Q2 2019 Earnings Call
Greetings and welcome to the Rex American resources fiscal 2019 second quarter Conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone if at any time, there the confidence going into each operator, Please press star zero.
I would now like turn the conference over to Doug Ulman, Chief Financial Officer. Please go ahead Sir.
Good morning, and thank you for joining Rex American resources fiscal 2019 second quarter Conference call.
Well get to our presentation and comments momentarily as well as your Q and 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 risks and uncertainties associated with forward. Looking statements are described in todays news announcement and in the Companys 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.
First I'll review, our financial performance and then turn the call over to Stuart for his comments.
Sales for the quarter declined 17.8%, primarily due to reduced ethanol gallons sold.
Sales for the quarter were based upon 60.4 million gallons this year.
Versus 72.7 million last year.
The reduced production also resulted in lower unit sales for the ethanol byproducts.
The lower ethanol production was primarily at Nugen, South Dakota plant as we began to experience reduced availability of affordable corn largely in response to the wet spring conditions, which has led to uncertainty on the current year corn production.
We also experienced lower distiller grain pricing on a year over year basis.
Our consolidated corn costs rose, 5.5% compared to the prior year.
Combining these factors led to a gross profit for the ethanol and by product segment.
Decreasing from 13.7 million to $6.2 million for the second quarter.
The refined coal segment had a gross loss of 2.2 million for the second quarter of fiscal 2019.
Versus $4.3 million for the prior year, reflecting lower production levels in the current year.
These losses are offset by tax benefits recorded from the section 45 credits.
SGT Nay decrease for the second quarter from 6.1 million to $4.8 million.
Primarily due to reduced incentive compensation associated with the corporate profitability and reduce commission fees associated with the lower refined coal production.
Equity in income of unconsolidated ethanol affiliates decreased from 874000 239000 for the quarter.
Interest and other income increased from 696000 to 1.3 million, reflecting higher interest rates on our cash and increased cash levels.
We booked a tax benefit of 2.6 million for the second quarter.
First as a benefit of 5.6 million in the prior year.
The benefit is primarily a result of the section 45 credits from a refined coal operations.
The reduced benefits reflect a lower production levels in the current year.
The above factors led to net income attributable to erect shareholders for the second quarter of 2.3 million this year compared to $9.2 million in the prior year.
In earnings per share of 36 cents.
Versus a $1.43 in the prior year.
Stuart.
Leave it to you. Thank you that going forward. Our ethanol business is currently running at a rate of approximately $3 million to $4 million pre tax loss for the current quarter excluding.
I am.
If we exclude our non cash depreciation charge, it's approximately breakeven.
Refined coal this quarter in the current quarter that we're in.
As it's currently running.
Significantly there are projected to run significantly down from last year's six.
Same quarter, and that's basically due to slowing production still running at a rate that should be profitable on an after tax basis.
Put it all together and we're currently running at a rate.
And again this is a fluid number because of them were in the commodity business, but approximately 35 to 45 cents loss for the current quarter biggest issues, which.
I see so far risks, we will talk about later in the presentation are a corn shortages in rent and waivers.
Terms of cash on the balance sheet that and that is now two and a little over 212 million.
Should this should the shares dropped significantly we still have authorization to buy.
Over 300000 shares and we historically have bought on Deps, we continue to look for opportunities in the ethanol field.
But currently profits are going down a lot faster than the price at the plants and we would be interested in.
And there is nothing eminent we look we always look for opportunities outside of our field.
Well, we can where we feel we can use our expertise we continue to do that but again, we have nothing imminent.
Our cash is being currently invested in short term securities.
And that has brought some income toward to our balance sheet.
All right.
All right into our income statement I'll now turn it over to our CEO . So far has been tough further on on the overall business. Thank you.
Good morning, everybody. This is <unk> I'll keep my remarks brief as I mentioned in a previous call plus bought a challenging environment has continued in the second quarter.
And now it has continue continued into the third quarter. The company is creating some whatever if you will do rather than later.
And we can delay the planting of corn and uncertainty.
I think regarding the expected going to use and I expect that delayed the harvest.
We have struggled to gain adequate life of corn and how could it be installed Greta.
Our non product so I'm going to continue to be instructed Google on availability of good Phil.
What are the reason, we wouldn't be facing a loss in the <unk>.
2019, as Stuart mentioned earlier.
On top of that we are experiencing continued uncertainty because of the dispute and the smaller they find the exemption recently approved 31 small refund. These attempts and effectively that you will see by 1.4 billion gallons.
Oh, the obligations required under Dodd, then you will fuel dependent.
Yeah also founded albeit what I'll call. It 2016, and 2017 totaling 2.6 billion gallons. These via rather than those that have been in the news demand for ethanol and a drop in price, which led to the decline in the crash, Matt margin as Doug mentioned I don't know yet so.
After bucksport, what ready healthy last year.
I'll talk to me at least 1.7 billion gallon, but during the first six months of 2019 explode as Bill said 160.
Million gallon compared to 932 million gallons during the same period last year.
But I was in Canada, and India over the top to the importers.
Ethanol exports out of running behind last year's volume and we expect that ethanol export will be below last year's level, you would continue to bid on sort of.
We believe that they had a dispute with other dogs exports of ethanol will increase as more countries will be begin to blend ethanol into the other fuel supplies, because we got to be a growing concern about equality.
That's not start last week report.
Do you.
385 billion at 385000 Battle and the stock ended with 22.98 million beds falling below 23 million battle for the first time in a nearly two months have gone into that he was a reduction in these last week.
<unk>, the one <unk>, one and one point or 288 million barrels a day rebounding from the four month low in the previous week.
But a reduction of about 30% less during the same week last week last year.
As far as concerned about the distillate grant in the first six month of 2019 exposure fell slightly to approximately 5.35 million metric tons.
Compared to 5.6 million metric tons in the past six month of 2018.
According to U.S.D.A. This that's the direction the reduction of 5% how I want to be the export to Mexico increased 3% as you know that they had a dispute with a dog with Mexico, Vietnam, 2% and South go do you have 10% during the first six month of 2019, while exports, Thailand up 55% and 34% respectively.
Mexico, Vietnam, South Korea, Thailand, and pelkey, what the top five destination.
And <unk> are currently planning at approximately 80% to 90% of the pool in value.
We believe that lead to new markets remain the same in the near future unless dinos data because the abuse or eliminated.
As we mentioned that many of them article on the corn crops is projected to yield approximately 13.9 billion bushels I've gone through August 2019, U.S. The airport cost report problem are flaunting 90 million acres of corn and estimated going you is 169.5 would fund it.
Well, it's going to be some improved slightly with 57% in excellent condition, but still at a time when you have a low gardening <unk>. According to the U.S. do you have the full.
At this time last year to 68% of the corn wasn't relented.
They did in the good to excellent condition, but gotti out for 2019 and 20 is expected to be 2.2, 0.18 1 billion bushels. According to U.S. B.
But due to heavy rain and flooding the planting season was delayed and many it because what blunted.
But I'm very late I'm not at all as I mentioned previously we have so I'm going to be an adequate supply of the pool and we have not we have not seen this kind of situation during the last 10 years, including the draw it up 2012.
[noise], let me discuss little bit about natural gas as you'll note that natural gas is also very important but off.
As far as prices are expected to stay stable automated drop mode as as to what is going to be new England could eat the expenses. These expenses will be factoring out industry or what all profitability going forward.
As far as concerned about how about the capital projects.
During 2019, we made total capital investment of approximately $1.4 million at our consolidated ethanol plants. We estimated two to 4 million up it doesn't rule month, excluding any maintenance and secular shutdown expenses this year.
At this time, we have no major fraud that said you would.
As I mentioned previously in spite of very challenging operating environment throughout the year.
Claude logistical problems or Thats, an interruption some positive on the exemption and play a dispute lacks the labels and the profit there by the second quarter, often side and that has $212 million cash and those that [noise].
I will get back to give the floor back those doors for any additional comments to what thank you. Thank you so far.
In conclusion, we drastically outperformed <unk> most of the industry during the quarter.
But better in a more challenging time that notwithstanding time I can remember.
Corn supply and low RIN prices are a current problem and they're going to cause difficulty in our profitability in the next quarter. We so far mentioned, we still have a large cash balances and and the ability to not just survive, but to possibly have opportunity said that other people are half cash to take advantage of opportunities that other people might not in terms of long term. We feel we have the best plants in the business. Most importantly, we feel we have the best people and we think that's all going to be needed to get through these difficult times amount outweigh the form open to questions.
[noise].
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One moment. Please for your first question.
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Our first question comes from the line of avail Molchan off with Raymond James. Please go ahead.
Hello, guys. Thanks for.
Thanks for taking the question and I appreciate the color.
On a macro perspective on the market. So you said you have a large cash balance and indeed you do.
You've also said that right now or you've indicated that right now is one of the worst ethanol industry conditions in modern history.
What would prevent you from.
Taking advantage of your under.
Under Levered balance sheet, and deploying some of that cash to pickup assets, many of which I imagine under the current circumstances are distressed.
You are 100% right that a lot or just for us, but the prices of the large fagan I see on plants in the corn belt.
What we have and what we are interested in possibly looking that.
Our have not gone down near as much as.
We have not gone down significantly Lacy, asking price and we have looked and we've been talking to at least one party and.
We just can't justify the current price that's being asked for those type plants now there are a lot of plants out there for sale at very very inexpensive prices, but their shoes, where we've we've tried to be the premium player in this industry and we're pretty much stuck to our knitting.
When we've gotten away from that it hasn't worked out so well so.
If we do see something of that nature and the price was right. We were we would definitely.
Pay very very close attention to and possibly try to buy it but we have not seen anything that governments, all those criterias seen everything, but the price being right at least once.
But that's the biggest part of surprise spent right.
Especially if we're going to buy something loosing money.
Right. So what do you attribute this so what you've described as a bid ask spread that's that's very wide for these assets why do you think that is is it because.
People are expecting the trade war with China, too and and everything is going to go back to normal.
I think I think there there is a couple of things that people are possibly expecting there there's been talk of rent adjustments trumps talked about it people competing against Trump certainly.
We have talked about being in favor of the ethanol business. So if if something of that nature would happen that would help us a lot.
The trade war would help us slightly and didn't have it would help our DDG a lot. It would help ethanol exports a lot, but the biggest issue that I see right now and so far I'll, let him follow up on this is corn supply, which we don't know what the harvest is going to be this fall, but right now corners very tight in South Dakota.
There's been articles written about it.
And the second the and that just doesn't go away because China.
It's settled so lets have far expand on that yeah, I think well I think the problem, we having in that sounds good.
Oh, Falk pharma own so I won't be 9% of the.
And elevators on only 21% of the cone. According to U.S. did report on June 1st which is new to board is expected sometime in September .
So the farmers are looking at the corn price when it was a full 50 they were looking at $5 and now phones continue to drop so hoping that wont bicycle going back again at least to flow through the <unk>.
Then they will pick it out and said so it's not that it is I'm at $410 million.
You know bushels off quite a lot since total storage and new new harvest will be coming at this time still a 57% of the harvest is good to excellent in South Dakota, but.
But the problem. We are experiencing is farmers are not selling and then.
Elevators don't have much that the reason is we see it is kind of.
A shortage of supply of the coupon or when.
I mentioned that even we have not seen that the drought time at that time, the corn price was still very high and ethanol was also high but the problem was willing to sell at that time, because they're able to getting six $7 corn. So they were happy with it but now they see it could be 40 to 50. So they are just not selling it. So that's what is causing the problem with the really the supply of the born in that area, but on the other hand, if you look at in Illinois, It's only 45% of the phone is owned by the.
Farmers and so.
That is only available but you have.
To pay a little bit up so that's a little bit different situation than Illinois.
So degree at all so that's really the concern we have.
Okay and then just one last question for me on.
In the renewable fuel standard statue, it's going back to 22007.
It says explicitly that we we have to have 15 billion gallons of corn ethanol blending.
In this country and that obviously has that law has not changed at all.
Given the the EPA refinery waivers.
Do you have reason to doubt whether we are in fact, the industry is in fact going to be blending 15 billion gallons in 2019 and 2020.
My opinion is we we are going to make it so we're going to have to blend it the problem being we all built our plants based on the rent and we put the industry put billions into these plants and we built our plants based on that 15 billion number in the capacities 15 billion. The only way the industry won't be and there is a real possibility I shouldnt have said it so quickly that we will be things stay the way. They are there will be some shortages and there'll be some plants closing down some of them probably for a long long time, and if that happens and then the industry probably will get back into.
Supply and demand equilibrium and and then prices should go up in the usual supply demand prices of ethanol should go up but.
At the moment I think the industry is very disappointed that the laws and our opinion is not being followed and and as you mentioned that it's a lot 15 billion gallons are supposed to be blended using.
Small refinery exemptions to lower that required number and it's very disappointing to to not just me, but all ethanol producers.
Right. So are we going to get to blend 15 billion gallons.
This year in your view that it's up to Trump or where there are they're going to require in my opinion. No party you haven't different answer my opinion, I know you're not going to require it.
I I think it will be tough given the situation, which we are facing right now so effectively there to do that in billion for 13.6, because by taking away 1.4 billion.
Garland and as you probably already know that is Oh splawn set all the lease some of them starting dawn as far as information, which I have is that almost 760 million gallons of ethanol plants are already so dawn. So so that's also reduction in total production will go down and so so situation is at this time.
Is different.
And change.
And we do not know as you know we are in the commodity market to model. It will maybe a different different so but it looks like a I don't think we will be able to blend 15 billion gallons. This year.
Okay I appreciate it.
Thank you.
Once again to queue up for a question. Please press one four on your telephone keypad.
Our next question comes from the line of Chris Kerry with singular research. Please go ahead Sir.
Hi, how how our on our exports.
To Brazil, or India, and Canada this quarter and.
And what.
How are they with this coming quarter I mean do you see.
You see growth in those numbers or are they still declining.
Thanks.
But as the lease was $419 million a gallon was exported through January through June and MBS was 115 million one nine was exported.
Generally to June and if you look at the last year same period, but as deal about 343 million gallons was exported. So that is certainly drop but last year, India was 74 million.
Exported which is.
And compared to this year 115 million gallons exported. So there is increase in India gallons, but there is a huge we choose to drop to Brazilian gallons. This year.
Okay, Thanks and.
Yes, and then.
As far as China is concerned do you see any.
You see any openings there will they.
Hi, Manny ethanol.
I think as you know China has said that they wanted to blend 10%.
Bye.
But.
Given this upgrade water, which we're going through a less this is as our China is not going to really hold any ethanol and even if they tried to import there's going to be heavy tariff and that really does not encourage any.
Export so that's the main concern we have so.
So far this this year in China, we see very little export if there is any compared to last year. It was about same period about 54 million gallons exported. So it's really got worse than last year.
Export to China.
Okay.
And then one thing for those the section 45.
Text.
Tax cut for the for the coal business.
How long how long does those last.
They last for two more years, a little over two more years.
Production for two more years, we can carry them forward up to 20 years correct. Thank you.
Okay, Alright, 20 to ours.
It's how long we can we have to use whatever we generate.
Okay.
Great. Thanks, Yeah, that's the thought thought.
Okay. Yeah. Thank you for the call for questions.
And we have no further questions at this time I will turn it over back to you Mr. rose.
Yeah, we'd like to thank everyone for listening and we'll talk to you next quarter. Thank you so much bye.
Thank you everybody bye bye.
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