REX American Resources Corp (REX) 2004 Q1 法說會逐字稿

Welcome ladies and gentlemen.

Thank you for standing by.

Welcome to the Rex Stores 2004 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. [Caller Instructions].

As a remind this conference call is being recorded Friday, May 28, 2004.

I would now like to turn the conference over to Mr. Stuart Rose, Chairman and Chief Executive Officer of Rex Stores Corporation, he will be joined by Mr. Doug Bruggeman, Chief Financial Officer.

Please go ahead sir.

Welcome everyone and thank you for listening.

Thank you for attending.

This conference call 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 there on or comparable terminology.

Listeners are cautioned that there are risks and uncertainties that could cause actual results 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 industry, changes in the national and regional economy, weather, the effects of terrorism or acts of war and consumer spending patterns, the availability of certain products, technological change, new regulatory restrictions or tax law changes related to the company's synthetic fuel, fuel investment, fluctuating amount of quarterly payments received by the company with respect to sales of its partnership, interests in synthetic fuel investment, and the uncertain amount of synthetic fuel production and tax credits received from time to time from the company's synthetic fuel investments.

In terms of the quarter we are happy to report earning were up 4.1 million this quarter versus 3.1 million on a per share basis.

That's 32 cents versus 25 cents.

We had a 28% increase.

The bulk of the increase is basically results of a large, large rise in our synthetic fuel income which, I sure, is related, in my opinion, is related to some favorable tax rulings allowing production to increase, allowing our general partner in one of the our partnerships to feel comfortable about increasing production.

The flip side on the retail side, same store sales were down, roughly 7%.

In my opinion the bulk of the problem there were inflation and in some key products like DVDs, VCRs becoming almost a nonproduct, also some shortages on some key products, the biggest one being rear projection LCD television.

In terms of what we are doing with the cash and we are generating now fairly large amounts of cash, we are looking to repay mortgages and we are looking to buy back stock.

We have an active buy back stock and we are also looking at what debt might be able to be repaid in a way that will add to our, positively to our earnings per share.

The future, we have a couple of things going for us we think are very, very positive for the company.

During the quarter we sold our Gillette plant, our interest in our Gillette plant.

We now will receive royalties on any production that take place in that plant.

And if that gets up and running that's another income stream coming out of our synthetic fuel investments.

We feel we are with a very, very good partner haven't high hopes for that.

The other thing that's very interesting to us is plasma televisions is an area where we did not participate in a big way, it's come down in price.

Suppliers are working with us.

That could be a good new product for us.

And rear projection LCD product which we have tried to carry and it's been in short supply is loosening up, could very we will go into an over supply situation shortly.

And again we perform best in an over supply situation.

So those two things we are very optimistic we are turn around the same store sales.

If we can get that turned around combined with some increases in the synthetic fuel numbers it would be nothing but good for all of us.

With that I will leave the conference open to questions.

Thank you. [Caller Instructions].

Our first question comes from the line of Rick Weinhart.

Hi, Stuart, Doug, how are you?

Hi Rick, how are you?

Good, good morning.

A couple of questions for you.

First you talked about shortage in the rear projection sets.

I remember that that was an issue in the fourth quarter as well.

Now, there seems to be a little bit more supply in the market place recently, at least some of our checks have shown that.

Are you getting back into a fully supplied position?

Yes.

I would say with the exception of Sony we are fully supplied.

We are carrying right now SamSung, Hitachi, Panasonic and Sony.

The only one that we are not get what we need from is Sony.

Just the Sony.

SamSung is actually a DLP, but it's a same type of product.

Okay.

Is that beginning to impact or, let me ask you, how comps are trending so far this quarter?

Is that beginning to impact that yet?

This quarter we are impacted by two things.

We need some air conditioning, too , this quarter.

That product is way up but comps are roughly trending.

Again, we are only in the beginning of the quarter but roughly the same.

They have not picked up as of yet but I would expect this quarter is not a big TV quarter for us, it's big air conditioning -- that's what will make our break our quarter this quarter.

We have great buys on air conditioning.

It's just a question of whether we can sell them through.

Last year if I remember, it was a modest year in terms of air conditioning sales?

Correct.

So easier comparisons this year I would imagine.

Okay, then looking at the gross margins, they were actually a lot better than I had expected after fourth quarter where you had shown a dip, and I think that was partly because you had said there weren't just as many opportunistic buys out there.

What's changed there this quarter?

I think probably, like I said, some of the product is loosened up, some of the, we've done maybe a little bit better job in this quarter of emphasizing the higher margin item.

Fourth quarter tends to be a gift giving type season.

You don't sell as much percentage wise as you do in first quarter where you have the NCAA play offs, a lot of sporting events, it's inside season and I think the bulk of it is probably mix.

Do you want to comment on that, also?

Yeah, I mean, Stuart is correct.

We've also, you know, during the quarter held the pricing pretty well on the merchandise.

Our inventory was in good shape.

We didn't have to have much in the way of, we didn't have out of order markdowns.

Actually that rolls into my next question.

Your inventory levels are down from last year, I think per store, like around 13%.

I know it bounces around a lot but where are in terms of where you want to be?

Are you going to be adding to that substantially do you think, or are you in good position?

In our company we are in an unusual position.

If we see an opportunistic we buy it.

We buy on a return basis and using our judgment which we've been doing this a long time.

It's worked over the years and we will continue doing that.

We don't necessarily by on a turn basis and right now the buys are starting to come out there so it could jump.

Now I believe you have several leases, I think it was around 25 coming off lease this year in service stores.

Can you update us on what your plans are there?

You had a couple of different avenues to look at.

Sure, Doug, do you want to comment on that?

We are still working on that.

We are definitely relocating seven stores.

We've renewed leases on four or five of those locations.

We continue to negotiate on some of the leases to do renewals.

And we are in the process right now of closing five stores that we are involved in that sell lease-back.

Okay.

We think it could, when it is all said and done, all this restructuring related to that could have an impact for us.

Is the timing of that, are the majority of those stores?

I think the impact will start August 31 is when we get off lease.

August 31.

That's correct, Doug?

That's correct.

I had a couple of questions on the LPs.

Last year I remember it was the audit so you probably have a lower production but even taken into into account this is a much higher level than I think you've had historically.

I know you don't have control of this but what kind of guidance would you want to point us to in terms of this level?

Is this something would you expect to sustain going forward?

Very hard to tell you because it's totally out of our control.

We have hopes and again it's only hopes that product will increase from this level but we'll see.

The one thing I do want to add to that, Rick, is during the quarter we did also recognize about 475,000 income from selling the Gillette facility.

The Gillette facility is not currently in operation so until it gets in operation that part would not be recurring.

That's in that line.

That's in that line?

Okay.

Yes.

In the Somerset facility, can you comment on in terms of where the production is on that, your credits?

Is that roughly in line with where it's been historically?

Doug, do you want to comment?

Yeah, the production has been in line.

That's one where throughout the year we've got to keep an eye on that tax line.

We are trying to judge for the full year what the tax lines, tax rate will be at for the full year.

Given that we make more money in the fourth quarter, even though production may be higher than what we recognize in the first quarter.

We try to take that throughout the year and keep in minds that we continue to be conservative on that until the audit is completed on the partnership.

Okay, now just because I know that's all kind of off balance sheet until you take it.

Is there any quantification you can give us how many credits you have that are, what I'm trying to say is, you are going to have some left over, I think when this is over with at the end of 2007?

There won't be left over.

We can carry.

You can carry it forward, I'm trying to get a sense of how many years you think you can still have those credits available after 2007 that you carry forward.

I don't know right now, Rick.

It depends on future product in the next few years and that would be impossible.

But you think you will if you.

It would either, if things stayed the same it would either have a lot to carry forward or maybe we would monetize it at some point unless it gets to be ridiculous on a carry forward we might monetize that, or try to -- or attempt to monetize that in the same way we monetize the [inaudible] progress line.

Got it.

Thanks very much.

Thank you, Rick.

[Caller Instructions].

Our next question comes from the line of Campbell Gibson.

Please proceed with your question.

Hi guys.

My question was with regard, really to what your plans were on the stock price and sort of trying to close the gap between what we see as a value here and where the stock is.

And we are now looking at stock that's trading at probably 70% of understated book.

Right.

The stock, it's certainly gone up in the last few years and it's also gone down but we have sort of been range bound, haven't been able to get top line growth, we only bought back, what, 50,000 shares last quarter.

I just am wondering if there is sort of a larger plan.

Management gets paid a lot of money.

The stockholders are not really, well, you guys are increasing earnings, we've not been rewarded with the higher stock price and I'm just wondering if there's a longer goal, larger goal of getting the stock up.

Well, we absolutely have the sale goal you have.

And it's important for us to try to do it.

We have an active stock buy back program.

Unfortunately the Safe Harbor rules only allow for one block per week.

So we are going to have to figure ways, we want to buy -- we want to repurchase more shares.

We've chosen not to buy just a small block per week in case a big block came in the next day.

No big blocks are come to our attention to repurchase.

Without this being an advertisement, and we certainly are in the market to repurchase shares and I think we can, if we can do that and if we don't just announce these programs idly if you follow us.

I realize that.

If we can do that with people we can figure a way to take out what appears to be some type of overhang over our stock and then I think you'll see some benefits.

On the other hand, the rules are really pretty tough right now -- the new rules that are in effect related to Safe Harbor and buybacks are making it a lot harder to buy shares than it used to be.

Okay.

All right.

Thank you.

Thank you.

Our next question comes from the line of Mark Cohen.

Please proceed with your question.

Hi Mark.

Hi.

Good morning.

I was wondered if you had had a compensation advisory firm evaluate the executive compensation plans?

And if not, would you consider this?

And I have a follow-up question.

We have a compensation committee and they have not as of yet, we are have not hired an outside firm to do it.

We look at, again, like I said, we have a compensation committee that handles that.

I can't tell you what their plans would be, to answer your question.

Okay, all right, because, I mean I follow, I've actually owned the stock for years and years and I followed you for a long time and I know that you have about, let's say from January, you had about 11 million shares outstanding give or take.

Right.

But you have over 6.5 million outstanding issued stock options, which represents more than 50% of your outstanding stock.

It's been a strange situation, to answer your question, and it's a good question that's you're asking.

What's happened over the years since a lot of those options were put out we brought back probably half the shares and split the stock twice.

So it just has turned out to be a number that it is when they were issued with a much, much lower percentage.

But we continue to buy back shares.

We think that's the right thing to do.

I agree with you but you just can't by enough back to cover the dilution and I was wondering what sort of criteria that the company or your compensation committee utilizes to evaluate the incentive compensation, because your operating income is about the same since 1995, give or take a little bit, it's basically flat to down, maybe a year or two it's been above, a year or two has been below, but when the person, or you reference the overhang over the stock, my opinion is that part of the issue to the outside investing public is the issue of the outstanding stock options and their continued issuance.

Again, in terms of new, there are some options that are being invested right now but for myself and for the president or for the ex-president, any way, the number that are issued are the amount that have been issued have been basically to people below the CEO and President level recently.

Again that's something that we look at as a motivator to these people.

They have not, as a motivator to these people who do a good job and the earnings speak for themselves.

Would you consider or can you somehow retroactively go back and issue stock as opposed to the options so it would be less dilutive?

I mean if somebody has invested options that are worth half a million dollars, it would probably would be easier to issue them stock worth that amount than the amount that they had exercised which would be even more dilutive?

It's a valid suggestion or a valid point and again that would be up to the compensation committee to make that decision.

But I couldn't -- it's certainly a valid point.

I hear exactly what you're saying.

On the other hand these are options, they are not stock grants and where the stock is today, and when you figure that the people who have received the options had to pay roughly between State and Federal taxes over 40%.

They are not -- and the company gets a tax deduction on the other side, it's not a great lucrative thing that you might, for the people that work, for the people that are in the trenches, it's not the great lucrative thing that people, unless the share price goes up people aren't getting huge compensation out of these things, I guess is what I'm trying to say.

People that are currently the once that are getting the new options.

I understand what you are saying but the options are still outstanding and they are dilutive and they affect all calculations?

Again, when the share price is down where it is now they are not -- but we hope they will go up and I understand your point, I understand completely.

I appreciate your answering the questions.

Thank you for asking those.

Gentlemen, there are no further questions at this time.

Very good.

I would like to thank everyone for listening and I appreciate very much your questions in the conference call.

Thank you.

Bye.

Ladies and gentlemen, that concludes the conference call for today.

We thank you for your participation and ask that you do disconnect your line.