great American workers. So we'll see what happens.
I think the one more thing which I want to probably add that, as you probably know, the consumption of gasoline is also increasing rapidly. We’re expecting this year 144 billion gallons compared to last year, about 140 billion gallons, 141 billion gallons. So as the consumption of gasoline will increase, the consumption of ethanol will also -- will increase with that.
If there's no more questions, I will thank everyone for the call and again, we're having -- we're in the middle of a great quarter right now and hopefully it continues to the end of it – hopefully it continues for a long time, but currently, we’re looking at very, very good numbers and we thank everyone for their support.
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. Have a great day, everyone.
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