REX American Resources Corp (REX) 2003 Q4 法說會逐字稿

Ladies and gentlemen thank you for stand standing by. Welcome to the Rex Stores fourth quarter results conference call. During the presentation all participants will be in listen-only mode. Afterward 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, 31th of March, 2004. I would now like to turn the conference over to Stuart Rose. Please go ahead, sir.

Thank you, operator. This conference call contains forward-looking statements within the meaning to the Private Securities Litigation Reform Act of 1995. Such statements can be identified by use of forward-looking terminologies such as may, expect, believe, estimate, anticipate or continue or the negative there of or other variations thereon or comparable terminology. Listeners are cautioned that there are risks and uncertainties that could cause actual events to differ materially from those referred to in such forward-looking statements.

These risks and uncertainties include, among other things, a highly competitive nature of the consumer electronics retailer, retail and industry changes in the national or regional economies, weather, the effects of terrorism or acts of war on consumer spending patterns, availability of certain products, technological changes, new regulatory restrictions or tax law changes related to the company's synthetic fuel investments of fluctuating in the amount of quarterly payments received by the company with respect to sells of it's partnership's interest in synthetic fuel investments and the uncertain amount of synthetic fuel production and tax credits we received from time to time from the company's synthetic fuel investments. I would like to again thank everyone for listening. In terms of the company, we were fortunate enough to have an 88% increase in fourth quarter earnings and a 20% increase in earnings for the year.

The bulk of the increase was caused virtually in total by very, very favorable ruling from the IRS related to some synthetic fuel partnerships that we invested in which allowed us to reduce our tax rate during the fourth quarter and for the year to a number well below last year. In terms of comp store sales, comp stores were down 7% for the fourth quarter, down 1% for the year, approximately 1% for the year. And in the fourth quarter comps, in our opinion, the biggest two causes for the decline in comps were big screens are now a much bigger percent of our business and in the fourth quarter they're typically not as big a percent as they are in the other three quarters especially the first and the third quarter.

Also, there was a shortage in some of the rear projection LCD television sets where we didn't feel we received our fair share from the manufacturers which caused us to miss some sales. In terms of our balance sheet right now, we were sitting at year-end with about $29 million in cash. This is on top of paying down mortgages by 11 million. We have an announced buyback. In the last year we bought back about 711,000 shares. We have about a 1,145,000 shares open on our current buyback announcement.

In terms of the future, a couple of things have happened that we think are positive. One, we have one unsold synthetic fuel opportunity where we were the developer, we found a partner, we sold off that partnership basically allowing us to receive our money, our investment back, and based on the partnership giving, the new general partners getting the plan into operation, they have the opportunity to money on that particular investment. Again, synthetic fuel has been a very good investment. On top of that , with the favorable IRS developments, it is our hope that production will increase in the coming year which should be great for us in terms of cash flow and return on that investment.

Second thing that is going on in the big screen area high definition, the FCC is pushing very hard to cause high definition to be adopted by everyone. Should that happen, it is a huge replacement market out there and we've been working hard to try and become the company of choice in our markets. LCD big screens have become a new item, a new big item. There was not enough production last year.

It happens, inevitably, in this industry, under-production, six months later, it is my history of this industry, becomes overproduction and we tend to do better in an overproduction type economy or where the manufacturers are producing more than the retailers are selling, based upon our buying abilities and our cash position and the fact that we tend to be partners with the people we do business with and, usually, if there is any overstock, come to us first or we like to try and get them to come to us first and offer us a product a little cheaper, and in turn, we treat their products with respect in the marketplace. At this time I would like to leave the conference open for questions. Operator, if you can allow questions.

Thank you.

I'd sure appreciated it.

Thank you. 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 acknowledge your request. If your question has 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 your handset before entering your request. One moment, please, for the first question . Our first question comes from the line of Linda Donnelly from Franklin Monitoring Group.

Thank you. Could you explain to us right now exactly where you stand on investments in the limited partnerships? And what you think your tax rate will be going forward?

Sure. I will let Doug answer the second question. Doug Bruggeman our Chief Financial Officer is on the line with me. In terms of the first question, we had one partnership that we sold to our interest to Board of Progress, that is the one that is generating the cash that you see each quarter. We have another partnership that we are still limited partner, Sempra Energy is the general partner, that is the one that is generating the tax credits right now. We have a third partnership in Gillette , Wyoming that we sold to a private party, and that one is not up and operational, our investment now is basically out of that, so everything that comes in from here will be upside and we receive on that particular partnership. We have a chance to receive a little bit more payment up front plus royalties. So we hope that that will get operational sometime this year. Doug, do you want to answer what we expect our future tax rate to be?

As Stuart indicated, that is a little more difficult to answer. It depends upon what the production level is. On the partnership that we have in Somerset, that's the one we're still receiving tax credits on currently. My thought initially is that we will book at a 25% tax rate at the beginning of the year and have to evaluate the production level throughout the year, and that partnership is currently under audit by the IRS, so we have to monitor both production levels, as well as any results from that IRS audit, whether we can increase or reduce the amount of tax credits we're recognizing from that.

All right. Thank you very much.

Thank you thank you very much.

Our next question comes from the line of Bob McDermott, Investment Counselors. Please go ahead, sir.

Stuart --

How are you?

How are you doing?

Great, Bob.

I have to admit this is one of the more befuddling companies I ever owned. It's done well, the last five year, on a total return basis it has outperformed, but it is really difficult thing to try to get a handle on, how to value it. The basic business looks like it is getting harder. At one point, --

I would say it did get hardener during the fourth quarter. And we certainly didn't get our fair share of the hottest products that were out there. On the other hand, and I've been talking about it a long time, but eventually every television set is going to have to be replaced with high definition and everyone is pushing it accept the cable companies which don't seem to really care. There is always one sticking point, that seems to be the one right now. But we have really done a great job of moving from commodity-type items over to stuff that requires sales people to sell, with Best Buy and Circuit City getting rid of their sales people and with these products between DLP, LCD, plasma, regular high definition ready-set, high definition sets with tuners, it is not a simple thing that someone can walk in a store and understand and we think it takes professional commissioned sales people to explain. Where as to sell a CD does not and that type of thing. So we have worked hard to move our stores over to that type of product. And we've lost a little bit of sales in some of the commodity, the lower end commodity products, VCRs, low end 19's, things like that. We're set up real well, going into the future. On top of that, the television is still the center, not the computer but the television, is still in the smaller cities still the most important item and we feel it's still the most important item in our consumers' homes. Basically, over the last few years, you've had no growth in square footage. Is that pretty much correct? Yeah. Doug, you can answer that better than I can.

Yes, that's correct.

Okay. And I think on the last conference call I asked what were your plans and I think you sort of said that now you were going to begin to try to grow the store base again?

I'm going to start looking at it. I think I said this year our plans were to replace -- we have a lot of leases that were not particularly favorable and plans this year were to replace some of those leases with company-owned stores. Next year would be the year we would look at maybe going into more new markets, more markets. But again, it depends on the return that we can get in the business. But we think we can -- especially with our cash position, by owning stores in some of the markets where we were leasing, we think that is a wise way to spend our money. The second wise way to spend our money, and we don't just talk about it we do it, is buybacks which you and I have talked about before.

Uh-huh. So the store base is probably going to be flattish this year and then maybe next year is the time that you may grow.

Yeah and you and I have talked about it before, also, we need to get comp stores headed in the right direction before we go crazy opening stores. And we really need to see this high definition in the small markets become a very, very important thing. And they will be. It is just been a lot slower than you and I thought it would take.

Where do you see that part of your business going to? 80% of revenues or --

No, I would say -- well, probably closer to 60 to 70.

Okay. I guess Walmart has become bigger in consumer electronics and they're part of the problem in the more commodity.

In the lower end products for sure. Again, they are another one of those companies that is trying to do better but not in the end of the business that we think is the -- they do not have professional sales people selling these products.

Right.

And we think that's our edge.

All right. Thank you.

Okay, Bob, thank you.

Our next question comes from the line of Arnold Breef, Goldsmith and Harris. Please go ahead, sir.

Thank you. A few related questions. Could you give us some idea of what percentage of your business now is in TVs and what percentage is the high definition? Could you discuss a little bit the plans to turn around your comp store sales apart from better supply of the TVs? Is there any other internal plans to get comp store sales moving? Your operating margins at the store level are down to about 3%, which starts, frankly, to make me a little bit nervous. Are some stores starting to lose money? Are the comps spread evenly across the whole base? Or is there certain areas that are suffering more than others? Are there any other internal plans to turn the comps around besides waiting for a better supply of the high definition TV sets?

Doug, do you want to answer the first --

Let me answer the first two questions. The first question, television is currently about 52% of our overall sales. High definition and high definition ready televisions is roughly half of our television sales at this point. Maybe a little bit higher than half of our overall television sales. Stuart, do you want to --

In terms of the income, again, first of all in terms of the income, you have to remember that it is not a pure -- a lot of time, a lot of money, a lot of effort and a lot of management time is put into these synthetic fuel investments, a lot of legal time, so it is not a pure just to subtract one out and say that's what you're making. It is not quite apples and apples. Again, we put the investment income on a separate line but we don't try to allocate employees expenses and that type of thing. In terms of what we're doing to turn around the comps, first of all we're going to have amazing products coming along in the next year in our industry. Like I mentioned earlier, LCD product, we didn't have LCD rear projection big screens at our stores till the end of last year. We're going to get those in. We'll probably have TLP, a very good chance we will take on Samsung DLP rear projection televisions, which was one of the hottest DLP products in the industry. In terms of plasma, we just put on for the first time a plasma television set for about $3500, which we never had before. We're looking at things going stronger into recordable DVDs. Again, we're pushing very hard to go to products that take sales people to sell that aren't off the counter type products. And again, my markets have been a little bit behind some of the bigger markets in high definition. Broadcasting came a little later, everything has come a little slower, but we think if we can get decent supply of some of these hot products, and I think we will because the industry has a great ability with all the -- and the Chinese coming on, has a great ability to produce, to turn on a dime and pick up production, and I think we're seeing that. We think we will do just fine. And that's our plans. It is not to go into something way far afield from our industry, just to have comp store sales increases for the sake of comp store sales increases. It is not to go out and buy comp store sales. It is to get good sell the comp store sales within where we fit in in the consumers' mind.

That turnover of your sales force, has that stabilized? Is it increasing, decreasing?

In terms of manager and above, even, we've had turnover is pretty -- it has been stable. Vice presidents and above, we've had no turnover for I don't know, we've probably been together on an average over 12 years. So everyone knows what they have to do.

But on the sales force, the sales floor?

Sales floor, it is a little bit more - Doug, can you answer that question? I can't.

I wouldn't say it has accelerated. On the sales force, we've always had a high level of turnover. It's an industry where people come in and try it and don't like the hours or whatever. We've always had high turnover at the sales level. I would not estimate that it is accelerated in recent years.

Thank you.

Thank you, Arnold.

There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. Well, in closing, we had a record year, and with a couple of things that went in our favor, the synthetic fuel tax ruling and one of our partnerships in particular, and very excited about next year, with the new products, with high definition again picking up and expected to pick up in our market. And DLP, LCD, plasma, that type of thing, which fits right into our sales people's ability, getting to be a bigger share of the market, we hope and expect and think we will do very well. So at that, I will close the conference call and I thank everyone for listening. Thank you. Bye.

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