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REX American Resources Corp (REX) Q4 2019 Earnings Call Transcript

By Motley Fool Transcribers - Mar 26, 2020 at 2:30PM

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REX earnings call for the period ending January 31, 2020.

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REX American Resources Corp (REX 6.27%)
Q4 2019 Earnings Call
Mar 26, 2020, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome to the REX American Resources Fiscal 2019 Fourth Quarter Conference Call. [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 fourth quarter conference call. We'll get to our presentation and comments momentarily as well as your question-and-answer 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 risks and uncertainties within the meanings 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 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 increased approximately 6.7%, primarily reflecting higher year-over-over ethanol pricing. Sales were based upon 65.9 million gallons this year versus 72.6 million gallons in the prior year fourth quarter. Sales for the full year were based upon 235.3 million gallons this year versus 285.8 million gallons in the prior year. The reduced ethanol gallons were primarily at the NuGen plant due to the impact of the wet weather interrupting rail service in the spring and ultimately fewer corn acres planted near the facility and the resulting impact on affordable corn in that area.

Gross profit for the ethanol and by-products segment increased for the fourth quarter from $5.4 million to $8.1 million, primarily due to improved crush spreads in the early part of the fourth quarter, which fell off as the quarter progressed. The refined coal segment had a gross loss of $1.5 million for this year's fourth quarter versus $3.2 million for the prior year with the decrease reflecting lower demand at the facility.

SG&A expense increased for the fourth quarter from $4.5 million to $5.6 million, largely due to higher ethanol freight charges recorded in SG&A due to certain contract terms. The Company recorded income from its unconsolidated equity investment of $1 million for the fourth quarter of this year versus the loss of $646,000 in the prior year. This improvement is consistent with ethanol industry conditions during those quarters.

We recognized tax benefit of $3.4 million in this year's fourth quarter versus a benefit of $4.6 million in the prior year's fourth quarter. The refined coal segment contributed a benefit of $1.5 million this year versus $4.8 million in the prior year fourth quarter, reflecting the aforementioned lower demand at the facility. This resulted in net income for the fourth quarter increasing from $1.4 million to $4.4 million and the diluted earnings per share increasing from $0.17 to $0.70.

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

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

Thank you, Doug. During the current quarter, ethanol, the whole operation is running at a loss, mostly caused by ethanol. Among the reasons that ethanol is running at a loss was a bad harvest in part of the country, as Doug explained. Low oil prices, low ethanol prices, COVID-19 outbreak -- resulting in low crush spread. In terms of refined coal, the plants are running -- currently running idle. We believe that's due to low natural gas prices and lower-than-expected demand. The price of coal now in our opinion is making it uneconomical to run the refined coal operation.

On the good side of that, we have no need for the tax credits at this time. So, it's not something that would definitely need running. In terms of our Company itself, we saved our cash, which currently looks like a very, very good move. Consolidated cash is about $205 million. Uses of this cash, which we're now -- we're certainly now actively looking at include possible buybacks, about 350,000 shares remain authorized. Right now, our stock is selling at a price that possibly makes that attractive, depending where it is on any given day.

We're also looking at carbon capture possibilities in Illinois. We're still always looking at new businesses. This is the same company that 10 years ago sold TVs. So, we're certainly capable if this is prolonged in the ethanol business of making a pivot. And we're looking if an ethanol plant -- a very good word comes along at a very bargain price, we would consider it.

Zafar Rizvi, our Chief Executive Officer, will now discuss further the ethanol business and the overall business. Thank you.

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

Thank you, Stuart. Good morning, everybody. As I mentioned in our previous three calls, a challenging environment has continued throughout the last year. The Company faced several issues due to weather-related problems, which delayed the planting of corn and resulted in an unexpected delay in the harvest. Commodity prices in 2019 was subject to significant volatility. We've struggled to obtain an adequate supply of corn at NuGen facility in South Dakota, where production has fallen off historic levels and resulted in the higher last corn basis. Our production at this plant was interrupted, including no operation in October due to corn availability.

We entered fiscal 2020 facing continued challenges, including the recent decline in the crude and ethanol market, a decline in the price, and the emergence of the COVID-19 pandemic, all of which resulted in decrease in the fuel demand and the negative impact on the crush margins. The federal government and various state governments are issuing advisory for social distance and working remotely from home, if possible. We are taking every steps to keep our employees safe and are following Center for Disease Control and Prevention and state and federal guideline.

As I mentioned previously, our NuGen plant faced many challenges last fiscal year in response to COVID-19 and the challenging industry environment, we decided last week to keep the plant [Indecipherable] until the threat of COVID-19 is reduced and the crush margin increased. We are in the process of evaluating further to take similar steps for One Earth Energy since the Governor of Illinois has issued stay at home orders and the crush margin has declined.

That's largely we are expecting a loss in the ethanol segment in the first and probably second quarter of 2020, if the threat of COVID-19 is not diminished and market conditions will not improve. On top of these challenges, we are experiencing continued uncertainty because of the trade disputes and the small refinery exemption. In 2019, ethanol export decreased to [Phonetic] 1.5 billion gallon compared to 1.7 billion gallon in 2018. Total ethanol production in 2019 was 15.8 billion gallons compared to 16.1 billion gallons in 2018. U.S. export of distiller grains in 2019 was 10.79 million metric tons, down 9.23% from 2018.

Let me discuss a little bit about what else we are doing as Stuart mentioned earlier. We are working with the University of Illinois to explore a carbon sequestration project at One Earth Energy. The plant produces approximately 500,000 ton of very clean carbon dioxide. Geologically mapping characterization and modeling have been demonstrated that storage potential in the Mt. Simon storage complex in the density [Phonetic] of the One Earth Energy facility is expected to have excellent reservoir quality. The Mt. Mt. Simon Sandstones are a proven storage reservoir according to University of Illinois analysis.

We have completed a feasibility study, conducting seismic testing, and have purchased extra land for the project. However, we are in the very early stage of this project. The University of Illinois has applied for the grant, and we are in the process of removing state and federal laws for bonding [Phonetic]. At this very beginning stage, we cannot predict yet whether we will be able to implement this carbon sequestration project.

In summary, in spite of very difficult and challenging environment, we were still able to produce a net profit for the year as well as the fourth quarter for the ethanol segment.

I will give back the floor to Stuart Rose for his additional comments. Stuart?

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

Thank you. In conclusion, we're going through difficult times. It's probably as bad as I've ever seen in the ethanol business. With corn prices and corn availability, oil going down, COVID-19, a lot of things hitting us at the same time, but we have an experienced management team. We know how to pivot when we have to. We have lots of cash. We have what we feel is the best people to handle these times and we will do our best to handle these times. We hope to come out it better than ever. We should -- but we'll see in these uncertain times. It's like I said, very difficult right now.

Now, I'll leave the floor open to questions.

Questions and Answers:


Thank you. [Operator Instructions] And our first question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Pavel Molchanov -- Raymond James -- Analyst

Hello, good morning. Thanks for taking the question. These are interesting times to say the least. Since everything seems to revolve around the pandemic these days, I thought I would ask about what several other ethanol companies have started to do, which is repurpose or at least partially begin to use their ethanol plants to supply industrial alcohol for the manufacturing of hand sanitizer as per the treasury's emergency authorization from last week. Do you have any interest in doing that at your facility?

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

Zafar, do you want to answer?

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

Yeah. Well I think -- let me say that we are looking into this, but we need to make sure we follow the FDA SOP, which clearly there's a guideline and we have to register with the FDA to make sure get the licence. We're also looking at some of the pharmacy founders who can produce this under their licence, but -- and also we have [Indecipherable] approximately 8,500 gallons to some other third-party to produce sanitizers for the hands. But at this stage, I think, certainly, there is some demand and we are looking into it, but as far as concerned, a lot of gallons will be utilized. I don't think that's going to be so many gallons of ethanol will be utilized because you can see we -- I mean, One Earth Energy, which we sold these gallons at this time. It's an 150 million-gallon plant and we just sold 8,500 gallons so far. So yes, we will be looking into it. But at this stage, we do not know how that business is going to be turned out.

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

We will do what we can if needed, if any -- and we are working on talking to hand sanitizers -- companies. But so far, just said anyone that thinks that's going to make any difference on the bottom line, I would caution them that it will be very, very minimal. We make millions and millions of gallons. We're taking about buying hundreds and thousands of gallons at most. There's no shortage of ethanol and people that will sell it. And the real problem is getting the bottles and getting the licences and all the stuffs Zafar just described it. And we are -- we want to do what we can to help and we do -- we will do, but don't expect that to hit many significant material change to our forecast, which we just went over.

Pavel Molchanov -- Raymond James -- Analyst

Understood. One more on kind of COVID-related question. You guys, of course, are in Ohio, which is one of the states under lock-down and more and more we are seeing the lock-down and stay at home order at the state level. To your knowledge, are any of the ethanol production facilities, either the ones you operate or other plants, are any of them are forced to shut down because of the lock-down just across the industry?

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


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

I think that basically there is some of the reason we are considering at One Earth Energy, because as you know Illinois has locked down, but on the same time the margins are affecting due to COVID-19 and it's not also economically to produce ethanol at $0.99 or $0.85 when the corn is $3.51. So I think there is no margin also, but we are also trying to follow the guideline, what exactly every state or every even cities are issuing those. So in both the locations, we have clear cut instruction and guideline where there should be a distance they've had and how close they were working and what policies are implemented because safety of our employees is the most important than anything else and we are taking all of those steps. Yes, certainly, this is affecting, but the major impact of not only COVID-19 is all of the ethanol pricing and the gasoline pricing and that leading to the shrinking margin. So, that's really happening.

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

Pavel, as you know, a lot of companies have announced shutdowns and many others I'm sure considering shutdowns. At this point, whether it was the state causing the shut down or the margins, it's the same effect. We can't make money at this cycle.

Pavel Molchanov -- Raymond James -- Analyst

Yeah. Last question for me about this one on a separate topic. So, it's been about three months since the Phase 1 trade deal with China. Obviously, a lot has happened since then in China and everywhere else. To your understanding, is China buying any U.S. ethanol at this point?

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

No, we have not seen really any even rumors in the market that China is buying any of ethanol or DDG. But we heard previously one time that China's buying DDG, but later on, find out that was not Chinese who were buying the DDG. But there certainly the rumors out and going on to that China is buying the corn. And that's the reason yesterday I think the corn price was a little bit gone higher because there was -- the China is trying to buy 1 million metric ton. And -- but as the corn price goes up and ethanol price is decreasing, consistent with crude, it really does not help unless we can also sell ethanol price also showed up [Phonetic] the same way. But it's really -- no, we have not seen any ethanol purchase from China at this stage.

Pavel Molchanov -- Raymond James -- Analyst

Thank you guys. Stay safe.

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

Thank you.

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

Thanks, Pavel.


[Operator Instructions]

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

There's no more questions. I thank everyone for listening today and hopefully things will get better in the future. We appreciate your sticking with us, whoever is sticking with us. Thank you very much. Bye.

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

Thank you, everyone. Bye-bye.


[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

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

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

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

Pavel Molchanov -- Raymond James -- Analyst

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