REX American Resources Corp (REX) 2003 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 we will conduct a 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 Tuesday, June 3, 2003. The speakers for today are Mr. Doug Bruggeman, Vice President of Finance and Mr. Stuart Rose, Chief Executive Officer. Please go ahead Mr. Rose.

Thank you operator. I'd like to welcome everyone to our first quarter conference call. The people who have seen the press release, we are pleased to announce same-store sale increase of 5%, which is a turnaround from the past few quarters and again it's caused by a large increase in high-definition ready big screen televisions that’s become our -- by far our biggest growth area and the prices of those items have come down significantly, which has allowed them to become affordable to many of our customers. As people have noticed, operating profit was down slightly, the biggest reason to that was, we changed and started going back to television advertising. And we also chose to increase our commissions in a period of time where other people are cutting back commissions or taking salesmen off commission. We want to do whatever we can to attract the very best in the industry, so we actually increased their commission, so that has a lot to do with our large increase in high-definition ready television and again this shows the operating profit. We dare them to show the earnings per share, we dare to stop the economic times when other people are showing large same-store sale decreases caused by war, weather, whatever and large operating profits, sometimes losses, we are happy to report good earnings.

In terms of synthetic fuel, that was down a little bit, but it was still strong number and again we were limited partners in that synthetic fuel operation and with asset that -- it's an asset that’s still returning unbelievable returns for our investment, something that North Carolina Power and Light had partner is keeping in good production. We are happy to see that number. In terms of the other big number, different number on our balance sheet, the gain on the sale of real estate, that was a closed store, again was unfortunate enough -- again, when we closed the store to report an operating -- to report, excuse me, a gain on the sale where as many companies report losses on the sale. This is related to our strategy of owning properties versus leasing properties. In a period of greatly rising property values, we think our strategy there is again something that sets us apart from the rest of the industry.

In terms of how things have gone; since the end of the quarter, we continue to show nice same-store sale increases are actually increasing -- have actually increased for the period of time a little bit over the period, they are doing a little better than that 5% that we reported for the first quarter, so we are happy with that. Again, we caution everyone, this is air conditioning season so depending on the weather, depending on whether gets hot or not that can drastically change same-store sales one way or another. With that, I will leave the conference call open to questions.

Thank you ladies and gentlemen, if you like to register a question, please press the "1" followed by the "4" on your telephone, you will hear a "3" tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the "1" followed by the "3". If you are using a speaker phone, please lift your handset before entering your request, one moment please for the first question. The first question will come from the line of Scott Chicorely (ph.) with Gerard Klauer Maddison. Please go ahead.

Thank you. Hi guys.

Hi Scott, how are you.

Good still. Couple of questions, first of all on the HD TV side, can you give us an idea of what percentage of your product mix status today, I know the TV sales are a big segment, but what is digital television, what is big screens etc?

Doug, do you want to go over.

Yes, that’s fine. Scott, in general television sales have grown to be a little bit more than 50% of our overall sales so far this fiscal year of the first quarter and high definition ready TVs are about half of our total television sales.

Okay that's on a dollar basis right up?

That is correct.

And then another question regarding the operating expenses. You know, what we are seeing there. Steve mentioned increase in commissions obviously as well as increase in advertising. I know that’s something you kind of alluded to before. How much of that may have been front-end loaded? How much of that is continuing? What is the game plan and what should we expect to see on the operating expense side going forward?

We are running roughly the same amount of television give or take at least its planned -- some of it gets preemptive that type of thing or sometimes we get extra. But it would be my thinking right now to go with about the same dollar amount per month and again second quarter with the air-conditioning and everything else is usually a little bit stronger quarter anyway and as I alluded to you earlier these were the first month and few days comps have accelerated a little bit on a percentage basis that should be going down.

Okay and can you just give us an idea on what that increase was on a year-over-year basis on the advertising, now that you have moved to television?

Sure I think Doug can give you that.

Scott, the increase for the quarter was somewhere between $500,000 and $600,000 in advertising costs.

Okay that’s pretty meaningful. I got it. Okay and then the last question can you guys give us an update regarding synthetic fuel, what we are seeing -- I know there is an audit going on, you've been putting money into an [Escrow] account. You know how should we be thinking about that just in terms of you know kind of going forward and what is the latest info you have on that?. Thanks.

The latest info is no change. That is just routine audit. No findings whatsoever been brought out one way or another. And again the proof is in the pudding, we are limited partners but the fact that our general partners are still producing like they are producing and indicates that they are comfortable. That things cost them a lot of money to produce this product and for some reason there is a problem in the audit and they don't get the tax credit they expect to get, or it doesn't generate the tax credit that is expected to generate. So they are still producing at a very, very strong cliff. We also have another partnership that has not been audited to the best of our knowledge and that one is producing also very, very strongly. That one -- we are partners with Sempra Energy. So we feel real good about that whole part of our business right now.

Now that’s a segment you know from Sempra that we see kind of flowing in a bit of cash flow with the stuff from Empire going into the [Escrow] account.

No the one from Sempra we used to offset, to lower our own tax. We used as tax credits to lower our own tax rate cuts. The other one, one that’s from Florida Province and North Carolina power line would have been one to call it. That one part of it was in [Escrow] and part of it is in our [inaudible], just…

I am just wondering how that is determined, what you determine goes in [Escrow] and what doesn't?

What goes into [Escrow] is basically, we have three separate sales which are outlined, they are pretty complicated, we really don't know.

They are lined in the queue, but the first one -- the sale for the first one right now does not, is not [Escrow] its second and third sales. We sold them each in three separate transactions. Second and third sales are [Escrow] per their rights in the agreement.

Got it. Okay thanks guys.

Thanks Scott, I appreciate it.

The next question will come from the line Bud Zino (ph.) with Risen Associates (ph.), please go ahead.

Hi, Bud

Hi. On the non-TV business, you know early experience may have been that air-conditioning is weak and horribly weak in -- I think in terms of the east coast, but generally it's been cooler than normal?

That’s a yes; it has been cool in parts of the country. On the other hand we didn't have a great early air-conditioning season last year. So it hasn't -- we are doing just fine in that category right now.

And general appliances?

General appliances are again, we seem to be doing fine there too. They haven't been -- that's a more stable business than I would say little bit more stable anyway than the rest of the business. And it's doing -- and not dramatically greater anything, but it -- but margins seems to be up in that business and the volume with that include air-conditioning since the first quarter seems to be holding its own.

Has the success of each -- early success of HDTV created traffic in the stores leading to sales of other products with some--?

It certainly helps a lot in accessory products, needed to hook up and we are -- that is one of our major suppliers record time actually went bankrupt over the quarter and believe it or not that we are going to use that as a positive for ourselves which gives us a chance to go in and talk to a bunch of different vendors. And we play one off against the other and so that's that category we are actually more excited than ever about right now and that's probably the biggest thing that you get out of high definition in terms of extra businesses and accessory business.

Do you do any service hook ups installation, that sort of stuff?

No, we do so as service policy. So that also -- it's a good product.

Sure. Thanks very much.

Sure, my pleasure.

The next question will come from the line of Rick Shay (ph.) with [Warden]. Please go ahead.

Hi, Stuart.

Hi, how are you.

Hey, how are you.

Good, thanks.

Just give us some thought as to how you are seeing the change in price points affect demands for the large screen in HDT -- HD ready TV?

I can only give you my personal feeling and...

Yeah, just your thoughts?

Once we get -- once we got under $2,000 for our 16/9 50 inch television, the business started to fly. At that point you could buy a 16/9 high-definition ready set for not much more than what people thought they would have to spend on a regular television -- a regular big screen. That’s really what's made the difference. That's a price point to me that makes all the difference in the world.

Under 2000?

Under 2000 per 50 inch or above.

Right.

And 16/9.

What business is under that price now?

I don't know exactly.

Okay.

I am not sure. It is significant though, it's a lot.

Okay and what are your thoughts on that price curve between now and holiday?

I don’t' think I think it's going to go down mate but it's -- but that's what will happen that's still the magic price I think you will be able to get even a bigger set though the money won't surprise me as some manufacturers 57 inch becomes 1,999. In fact I would be surprised if it didn't.

Okay.

All right?

Yeah, thanks a lot.

Sure, my pleasure.

As a reminder to register your follow-up question, please press the "1" followed by the "4" at this time. So to ask a question, please press the "1" followed by the "4". The next question will come from the line of Bob McDorman with Investment Councilors. Please go ahead.

Hi Stuart.

Hi Bob, how are you.

Pretty good, can you hear me?

Sure.

I have two questions: number one, the -- you may have addressed this-- The actual [St. Paul] plant that you bought. Is that still sitting around, unused in July?

We are -- right now we are dismantling it. We have a letter of intent with an operator. It is not a binding contract yet. So -- but we have someone that we are talking to and we have hopes to have them operate the plant for us. We will receive some type of -- some tax credits and some type of royalty. And again we are going for steam ahead on that, it is not just sitting there.

When would this agreement go forward or when will--?

When will it go forward, when will that happen? Before the end of this year would be when -- towards the end of early next year would be my guess when production would start.

Okay. Then the other question...

And that plan again the investment with -- versus the potential return is huge for broad shareholders should it happen and then should it not happen and the risk or the investment is not huge. Go ahead Bob.

I was wondering if you -- couple of things; number one, given the share repurchases over the years, [inaudible]. The number of outstanding options relative to the shares outstanding is huge. The floor has been reduced. I was wondering if new taskforce has any impact on your dividend distribution as opposed to share repurchases or--?

Well, the only reason-- to me it’s always been a dividend, the only reason I like share repurchases still, although it’s much more marginal before -- it was a no brainer but still lower the number of shares outstanding when you do a share repurchase versus a dividend and so by doing that, if you spend your money that way instead of just dividend than no doubt your future earnings become much higher. The future -- I should say earnings per share become much higher and so to me that’s still an advantage; although, it’s not the huge advantage it was when the tax rates were so high on dividends. So it is something we will have to look at very closely and -- decide the disadvantage of a share repurchase, which we have been never to take care up through splits as [inaudible]. So that’s the downside on the other hand, that can be taken care of also through splits.

No, I am sorry. Did anybody ask about the big increase in inventories, is that a timely purchase?

That’s -- yeah, as you probably know Bob, our industry has hit rough times the first quarter. A lot of people are recording way lower sales than they expected and that’s caused a lot of cancellations and were there to pick up the pieces. We tried very hard to beat the manufacture’s preferred supplier to do that. We don’t destroy them in the marketplace, we try to have -- we try when they sell to us, sell it in orderly basis. We take their overstocks, we take their cancelled orders. In return, we ask for a much lower pricing. We think we have gotten that. Now let see what happen.

All right. Thanks.

We may-- it’s that we have been doing for -- I have been doing for over 20 years and that’s something we think that we do both good for us and good for our supplier.

Next question will come from line of Scott Chukral (ph.) with [Joe Clark Maddison]. Please go ahead.

Hi Scott.

Hi guys, just a follow-up or two. How much of the inventory or I guess both inventory and inventory increase is third on the big screen televisions and HD ready TVs?

Doug, do you--?

I don’t have a number readily available, Scott.

The -- I can just tell you since I deal with the television purchasing that there have been opportunistic buys in that category as well as every other category that on the video side.

Fine. Let me ask a different idea, do you think inventory is roughly skew to what the sales mix is? Are we heavier or lighter in any particular categories?

I would say, it’s skewed probably we are-- it’s -- we're a little bit heavier. It’s been slight bit more -- little bit heavier in videos and we are in high definite, what I call video camcorder and I am just talking on the videos. So, right now little bit more skewed heavily in camcorder. That type of product, the video beside than we are in television side but this stuff that we have, the purchases we’ve made based on current prices look extremely good right now.

Okay. And then the other question was follow up on your statement you made earlier, Stuart, about the properties you guys own. How many of your stores do you actually own, as apposed to lease today, and then Tom what's that average rate on the mortgage debt with an implication; are we potentially getting the additional benefits down the road from additional refi etc., thanks.

Yes, we own currently about 153 of our stores, Scott. We have pretty much refinanced everything in the last year, and most of what we have done is taken through a variable rate at this point. So, going forward, I don't really see much more savings on re-financings. We did that about a year ago.

They are variable rate, which means they are -- it should be at lower rate over the last year, I would guess.

And we, yes, that is correct and we have started to anniversary that here in the first quarter because we wrapped that up last year in the first quarter.

Okay. And what is that average?

One thing I want to say, Scott, related to owning our property; that's turned out to be a huge edge because real estate prices today are just going good. Top notch commercial real estate is, when you can't find it, the real land costs are going way, way up even in small cities. So, we actually have decreasing occupancy costs where our competitors, if they do have good locations and they did lease store at a minimum cost to revenue increases and they have to leave their stores and go lease somewhere else. So, we are looking at huge increases.

Right, okay. And then the last one just on the housekeeping line; what was the cash flow from operations?

We have not put that out yet Scott. We will put that in the Q.

Can you give us an idea?

From operations, actually, I mean, there is probably a huge [inaudible] build in inventory, you know, probably in the range of $9-10m, again because of the building inventory.

Okay. Thanks guys.

Thanks Scott.

The next question will come from the line of Todd Otado (ph.) with TEGT Capital (ph.). Please go ahead.

Hi Stuart and Doug, a follow up on the buyback. Now that you are down to 200,000 shares and the stocks up a little bit, are there any -- I know you had the tax question after the tax change, first dividend, first stock buyback, but is there any plan to authorize any more; do you get down with that as the stock?

I imagine, if you look at our history, we seem to -- it depends on, it lot depends on the stock price, but we have been very successful for us and our shareholders buying in shares and it allows -- and so I would -- there is nothing and I think that should change just because we are getting down on that authorization. There is nothing in our capital structure such that should we decide to increase -- there would be -- there is no major change in our thinking that would stop us from going there.

Okay, thank you.

The next question will come from line of Rich Shay (ph.) with [Warden]. Please go ahead.

Stuart, I just want to follow up on the actual plans you talked about in terms of -- you don't have a binding agreement, but you are in process?

Right, we are in process. We are working with someone very closely to try and basically do what we have done in the other partnerships; allow us to not be the general and allow someone else to run it, allow someone else to buy the site, hoard everything, and we will just receive income or tax credits or both.

Could you just give some sense of the order magnitude?

I – we are not at out at that point, yes.

Okay.

I wouldn’t want you to put in any numbers on that yet, we are not there.

Do you consider it material?

I would say it would be certainly material to the limit of partnership line.

Okay. And is there any sort of time horizon on which we would think that this might happen?

Yes. I would hope that if it does happen, it will happen and be up and operating, either hopefully late this year, probably more realistic first quarter next year.

Okay.

A follow up on Scott's earlier question. As looking on the balance sheet, we actually had an increase in accounts payable, so that actually will probably result in [not a] cash use but a cash flow from operating activities, and I don’t have that calculation done yet, so I will defer answering that until we get the Q filed.

Great. Thanks Doug.

The next question will come from the line of Bernard Rebovitz (ph.) with, pardon me, with Smith Barney, please go ahead.

Yes. Hi Stuart; Bernie.

Hi Bernie, how are you?

How are you? Good quarter.

Thanks Bernie.

Congratulations. I just -- I may have missed something, I have been in and out; did you talk about store openings and strategy there and where the stores might be and whether you changed any -- in any way the strategy of your openings?

I think you didn’t miss anything, but our strategy has been right now during the economic times to slowdown on the openings and just concentrate on the same stores, and as you saw, we were able to increase same store sales 5% in the first quarter, and we think that is a healthier way. We can do it that way right during these times. That is the smarter thing to do. Long term, our strategy has not changed—- we’re trying to be the largest and to dominate the small towns.

Right.

Across the United States.

Very good.

Thanks Bernie.

Yes.

Gentlemen, I am showing no further questions at this time. Please continue with your presentation or any closing remarks you may have.

Right. Well, we just want to thank everyone for their support and thank you very much for listening; I appreciate it very much.

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