Doug Bruggeman - CFO Stuart Rose - Executive Chairman of the Board Zafar Rizvi - CEO.

Greg Eisen - Singular Research Allen Klee - Sidoti.

Ladies and gentleman, thank you for standing by. Welcome to the REX American Resources Fourth 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 will now turn the conference over to Doug Bruggeman, CFO.

Please go ahead, sir..

Good morning and thank you for joining REX American Resources’ fiscal 2016 fourth 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 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 is 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 pleased to report its fourth quarter earnings results are most profitable for the year.

Sales for the quarter increased approximately 13% primarily due to increased ethanol pricing and production. Sales were based upon 64.4 million gallons for this year’s fourth quarter versus 61.1 million in the prior year.

Sales increased approximately 4% for the full 2016 fiscal year, primarily reflecting increased ethanol gallons sold offset by lower DDG pricing. Gross profit increased from $9.2 million to $25.2 million for the fourth quarter as the crush spread was approximately $0.40 in the current year versus approximately $0.16 in the prior year.

Gross profit for the full 2016 fiscal year was $71 million versus $50.8 million in the prior year, reflecting the crush spread was approximately $0.25 this year versus approximately $0.17 last year. DDG pricing was lower both for the quarter and year.

SG&A increased in the fourth quarter from $4.2 million to $7.1 million, primarily reflecting increased railcar cost and higher incentive compensation from the increased earnings. Equity method income for the fourth quarter increased from $1.1 million in fiscal 2015 to $2.9 million reflecting the improved industry dynamics for the fourth quarter.

For the year, equity method income was $6.1 million versus $9 million in the prior year, primarily due to recognizing $2.9 million from the Patriot facility in the prior year prior to its sale. Our tax rate for fiscal 2016 was approximately 35% versus approximately 31% in the prior year net of non-controlling interest.

The prior year tax rate was impacted by a lowered state tax rate and its impact on deferred assets. Our net income for the quarter increased by 235% to $12.4 million versus $3.7 million in the prior year.

Our net income for the year also increased from $31.4 million to $32.3 million despite in the prior year benefitting from the $10.4 million pre-tax gain from the Patriot sale. Our diluted earnings per share for the fourth quarter was $1.88 versus $0.64 last year and $4.91 for fiscal 2016 versus $4.30 for the prior year.

I’ll now turn the call over to Stuart for his comments..

Thank you, Doug. Going forward, we expect first quarter, or we’re currently running at a rate of first quarter earnings at this point in time look better than they were in last year’s corresponding first quarter.

We had some benefits, good corn availability; there is a parent stability at the moment on the RINs, which were increased to 15 billion gallons this year. Strong export demand which Zafar Rizvi, our CEO will talk about later.

We’re an American made product which should put us in favor and President Trump has talked favorably about the ethanol industry and we also should benefit if there are any tax cuts this year. On the negatives going forward, low DDG prices continue to be a problem, China demand is off.

They were a good customer in the past for DDGs and that remains an issue. Oil prices are still low which makes us less competitive to the oil industry. This pressure in the Trump administration to change the RIN program, so far that has not happened, but that continues to be a worry.

The Head of the EPA and the energy sector are both from oil states and they may not be as supportive as people – the previous people in those positions. For the remainder of the year, the comparisons do get tougher.

We’re hopeful that will play out like last year with summer driving season, increasing demand for ethanol followed by year-end demand related to the RINs, hitting RIN requirements, that’s how it went last year.

We again hope because this year should that not happen, should margins remain where they are now, then our comparisons become very, very difficult after the first quarter. Rex currently has cash of $188.6 million including $79.5 million at the parent level and no debt.

Our uses in the past had been to repurchase large amounts of stock, we will look at that opportunistically and should the opportunity arise, we certainly have the ability to go that route. We’re also looking at industrial and energy products – projects where we can use our plant management capabilities and continue to look at that.

The other thing that we’ve been always are looking for is to purchase successful ethanol plants, we continue to look at that, but we have nothing imminent in that particular area.

The biggest place where we can expand and Zafar Rizvi now is going to talk a little bit about the expansion of our ethanol plants and the international demand for ethanol which even though oil prices are low seems to keep increasing. Again, I’ll turn it over to Zafar to talk about these two things. Thank you..

Good morning everybody. As you know, we have started some investment in – capital investment to increase our production last year. During the financial year 2016 we made a total capital investment of approximately $114.2 million.

We have started new capital investment project at our consolidated plants to increase our expected ethanol production to 150 million gallon at both our consolidated location. We plan to invest $10 million to $15 million at each location. NuGen has reached approximately 135 million gallons and One Earth 125 million gallons.

We also have received a final pathway approval for the EPA to increase our production. NuGen also qualified for carbon intensity for California ethanol shipment. As we continue to increase our ethanol production, we will continue to monitor gross margins. NuGen is also producing export grade.

By the way this is the first time we have produced export grade due to our capital investment last year. NuGen sold over 8.2 million gallon export grade during last year November and December. So, we believe exports certainly continue to increase U.S.

ethanol export of more than 1 billion gallons in 2016 was the second highest on record according to EIA report. Overall, Brazil, Canada, China ranked as the top three destinations in 2016. Ethanol export were estimated 6.9% of ethanol production and valued at $2.2 billion in 2016, up 13% from 2015 according to RFA.

China temporarily reduced its ethanol tariff in 2016 from 30% to 5%, but the tariff rose back to 30% at the start of 2017. Due to an increase in the tariff, China may not reach its peak level ethanol export again in these remaining years. We expect ethanol export will increase to Brazil, Canada and Mexico and India.

Mexico will potentially replace MTBE ethanol export in January this year were 124 million gallons compared to January 2016 87 million gallons. Ethanol export in February to Brazil was 67.9 million gallon compared to last year total export was about 67 million gallons.

And we also see some export is increasing in February and March and we believe that this will continue to increase. If the export levels stay the same way, probably it will be close to 1.4 billion gallon will be exported this year.

Stuart?.

Thank you. Thank you. In conclusion, again in 2017, in the fourth quarter of 2017 we significantly outperformed the ethanol industry. We had a large increase in earnings in the fourth quarter, 248%, the reasons are pretty easy to understand.

We have great plants, Fagen, ICM plants that are increasing their capacity; we’re running well above their original nameplate and increasing that capacity as we go along. Good locations with great corn supply and very good rail.

The most important thing that separates us and why we’d really consider ourselves among the premier ethanol plants in the country is we have – we feel we have very, very – the best people. Our people have been with us, very, very little turnover.

They do their jobs better than we think anyone in the industry and those same people, those same plants will be carrying forward into the future, which gives us great optimism for the foreseeable future. With that, I’d like to turn it over to questions.

Operator?.

[Operator Instructions] And our first question comes from the line of [Robert Richard, Jr.] [ph] with [Weatherbie] Capital. Please go ahead with your questions..

Hi folks, congratulations on a great result. It’s great to see the progress that you’re making and good – great news about NuGen in California, it’s pretty exciting.

Just a quick question on, given that you have $180 million plus of cash on the balance sheet today, how are you thinking about capital allocation and historically it’s really been done through share purchases.

Can you share what your view of the stock’s intrinsic value is?.

We never set the intrinsic value, but as you pointed out, we have a very, very high return on working assets, our return on cash is very low. So in the past and I think this is one of the things we’ve been pretty much have done as well as anyone in the country.

When the share price – and again that’s opportunistically when the share price is down we’ll create a floor for the stock and we’ve done that year-in, year-out and then we reduced the number of share and when things look good the stock tends to be better than the market does and that’s pretty much been our formula, we’re going to stick with that.

We always are looking for acquisitions. We’ve expanded our search to energy and industrial products outside of the ethanol industry, so we’ll see what happens. We are always looking for ethanol plants, but we want to buy good ethanol plants, we know which ones are the good ones at this point in time.

Most of the good ones have made a lot of money over the last few years, they’re not – they are most – we know of none at this point in time that are up for sale at a price that we’ll consider a good price for our shareholders.

But again, and the biggest thing we’re doing and Zafar went over it very, very well as we are increasing the – and this is the best thing we can do for our shareholders.

And at least the best bang for the buck is increasing the capacity of our existing plants and as we do that, as long as the industry remains profitable, be increasing our earnings and again that’s what we’re looking at.

Also it doesn’t hurt that interest rates are going up in our case, because we should be able to get a little bit better return on our – a little bit better interest income on our cash. Thank you..

Thank you. If I could just kind of have a quick follow-up. I mean, you said you’ve purchased some opportunistically, I think that you’ve done a great job of doing that historically.

I mean, when you say opportunistically, is there a way that you look at it? Is it at a certain discount to your view of intrinsic value?.

Again, we – the book value is a big thing that we look at, but that’s not the only thing we look at, but it – and a lot of it has to do with, again, when – there has been periods where management and they were not willing to throw that number out on that table, but we look at book value, we look at how we can increase our earnings per share.

We probably have done this better than anyone in the – at least percentagewise in the United States.

But we have never had a fixed number of what that we’ve thrown out there and say, if it hits this price we’re going to buy, we’ve always maintained the flexibility because you don’t know what’s – when the stock drops you don’t know if it’s because if it’s a fluke or you can never just say it could be the industry goes by the wayside for example then the stock would deserve to sell at below book value which none of us expect to have happened.

And it would be crazy if that happened, but I’m just throwing something out there, so you never set a price out there, but we’ve been very, very good at when the market is undervalued our stock, to buying that stock, create a floor for our shareholders and when the earnings went up, increase our earnings per share to – which has been one of the reasons, not the only reason, also great management, great plants, but one of the reasons why our stock has done well over a long period of years..

Yes, I think you guys have been great, so very much appreciate that and appreciate the response. Just one last question if I could.

If you could just expand our where you’re looking in terms of just getting sort of the large cash balance and capital allocation being increasingly important from here? You mentioned M&A outside of ethanol in industrial and energy plants..

Yes..

Can you just sort of expand on the types of areas within industrial and energy that you’d be considering?.

Pollution control, pollution control would be something that would be interesting to us. Ethanol by its own nature controls pollution by increasing the octane level, so that would be of interest to us.

We have, but because of low oil prices have gone nowhere with it, but we do have some patents and some interest and steaming heavy oil is something that we’ve looked at in the past and again we have nothing imminent in that area, but those are just a couple of things outside of our normal business that we consider..

Okay, great, thank you very much. I appreciate you answering the questions and congratulations again..

Yes, thank you for the questions..

Our next question comes from the line of Greg Eisen with Singular Research. Please go ahead with your question..

Thanks and good morning.

Could you – I didn’t hear one thing, one key number that was thrown out in the call which was your expectations for you capital spending on the two plants in 2017, could you repeat that please?.

Yes, we plan to spend almost close to $20 million to $30 million this year..

Okay, so that was – okay, that was $10 million to $15 million per plant, I wasn’t sure that that was – if I heard that correctly..

That’s right, $10 million to $15 million per plant..

Understood, understood. Going back to the capital allocation question, you think very highly of the plants that you are invested in, and for each plant you are not 100% owner of those plants, two of them you’re majority owner, two you’re clearly a small minority owner.

It kind of make – and I’m sure you’ve had this question many times, but how would you like to answer today the question of what about buying additional interests in the existing plants? What are the impediments to doing that other than price?.

That they make too much money and people don’t want to sell, we have outstanding offer to buy existing shares of the ones that we have majority interest.

The ones that we have minority interest, again if we could get a good pick and that’s been a great investment for us if the price was available at a price that we felt was good, we’d certainly look at that if they are great plants, very, very good plants and we’d have no objection to increasing our interest if we ever saw the chance at a reasonable price..

Okay and then – at a reasonable price..

Let me add to that. I think of One Earth Energy which we owned 75%, we have a plan out there to – a buyback plan and we’re consistently buying whenever the shares are available and if somebody willing to sell it.

And NuGen, we own 99.5%, so there is – few farmers out there, we like to keep these farmers because they are bringing the bone and it’s a good community relations..

Understood, understood. Looking at the capacity of the plants and you touched on that and again that was the part that my ear was away from the phone.

Could you just repeat what your expectations or where you want to bring the capacity up to for those two plants in 2017?.

Our plants are running now, NuGen is running close to 135 million gallons and One Earth Energy is running close to 125 million gallons at annual rate. Our goal is to bring it to them close to 150 million gallons for annual rate, that’s what we are looking for..

Do you believe….

As you know, while we will be doing this capital investment we’re certainly going to find some bottlenecks, which we – while we will be doing all these investment and that’s why we – as we grow, as we expand our ethanol consumption, we try to find out all those bottlenecks so that we can increase the production..

Okay, so at $20 million to $30 million of capital spending, your goal will be to end up with 150 million of capacity, by – sometime by the end of next year if there were no bottlenecks, am I correct in understanding that would be the….

We are already finding some bottlenecks, but we are trying to work through those by the end of this year, that’s what our goal is..

By the end of 2017? Sure. And I guess one more question about the expansion capacity. You said earlier that the really good plants are making a lot of money and the price for them would be exorbitantly high, so it wouldn’t make sense to buy them.

Is there any logic to buying an underperforming plant that happens to be in a really good location for access to both corn and rail, but if it was underperforming and spending the money to bring it up to speed, to bring it to your standards, is that a strategy?.

We would never say never but generally those underperforming plants continue to be under – people are trying to do that and generally they stay underperforming. No technology that I know of has worked are the ones that you see out there Delta T and Mercy [ph] plants, both of those are technology never works, it’s almost like starting all over again.

There are some advantages, people that do buy these existing plants get to grandfather the RINs in, but it really – when the industry turns marginal or turns less profitable, those plants inevitably get – the production gets slowed down or they get shutdown and it’s – we think the better strategy.

And again, I would never say never, but we think the better strategy and the less-expensive strategy and the smarter strategy is to increase the capacity of our good plants and to look for other good plants.

But again we don’t knock the strategy of other people that do that and during good times that works out, but during bad times those are the ones that have real problems and cause disruptions in all sorts of ways..

Great, great. Okay, I’ll let someone else go, thank you very much..

Sure..

[Operator Instructions] Our next question is a follow-up from Robert Richard, Jr. with Weatherbie Capital. Please proceed with your question..

Hi Rob..

Hi, just another quick follow-up.

Can you just – in the past you’ve sold plants and presumably if you’re not willing to buy plants at going market – prevailing market prices, would you consider selling the plants that you guys currently own?.

No, we have sold plants, we’ve bought plants, we’ve done everything pretty much over the years. As I’ve always said in the past, our company is owned by shareholders and we do what’s best, what we think is best for shareholders.

And would we sell plants? We really like this business, we really enjoy what we do, so – but if someone throw a huge offer out there for our plants, we would try to do what’s best for shareholders, let’s say, long-term best for shareholders and that’s the way we run our company..

And do you think of that in terms of a – sort of a dollar per nameplate – a dollar capacity or how do you think [ph]?.

Absolutely not, the only plants we sold recently were minority interest.

We did – we had sold – in fact the only plants we’ve sold in the long, long time have just been minority interest plants where we did not control the plants and we just went along with whatever price where we just went along with what everyone else wanted to do wasn’t that we think, we thought that that was such a great price that they got, it was fine, but and everyone else wanted to do it, so we went along..

Okay, great, good.

And just on the capacity, can you just talk about you’ve sort of steadily increasing your capacity, debottlenecking for several years now and it seems like it’s a bit more than a onetime event, I guess, do you have a view of where you can get capacity? At what level you can get it to on a multi-year basis?.

I think we’ve started this from late 2015 and it’s almost a year and few months when we started and it takes a lot of time and effort to get the permit from EPA and then after that you start those capital investment and there is delay in receiving the equipments and all those things.

So, it depends on several factors that’s what really – because we have 100 million gallon nameplate and now we’re close to 135 million gallon and 125 million gallon over, say, a month and a half, a year and few months.

So I think this now once we reach to 135 million gallon, we want to go very slowly so that we make sure if we push and not push too hard and break some equipment thus create some kind of problem at the ethanol facilities. We’re bottlenecking and it’s a consistent ongoing valuation and that’s where we slowly try to work and reach to our goals..

Okay, great, I appreciate the color. Can you sort of – given that a lot of your CapEx is focused on these debottlenecking initiatives, and you sort of classify that as growth capital and less capital expenditures.

I guess what – and that’s in that $20 million to $30 million range, what portion of that number is what you call maintenance CapEx?.

I think that will be probably….

…prior to doing these expansions, we typically would have CapEx of about $3 million to $5 million at a plant, so on an annual basis..

That’s right, because due to shutdown, we do full shutdown for every six month. What you call it turnaround..

Okay. Great, I appreciate the color. Thank you very much again..

Thank you again, I appreciate it..

[Operator Instructions].

If there are no more questions, I’d just like to thank everyone for attending the conference call. And we very, very much appreciate your taking the time to listen to us. And thank you again..

Pardon me, this is the operator, we did have our last question, it’s coming from the line of Allen Klee with Sidoti. Please go ahead with your question..

Good morning. I know it’s probably too early to tell with great certainty, but what have been some of the takeaways from the new administration regarding their views around ethanol? Thank you..

Well, they have – basically they did review and slow down the final RIN ruling, we’re led to believe that they’re going to stick with the 15 million, 15 billion gallons U.S. RIN requirement.

There has been some talk of switching the requirement down to the retailer or to the blender, I should say, where we certainly are against it, but if that happen, we’ll deal with it, it’s still 15 billion gallons of demand.

So we’ll see what happens to President Trump himself has consistently, as far as we know, supported the ethanol business all the way back from his primary days in Iowa.

There are people in his administration, as I talked about earlier, the EPA Chief and the Secretary of Energy who have not been ethanol supporters, so we don’t know what they – we don’t know if they – we don’t know what’s going to happen with them that’s a negative. The tax cuts would be a great positive for us, we pay full tax rate right now.

So it’s a mixed bag to answer your question, the appointments could be a problem; the President himself we believe is a true ethanol supporter, so we’ll see. And especially, since we’re American made and limit our foreign imports, we really fit what he – and employ Americans, we really fit his agenda in that way so we’ll see what happens..

Thank you very much..

Our name is Rex American Resources for a reason so let’s see what happens..

Thank you..

There are no further questions at this time..

Very good. Well, thank you everyone for listening. We appreciate it very much. Talk to you in a quarter. Bye..

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