REX American Resources Corp (REX) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the REX Stores first-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, please press the 1, followed by the 4, on your telephone. As a reminder, this conference is being recorded Thursday, May 30th, 2002. I would now like to turn the conference over to Mr. Stuart Rose, CEO, and Mr. Doug Bruggeman, vice president of finance. Please go ahead.

Thank you. This announcement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by use of forward-looking terminology such as may, expect, believe, estimate, anticipate, or continue, or the negative thereof or other variations thereon or comparable terminology. Listeners are cautioned that there are risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties include, among other things, the highly competitive nature of the consumer electronics industry, changes in national or regional economies, weather, the effects of terrorism or acts of war on consumer spending patterns, the availability - and the availability of certain products and technological changes.

I'd like to welcome everyone to our first-quarter conference call and again, we're happy to report very nice numbers. I think it's our ninth quarter in a row of double-digit earnings increases. This time, we were up 35%, which again in a tough retail economy, we're very proud of. Earnings per share increased from 28 cents versus 24 cents. We did all this during a very tough retail environment, like I mentioned. Our same-store sales actually declined roughly 9%. The earnings increase was caused through a couple of things. Mostly - first of all, the synthetic fuel partnership that we're invested in. Secondly, we've been able to lower our interest - our inventory levels, and therewith, our interest expense. We've also worked real hard at increasing our high-definition big-screen television sales, which are a little bit higher-margin, which caused our overall business to have a little bit higher margin.

In terms of negatives, we're sort of in the limbo period in our small markets where high-definition is just starting to be broadcast and we expect in the next year all our markets to start getting high-definition TV broadcasts in, or hope that that will happen. Again, it's hard, because of the limbo effect, where we're losing a little bit in our smaller television, on monaural television sales. In fact, that would also have been hit by drastic deflation in items such as DVDs and VCRs, that type of product. That's become commoditized very, very quickly and has hurt our sales.

On the other hand, we've replaced some of that business with much higher-margin big-screen business, and our profits have been doing very well.

At this time, I'd like to leave the conference open to questions.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1, followed by the 4, on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Scott [Cicarelli] with Girard [Clower] Madison. Please go ahead.

Hey, guys, Scott [Cicarelli]. How are you?

Good.

Good. Couple questions here. The first is, you know, when do you think we might see maybe a little bit more momentum on the top line, or are you just kind of in limbo until HD takes over? Is there something else that might be able to jump-start that? That's one.

We have very high hopes. We have not seen it yet, but last year was a very cool summer, so we - if the weather heats up a little bit, we are very, very big in our markets in room air conditioner sales. That's probably our best appliance category. And if that takes off, we've bought in that product. We feel very, very - we're well priced in what we paid for the goods and that should add both to our margins and our sales, if there is some real hot weather. And again, we were up against - last year, we didn't have a lot of hot weather. So far, it's actually been worse than last year, so - at least in May. So again, that could happen anytime.

Then in the fall, I expect people - that's when big screen season hits, and if a fairly decent number of markets actually finish - finish the construction and actually start broadcasting in high definition, that's going to stimulate a lot of excitement in our markets, as we've seen in other bigger markets, and we have high hopes.

On the other hand, we have to still make money one way or another and so we've trimmed our inventories, cut our interest expense, and worked real hard at making money through controlling expenses.

Okay. Thanks.

Thanks, Scott.

Just a quick follow-up here. Can you also - you guys have been able to generate some pretty good gross margins, going - so far. You know, are we able to - do you think we're going to see, you know, similar types of increases in the back half of the year? And then the last part is, store openings, closings. Are you going to close some stores this quarter? You know, what does the balance of the year look like? Thanks.

Okay. In terms of gross margins, again if we get air conditioning, they'll be great for the second quarter. If we don't - that's really a key product. During the third quarter and fourth quarter, we could start running up against these higher margins that you're seeing now. A lot will depend if we can keep selling - if high-definition takes off, that's a higher-margin product. Things will look real good. So again, we're pretty much dependent on doing well in that cat - in that product category.

What was the other part of your question, Scott? Oh, store openings? Right now, we're - right now, we've put - right now, our plans are to work on turning around same-store sales. In my opinion, it's silly to throw a lot of stores out into the market when same-store sales are not increasing. We cannot further dilute management. The way we take our managers is from our existing stores, so our focus right now and our plans are to limit the same-store openings and - or the new store openings, I should say, and concentrate on same-store sales. When you see that turn around, then we'll be ready to announce our next wave of store expansion.

But is it fair to say that we're not going to see any new stores to offset, you know, what's been closed, or should we be looking at kind of a net zero or net minus something?

At this point in time, I would not - we may end up opening one or two, but I wouldn't put that in your numbers, Scott.

Okay. And should we see more closings, then.

We're not planning any more closings through Christmas. Again, that could change, too, depending - depending if a bad store starts losing people and starts eating up management's team and we have a short-term lease. That could change. But at the moment, we have no more store planning - store closings planned through Christmas.

Great. That's helpful. Thanks Stu.

Okay. Thanks Scott, appreciate it.

the next question comes from David Berman with Berman Capital. Please proceed.

Stuart, how are you doing.

Good. How are you, David?

Good. Thank you. Can you just give us a a flavor for the sales, during the quarter? You know, like how did the sales do by month? And also, if you can comment on the - you know, how they did in different locations in different cities.

Doug, do you want to answer that question?

Yeah. The sales were better in April than what they were in February, so to answer that question, they got better toward the end of the quarter.

There really isn't any geographic -

How different? I mean how much better? How -

Marginally better.

Okay.

So . . .

and as far as geographical area, there's no geographical area that's performing, you know, significantly better or worse than another. It's pretty much consistent. You know, you've got individual stores within a market that may perform with respect than another one, but there's not, as I said, any geographical area that we can pinpoint as to -

Can you break out the sales in the quarter by, you know, product category? Like which products were up a percentage, which ones are down a percentage? If you don't have the exact numbers, just roughly?

Well, consistent with what we've been saying, high-definition and projection TVs are clearly our strongest product category. We continue to position ourselves to take advantage of those categories. Ready to assemble furniture also performed very well for the company. That's been another good category. Beyond that, you know, every category probably had negative comp store sales and it was probably pretty consistent amongst all the other categories.

All right. Okay. Thanks, guys.

Okay. Thanks, David.

Ladies and gentlemen, as a reminder, to register a question, please press the 1, followed by the 4.

[Megan] [Rudicil] from Cane Capital Management, please go ahead.

Hey, guys, how are you doing.

Good. How are you.

Good. I got on the call a little bit late. I guess I was - I was going to ask you, you were talking about weather and that you're set up well for - to benefit if we start to see some trends in weather.

Correct.

As far as your store - what's the total store count now?

255.

255. And what is the majority of that geographic location? Northeast?

The place where we do the strongest air conditioning sales is in the northeast, but we're spread out probably - between the south and the northeast, are our two biggest areas of concentration.

So you'd have to really see a heat wave in the -

Yeah. The thing to look for is a heat - if it's hot in New York City, then we're doing - real, real hot in New York City, you can bet we're doing real well, because usually when it gets hot there, it's hot in the northeast.

Okay. And then typically speaking -

The south, a lot of it has central air conditioning. There is some air conditioning sold there, but not near - it doesn't have the big spurts like the northeast does.

Okay. I just have - and in air conditioning as a - inventories are clean there?

More than clean. We have - we bought extremely well there.

And inventories are pretty clean on the HD side, on the TV side.

Very much so. Very much so. There was a big shortage in the industry. We - except for Sony - pretty well cleaned - Sony was really the only one that had good product through the first few months of the year.

Uh-huh.

It's - since then, it's loosened up significantly. Everyone has good product. But our inventory got extremely clean because of the shortages.

And the consumer, will they - are they - did they back off on the HD? Did they - have they cooled off a little bit.

They kept buying and we - as soon as the broadcast comes - eventually, and it's still set for 2007, I expect they'll extend that, but eventually, I don't know, I'm sure most people on the call know it, but the televisions that - the analog televisions that are out there today will no longer work on the -

By 2007?

By 2007, the way it is today. And so that's a huge replacement market, 200 million sets, roughly, give or take a little bit. So -

So that's the longer term play here.

Right.

Is this recycling. But there's no short-term catalyst or -

There's almost a short-term, in some of power markets, negative, because why buy - why spend all that money for a high-definition TV today when you can't even get the signal. But we expect that to be taken care of very shortly, simultaneous with prices coming into a very affordable level of high-definition big screen -

High definition ready big screen today doesn't cost much more than a nonhigh-definition ready big screen.

The channels just aren't turned on.

Correct.

And is there a time on when that - on average -

We hear a fair amount of our markets claim they're going to do it this year. I'll believe it when I see it. They are not - in no hurry, the broadcasters, in our markets, to do this and they're stalling as best - to the best of their abilities because it's double expense without double income to broadcast two different signals.

Okay. And then just two other quick questions.

Sure.

On the air conditioning front, what is that as a percentage of your overall market, of your overall revenue?

Doug, do you have that number? We may have to get back to you on that.

Yeah. I don't have it readily available, but it - for the second quarter, it can run as high as about 20%.

And that's - and the margins there are - what's the margin differential there between TV.

They're the best of anything we sell.

Especially with the good buying.

Yeah.

Okay. And did you guys - did y'all - did you give guidance at the beginning of the call, to reiterate, or -

We don't really give guidance. A couple analysts out them, Scott [Cicarelli], who asked the first question, and David [Shick] is the other one, that do have shipments out there.

Okay. So you're just comfortable with those street estimates?

Yeah. Well, what - what I've seen of those. Especially the first quarter, I think we're right on target.

Okay. Great. All right. Thank you very much for your questions - for your full-time.

Sure.

the next question comes from John Lewis with Gardner Lewis asset management. Please proceed.

hi, John. John?

Mr. Lewis, your line is open.

Sorry, guys. I had my mute button on. I apologize.

That's all right.

I hope you're doing well. Congratulations on another good quarter.

Thanks, John.

You guys are doing well in a tough environment.

Stuart, just a question. It's been probably 12 years, maybe even 15 years, since I've done a lot of work on air conditioners. I remember there being sort of a long-term replacement cycle in that business. I also remember that if it was hot in the first three weeks of June, it could be particularly good. It looks like a long summer at that point to last through. But you kind of need the heat early. Do you have any idea what the replacement cycle looks like?

No, I - we go more by, John, the bottom line is if it's hot, there's more homes than - with the amount of people selling homes and with new - when people leave a home, they generally take the air conditioner with them and they haven't had a lot of - a lot of ability to re- - or a lot of need recently, anyway, to replace them. So if it's hot, I would - if it's hot for an extended two-week period of time, I would expect to sell through our air conditioners.

Right. That's usually the way it goes. So I - it's been a few years since -

But I'd say the replacement cycle from when you studied it has changed a lot because of all the home resales, with the mortgage rates coming down.

Right. I understand. Has there been - has there been a blockbuster years in air conditioners in the last three or four that you know of?

There wasn't last year or the year before. Maybe three years ago.

Okay. Yeah, that sounds kind of right.

and then on big screens and high-definition, is there anything going on with integrating set-top boxes? Is that a potential, and does it matter to you whether people are signing up for satellite or cable? And I guess in the -

We'd much prefer satellite. One, because we sell it, so we make money, not just on the sale, but on residuals. And more than that, satellite now broadcasts in high-definition. Cable is one of those foot - the cable companies are one of the biggest foot-draggers on broadcasting in high definition. They're - they yell and scream digital, but digital is not high definition, and that aggravates me a lot that they sort of trick people into thinking they're going to get high definition, when, in fact, they're just splitting that signal off when they get digital television.

The numbers I'm looking at are saying pretty positive things about the satellite, guys. I have recently switched myself and the picture is unreal on satellite.

Yeah. And they do broadcast a couple of stations in high definition, and we can upgrade the receivers to high definition receivers, that type of thing, so . . .

Okay. All right. Well, congratulations. Any comments you want to make on the energy plays, what you guys have done there, and how maybe that can continue or what your plans are?

Sure. What we've done, we've been fortunate enough to - we've bought into them a few years ago to generate tax credits, and we generated tax credits that the income now is - that we have plenty to sell off and the income for the first quarter was $4.6 million, and that's just pure income. There's - the investment has already been written off, and that should - should go on to 2007, barring anything bad happening like the law changing or something like that.

in terms of what we plan to do forward, we - we have one other partnership that isn't generating income. I expect and hope that to generate - or tax credits, I should say. I expect that to start generating tax credits in a bigger amount sometime this year, and we're working on other - it's a hugely profitable business, and we're working on at least one other investment. If that comes to fruition, these numbers are going to jump up any higher.

That's fabulous. Congratulations.

Thanks, John.

Your next question comes from Jack O'Hara with CWH associates. Please go ahead.

Hi. A couple questions. One is, how are the stores doing in terms of stock out, in the sense that you've done such a good job with the inventories? Is the same store being affected by increased - or on an increased basis being out of stock?

Well, there were a few shortages in the industry, and I - I - not everyone wanted - there might have been some lost business, but, you know, it was an industry-wide problem, which has since been taken care of.

Generally, we have a - I think we have as good an open to buy system as anyone in the country. It's an automatic replenishment system, and our stock outs, our inventory levels, if you look at us versus some of the others, are - we don't shoot for the turns that they do. We shoot - we buy more on a return on investment basis, so our stock outs tend to be less than other people in the industry.

Okay. And on the limited partnership, the synthetic fuel, is there any way that that's predictable? In other words, like in the fourth quarter, I think on a year-over-year basis, it was up 20%. This quarter, it's up 50. Is that because there's more throughput or price -

I think more throughput.

It's not price of the commodity or expense control or whatever they're doing at these plants in Florida.

Unfortunately, we're limited partnerships and can only - but there's no logical reason why production on these won't go up, which then will increase our income. They - the more - the more that our - our biggest partner is North Carolina Power and Light. The more they produce, the more they make. It's as simple as that. And they had a very good first quarter, producing syn fuels, so - but we don't - we can't tell them to go produce more or anything like that. We're strictly a limited partner. We would like to tell them, but they don't have to listen to us. We always tell them to produce more, but they don't always listen.

Yeah. What's the end market for those syn fuels?

Usually utility. Usually a burn plant, a coal plant. It replaces coal.

It replaces coal?

Yeah.

Okay.

The main ingredient is coal.

Okay. Last question. What percentage - like you say you got - you're dealing with some deflation or pretty stiff deflation in VCRs, DVDs.

Audio..

Audio, basically. What percentage of your business is that?

Doug, do you have that number?

Which percentages?

DVD and VCRs, roughly.

It's - it's about eight or nine percent for VC R and D VD.

Okay. So what you'd say, though, is that your unit sales are up but the deflation is just -

Unit sales in DVD are up. Everything is down in VCRs, both price and unit sales.

Yeah. Okay. Thank you, Stuart.

Appreciate your listening.

Okay.

Next question comes from Campbell Gibson with TGT capital. Please proceed.

Hi. It's Todd Turketta, actually. I had two questions.

First, on the buyback, I know that it doesn't like we bought any stock back this quarter. I was wondering if - I know there's been typically no magic level, but now that the stock is back up 25%, is there any more plans to get more aggressive on that front going forward?

The program is out there and as we've shown when the stock - the stock has come down a little bit, and again, we - we earn a good cash position to exercise a buyback, and depending on stock price, we don't obviously announce what price that is, but - but depending on stock price, we - we are in that - we are in the market using the authorized shares that we have.

How many is left?

Over a million shares available in the buy back.

You still have a million left.

Correct.

And the second question, you said, Stuart, the tax credits will be generated. Is that that lawsuit? You expect that second syn fuel partnership to be up and running by the end of the year and get some tax credits from that or what -

We have high hopes of that, yes.

So you're speaking specifically of that one, that law - the lawsuit we just filed?

Correct.

So what - anything happening specifically to make us think that we'd have something -

They have every incentive, even though we didn't - even though there's a lawsuit filed that's in their best interests to get - it's in everyone best interests to get the plant up and running, and I know they're working very hard -

Why have they dragged their feet up to this point.

- to get it up and running. The lawsuit would then just relate to - it mitigates - if we do win the claim, it would mitigate our claim, the quicker we get this thing up and running, and so hopefully we can have - hopefully things will work out where it does get up and running. We are led to believe that this could happen.

Is there a reason they give you why they're dragging their feet on the second one?

Again, basically that they - well, there was a good reason. It was in - the Enron was their operator, and -

Oh.

- that didn't quite work out. So now they have to go find another operator.

Oh, all right. Thanks.

Yeah.

the next question comes from [Megan] [Redicil] with Cane Capital Management. Please proceed with your follow-up.

Yeah. I was just going to ask a yes, you mentioned the VCRs deflation. I mean this is - and that's probably on an obvious trend as far as displacement is concerned. Are there - are you seeing any kind of brand weakness, in particular, in your electronic group? You know, is any -

No, I think all the brands - none of them are doing any worse than any of the others. Sony is still the big demand brand, but other than that, they're all doing very well, I think.

So no real noticeable gain or loss of market share in those?

No, not - about the exception of Sony, which seems to always gain market share.

Uh-huh. And just one other question, just a last question. On the air conditioning side, do you guys - could you kind of paint a little picture about the offerings there? I mean, is it more like a window - you know, how many different types do you have? Is it a high or low margin?

It's very high margin and we carry sharp, carrier, and Bryant, are our - and GE.

And they're all mostly the window units.

Window units strictly.

Okay, okay. All right. Fantastic. Have a nice day.

Sure.

Gentlemen, there are no further questions at this time. Please proceed with your presentation or any closing remarks.

I'd just like to thank everyone for listening and appreciate very much your being on the call. Thank you.

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