REX American Resources Corp (REX) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rex Stores fourth quarter results 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. As a reminder, this conference is being recorded Wednesday, Mar. 26, 2003. I would now like to turn the conference over to Mr. Stuart Rose, Chairman and CEO. Please go ahead, sir.

Thank you, Operator, and I would like to thank everyone for dialing in. This conference calls 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, materially from those referred to in such forward-looking statements. These risks and uncertainties include, among other things, highly competitive nature of the consumer electronics industry, changes in the national or regional economy, weather, the effects of terrorism, act of war, consumer spending patterns, the availability of certain products, technological changes and changes in the tax law.

I would like to begin the conference. We are very fortunate last year to be able to report record net income of $22.9m. Again, that for us was the best we've ever done. More importantly from our standpoint is on an operating basis excluding [syn] fuel we were up, our income using a 25% constant tax rate was up, it was 11,612,000, versus 10,473,000. 82 cents versus 77 cents that we were up in both earnings per share and actual earnings when we exclude the synthetic fuel from our results.

In terms of, in terms of the quarter, the quarter again from an operating basis was up, on an earnings per share basis using a constant tax rate of 25% it was $0.59 versus $0.58 the year before. And, again, in this industry we are the only company that I know of that had both from, for the year that was up both actual earnings and earnings per share. Again, that's excluding the synthetic fuel. Putting in the synthetic fuel, the year and the quarter we were down a little bit. The reason we were told for that is most of you know we are limited partners in that operation. The reason we were told for the synthetic production being less than the years ago, North Carolina Power and Light could not use any more tax credits than they were producing so they chose to go a little bit less on their production which caused us to receive a little bit less money. In terms of the audit, their audit status is unchanged as far as we are being told, they are still undergoing routine audit and, on a favorable note, they are continuing production, not at the level of last year because they can't use the credits, they say, but they are continuing production and we feel that's a very positive sign that they are comfortable that the audit remains a routine audit.

In terms of what's going on currently, comp stores have turned positive for February, March, we are up roughly in the mid-single digits and that's led by big screens and, again, that's the total of February, March. It's led by high definition big screens, I should say. With high definition becoming a bigger part of our business we think we are uniquely positioned in our industry to do well during the current year. No one else places as much emphasis on television as we do and we think that's starting to pay off and high definition is, is real, everyone is going to eventually have to replace their television sets and we think our future looks great because of the way we've positioned ourselves to sell these high definition television sets.

That basically concludes my part of the conference call. I will now leave it open for questions. Douglas Bruggeman is with me, also, our Chief Financial Officer. Go ahead.

Ladies and gentlemen, if you would like to register a question please press the one followed by the four on your telephone. You will hear a three tone prompt to knowledge your request. If your questions have been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone please lift the handset before entering your request. First question comes from the line of Scott [Ciffarelli] with Gerard Klauer Mattison. Please go ahead with your question.

Good morning. Actually, it's Rick Weinhart (ph) in for Scott. Good morning, gentlemen. A couple questions, I was wondering if you could comment on gross margins for the quarter. They were a little lower than we were expecting and I was wondering if you could give any kind of a break out as to the difference from last year, whether it was more mix or if there was other factors?

Doug, do you want to answer that?

That's fine. Well, the mix continues to go toward high definition television sales. Probably the biggest factor is that we definitely became a little more aggressive on our retail pricing so we went after the business pretty hard this year to try to generate some increased comp store sales. We started to benefit from that in January and February and into the current quarter. So that was probably the biggest factor right there, Rick.

So when you were being aggressive in promotions, was that, is there a particular product category that you were aggressive on? I know that a lot of your competitors have been pretty aggressive on the low end of the TV spectrum, was that kind of what you were doing also?

Very much so. One other thing we were doing, there was a great price drop at the end of last year and so we were flushing out a lot, we are on a first-in, first-out basis, flushing out some of the inventory cost a little bit for gross margin.

We definitely anniversaried last year in the fourth quarter is when we started to see the gross margin profits improvements, we pretty much anniversaried that.

Last year we were dealing with a period of very short supply. This year is the exact opposite and we happen to do very well in this type of environment, as you know, because of our opportunistic buying and the buys are out there. It's a tremendous time for a company of our type. On the other hand we still have to get rid of inventory that we owned at higher prices.

Are you forecasting gross margins to be comparable to what you had in '02 or I should say fiscal '03?

I don't think we forecast that at all. We leave that to the analysts. But I would say, again, there are certain categories that are going to be tough to match from last year, air conditioning was a phenomenal category last year so I wouldn't forecast to do the same gross margins in that category. To give you, it's really, the buys are phenomenal out there. The flip side of having phenomenal buys as they seem to be getting better and better, business is very soft, we are probably one of the few companies if not the only company that had for the year, in our industry, that has had nice, that had for the year on an operating basis excluding the syn fuel had increases, so there are companies that had canceling orders that had when I say increases, earnings increases, there are companies that are canceling orders. There are also companies that manufacturers are refusing to sell to because of credit risks. So the lower prices go, it's been our choice this year to take those lower prices to the customer to try to pump up our same store sales which has been a weak point in our company so we are doing that but as you move through the prior buys there tends to be some drag on gross profit because we are on a first-in, first-out basis not a last-in, first-out basis.

I guess looking at that comment in particular, to your knowledge, any way, are you expecting that you have more inventory in there that could cause some kind of degradation? I don't know how long it takes for you to flush through. I guess that's what I'm asking.

Because of our choice in being aggressive in working on comp store sales to answer your question yes there could be some gross margin. There could very well be some gross margin shortfalls, depending on what you forecast. And remember last year product was very, very tough to get so our gross margins, even though our business was down our gross margins were actually way up because we didn't have to, because we were one of the few people that even had product in certain categories so we could charge a little bit more this year. Everyone that is creditworthy has product and this year is more buying, more of a buying game, I guess.

So I'm taking from that that your strategy that seemed to work pretty effectively in the fourth quarter of competing more aggressively on pricing, that's going to be your strategy, at least in the short term that you can see?

Yes, and most people as you know in February record reported terrible comp store sales and as I just said year-to-date through last weekend we are running mid single-digit positive comp store sales which is pretty good.

Do you know if that was more of linear in nature in terms of what you saw through the quarter or, I just --

I don't want to get down to, we don't want to report same store sales on a day-to-day basis but you can compute January pretty easily and see January was a very good - and how it relates to November, December sales and January was enough to move, you can figure it out, though, we did very well in January, too.

Okay. Great. Now you had commented on the audit for the LPs, I'm trying to remember if you had given an initial estimate as to when, at least what you were told, anyway what the initial time frame was on this audit if there was one.

I don't want to answer that question. Doug you want to answer that question.

There really is not a time frame. I mean initially there was, they were trying to give us a time frame but it just kept being pushed back so at this point they are very open-ended about it and they are trying to get it wrapped up as quickly as possible but they are pretty much at the mercy of the IRS' time schedule and I don't think they've got a real time frame from the IRS at this point.

Stuart switching gears onto products, you mentioned high definition big screen television is doing well and I guess that makes sense and that seems to be a hot product for a lot of folks and that you specialize in that to some degree. I am wondering if there are products that you saw that did extremely poorly or below what you had anticipated in the quarter.

I don't know about below what we anticipated but we had plenty that did poorly. VCRs did poorly, camcorders did poorly, TV/VCR combos, again, VCRs since both of those, VCR and TV/VCR combos are related to the VCR sort of going out, and DVD of course did real well. Audio did, almost across the board did not do what we hoped to do, on the other hand, the flip side, our biggest product, high definition TV did phenomenal.

On product again, high definition television, that's clearly the focus. Is there any other products you see that might provide some additional growth this year?

Well, in terms of, I'm sure we are going to continue to do well with DVD players. We are, some of the audio related to high definition television sets, that type of area is doing, I expect to do well again this year. On the flip side we had a great air conditioning season last year so we will see how that goes this year. I'd say, again, the biggest thing, and it's a big part of our business, Rick, is video is, television is over -- looking at it it's almost exactly half of our business.

Sure.

High definition television is going to be the key to everything.

My last question and I will let someone else ask a few here, in your 10(Q) that you filed for the third quarter, there was a statement in there regarding an extension of your warehouse in Dayton?

Yes.

I'm just curious as to know what the strategic benefits there were, what they the thought process was.

Right now we are leasing how many different warehouses, Doug?

Right now we've got three off site warehouses that we've been leasing on a temporary basis and at this point this warehouse for the most part will pay for itself immediately versus making the lease payments on those other locations. As we continue to move the business toward high definition business, it takes up more warehouse space, et cetera, but we've been using this off site warehouse for a little while now and it made sense to go ahead and put the addition on at this point, in our opinion.

So this is more of a shifting of warehouse space not an addition.

We already owned the land. It's exactly a shifting of getting rid of some lease space and we already had the land, and also we don't have to run to three different sites, it will now been all on one piece of land.

Efficiency will be much better; it made sense to do it now.

Thank you.

Next question comes from the line of Linda Dolly (ph) with Franklin Management Group. Please proceed with your question.

Thank you. I apologize I got on the call a little late so if you've answered this question just tell me and I can call back separately. Did you give out the capital expenditures and depreciation and amortization number for the year just ended?

We did not put that out there. The capital expenditures for the year were about, a little over $2m, depreciation about $4.3m.

All right. And can you give us any guidance for the current year in those two?

Depreciation will be very similar to the previous year. Our depreciation over the last years has been right around $4-4.3m. As far as capital expenditures, we just alluded to the fact that we are building a new warehouse addition here. I think the total cost on that is going to be about $3.2m, a portion of which has already been [inaudible] at year end. As far as new retail stores, we don't currently have any under construction for the year and I'm not really sure where we will wind up on that.

All right. And my final question, I'm assuming that the decline in cash and the increase in inventory was what you called the opportunistic buying?

Absolutely.

All right. Thank you very much.

There's plenty of it there right now so it's a fun time.

Well, good.

Thank you.

Ladies and gentlemen, as a reminder to register a question please press the one followed by the four at this time.

Any other questions?

Once again, ladies and gentlemen, to register a question please press the one followed by the four. Our next question comes from the line of David Freed (ph) with Freed Asset Management. Please proceed with your question.

Hi, David.

Hi Good morning, gentlemen, how are you?

Great. And you?

Good. I got on a minute or two late, also, so I have the same disclaimer as the lovely lady that went before me. As far as capital, capital structure now, you did announce an additional buy-back awhile ago.

I knew that was going to come from you.

Of course, it had to. I have a follow-up question. Go ahead. You want to answer that first?

Yes, we did announce 1m more shares and we have actively, as everyone can see, been buying back shares. That's going to be a big benefit from this year. As you can see, we had far less shares outstanding in the fourth quarter than we had in the first quarter.

How much is left on that program?

Doug?

The number is in the release. Its 564,000 shares.

And the value now of the -- if you hear some noise in the background, forgive me, I am on the West Coast and I am home for the morning. But the value of the tax credit, what is the remaining value of that?

We have roughly five more years left and on our balance sheet we are carrying forward, Doug, what are we carrying forward in tax credits right now?

We are carrying forward somewhere around $8-9m in tax credits.

And we are continue to go generate, we feel this year that we will actually, if things stay the way they are now we will generate, we have, the partnership -- we have two partnerships, one of them is generating tax credits, the other we sold and generates cash to us. The one generating tax credits we feel this year will do better than ever. So the tax credits in our opinion, the tax rate will last for at least the next five years and we hope may be even longer than that, the 25% tax rate that still will carry forward at the end of the five years.

How much do you think it will generate over the five years?

It's hard to tell because it's been up and down. All I can say is we are comfortable, I am comfortable saying right now that I believe barring some IRS change or government change or something of that nature that we will be able to maintain the 25% tax rate.

And, on the other partnership which has been generated income, what are we generating from that?

Based on the production that I've seen in January, February, it would probably be about $8-9m per year based upon January, February productions. As Stuart mentioned, we don't really control that production and that could fluctuate up or down throughout the year as it has in past years.

Is that something that's projected out? Is that a partnership that will run out?

It runs out in five years. Well, it could go out at the government expense a program for synthetic fuel; we don't know what they are going to do. There has certainly been some legislation, legislators talking and proposing extending the synthetic fuel program. So we'll see. Right now it's scheduled to run out in five years.

Okay. Very good. Those are my questions. Thank you very much.

Okay, thank you, David.

You're welcome.

Ladies and gentlemen, if there are any further questions please press the one followed by the four at this time.

Your next question comes from the line of James Harvey with Rice and Associates. Please proceed with your question

It's [Jose] (ph) speaking for Jim. Hi. What's the competitive environment like, are any of the big box retailers coming into your markets? What's pricing like with them?

As most of you probably know, Circuit City, the competitive environment from our standpoint has gotten a little easier because Circuit City chose to do away with their commissioned salespeople. And it's our feeling right or wrong, and we are going to stick with this, that on a high definition, $2000, $3000 purchase, people want someone to explain the product to them, want someone to tell them what they are going to buy, want to feel comfortable buying it before they put out the money and to do that enthusiastically, it's our feeling it takes a commissioned salesperson. And because we think we are able to attract a more enthusiastic person by paying a commission and hopefully a better trained person who wants to make a little bit more money, a more high achiever, we'll have an edge there. But we will see what happens over the year. In terms of companies in our industry, you can, The Wiz just decided, we used to compete with them, they had already closed the stores in our markets but they are going to, it looks like they are going to close it up and see what happens. I would expect there will be less competition not more competition because of the economy.

Great. HDTV, video is now half your sales --

Television is half our sales; video is way more than half of our sales. I count video and television together.

Television is half. How much is H.D.TV representing as part of TV now?

Doug, you want to answer?

It's, HDTV is about half of our television sales at this point.

In dollars, not units?

In dollars, yes, that's correct.

And you sell a much higher ticket?

Yes, a much higher ticket. When we say HDTV, remember we are saying HDTV-ready, that includes stuff that, anything that can become connected and become HDTV.

When we look at the increase in inventories, is that opportunistic buys in the higher end product or is that the lower end product?

I'm sorry; we are getting opportunistic buying in every area right now. For our industry, again, most people, anyone that owns stock and other people in our industry knows how the rest of them are doing, they are not doing great, we are doing pretty good, so the buys are - people are canceling orders and giving us great opportunity in every category.

Are you doing anything with the advertising budgets?

We went to television and I don't know, maybe that's the reason why we've done so much better than everyone else during the first couple months of the year. But we switched a lot, we brought a new agency in from New York and they put on some commercials that are different from our old image and we are running more TV this year than, more television commercials, this year than last year. So with advertising you never really know what it's, all you can look at is that we switched and our business is doing better so you have to assume that that might have something to do with it but you can't ever be sure.

Right. So television has done well. Now, in the appliance area, you carry a lot of Whirlpool as opposed to Maytag?

Correct.

And Whirlpool was saying business is okay, Maytag is saying business is weakening. So I'm assuming your appliance business is at least holding its own?

Yeah, our appliance business has been fairly stable. It's been, for the year it was roughly, the good part of the appliance business last year was the air conditioning.

Okay. Thank you, Stuart, I appreciate it.

Sure, my pleasure, thank you.

I am showing no further questions at this time. Please continue.

We would like to thank everyone for listening. It's been a pleasure and we appreciate very much your dialing in. Thanks you and good bye.

Ladies and gentlemen, that concludes the conference call today. We thank you for your participation and ask that you please disconnect your lines.