REX American Resources Corp (REX) 2004 Q3 法說會逐字稿

Welcome to the Rex Stores third-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. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded, Thursday, December 2, 2004.

I would now like to turn the conference over to Mr. Stuart Rose, Chairman and Chief Executive Officer of Rex Stores.

Please go ahead, sir.

Thank you.

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 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, the highly competitive nature of the consumer electronics retailing industry; changes in the national or regional economy; weather; the effect of terrorism or act of war on consumer spending patterns; the availability of certain products; technological changes; new regulatory restrictions or tax law changes related to the Company's synthetic fuel investments; the fluctuating amount of quarterly payments received by the Company with respect to the sales of the partnership interest in the synthetic fuel investment; the price of oil; and the uncertain amounts of synthetic fuel production and tax credits received from time to time from this Company's synthetic fuel investments.

I would like to thank everyone for listening.

And we're happy to report an increase in same-store sales this quarter of 1 percent, highlighted by a huge increase in plasma and LCD televisions.

This was offset by decreases in our conventional television set, video, and audio business.

The beauty of where our sales came this quarter is it's where we are trying to drive our business, which is towards the bigger-end purchases.

Plasma and LCD now account for about one-third of our television sales.

Television sales accounted this quarter for about 57 percent of our overall sales.

So the business is truly moving towards the better products, toward products that take salespeople to sell towards our strength.

And it's exactly where we need to be, where we can get away from the commodity items that have been consistently declining in price and have been consistently more competitive.

Earnings were down a little bit.

We earned 27 cents this quarter versus 31 a year ago.

We were hurt, first of all, by the hurricanes in Florida.

We lost approximately 200 store days.

The earnings were also hurt by lower margin.

We did spend a little bit of the synthetic fuel earnings to develop some marketshare in these products.

Plasma and LCD television -- not a huge category for us last year.

It's now become a huge category out of nowhere.

And with our markets now getting high-definition television, it's our goal to make it a bigger and bigger category.

And we think that is our strength that we have knowledgeable salespeople.

The price is down.

Everything really is driving in the right direction for that.

In terms of other things that happened, as everyone probably saw (ph) for Thanksgiving, the commodity items continued to go down in price and become more and more competitive.

And that, of course, hurts our sales, hurts our margin, and hurts our earnings.

Synthetic fuel production was up significantly over last year and continues to be a stellar part of our income statement.

That just gets better and better.

Florida Progress produced more.

The Sempra partnership produced more.

It's free cash flow that we use basically a number of different ways, whether it's buying in stock, developing market share of new products, or general corporate purposes.

It's something that gives us a huge, huge advantage over our competitors, and also gives us a significantly lower tax rate than virtually all of our competitors, which we're looking for ways to take advantage of strategically.

Another gain this quarter in real estate -- we own a little bit over 150 stores right now.

And as we've closed stores, we have historically been fortunate enough to make money on our worst stores.

It's, we feel, a very undervalued asset on our balance sheet.

And depending on whether a store is profitable or not profitable, it gives us a second bite at the apple.

If we can't make money in the store, then we can make money generally, or have in the past, made money on selling the real estate.

And I think our real estate is getting more and more valuable to more and more companies as the prime retail real estate in our markets starts to get eaten up.

And people want to go where we are -- other people and other businesses.

In conclusion, we're well-positioned right now.

We have transitioned beautifully over to the higher end television set.

It did cost us a little money.

But November, we're fortunate enough to say that sales continue to be up a little bit on a same-store basis.

Even though the trend on commodities has continued, margin seemed to stabilize -- maybe even gone up a little bit.

So things are headed in the right direction.

And with small markets now having high-definition television sets with the price of LCD and plasma in a price range our people can afford, we're probably more excited about the future now that we have been in a long, long time.

And it's an exciting time to be in our industry.

And we look forward to the next -- to the Christmas selling season and the next 12 months.

Thank you.

I will now open it up for questions.

(OPERATOR INSTRUCTIONS) Rick Weinhart, Harris Nesbitt.

I have a couple of questions.

First, if we could talk for little about the synthetic fuel investment.

The income was substantially more than what we had been anticipating.

I'm wondering if there was anything onetime in nature, or if perhaps this was front-loaded to the beginning of the quarter -- as we had thought that the progress had slowed the production because of losses from the hurricane.

Any color you can provide would be appreciated.

Sure, I'll talk to the best to my knowledge on that.

I can't speak for Progress Energy.

But I know as far as -- to the best of my knowledge, our partnership did not slow down.

Our partnership has a closing agreement from the IRS.

Their other partnerships are still being audited by the IRS.

When they were talking about slowing down their production, they I think rightly chose to slow down the ones that are still being audited.

Also, they partly monetized our partnership, meaning they sold some of the partnership to a third party, which means even though they may not be able to use the tax credits themselves, they can still generate income from this partnership, which then will allow them to use more tax credits than they would be able to use otherwise.

So to date, we've not seen a slowdown to the best of my knowledge.

And I don't expect to see one in our partnership.

Now, that does not conflict with their statement.

They're statement was in total, not on specific partnership.

Okay, that makes sense.

And on the core business, it sounds like -- and maybe in looking at some of your advertisements, it looks like you are being a little more aggressive on pricing.

And it's helping your comps and hurting margins.

Is that how I should think of (multiple speakers)

We're developing -- we're trying to develop, doing everything we can to develop leading marketshare in our markets in plasma and LCD from nowhere.

And our markets were late getting high-definition television.

Plasma was a very high-priced item in our markets.

We're not in the richest markets in the world.

We serve small cities.

And we took a little hit on margins, and maybe get a little -- to pick up a little marketshare.

And I think it's paid off.

I think that's our future.

If we're going to be important to our customers, we have to sell them the products that take salespeople to sell.

We have to sell the higher-end products.

And so we really made an effort after that business.

It cost us a little bit.

I consider it an investment.

But it did cost us a little bit of money.

But I think it was very, very necessary to change our image and become what we need to be going forward.

So this is (multiple speakers)

To answer your question, it was in margins -- yes.

So as far as going forward, and these are the types of investments you plan on making for the next few quarters to drive that sales?

In November, we managed -- and I can only speak for November margins were not significantly -- they might even be up a little bit.

We don't have the final figures in yet.

But we hope to see -- and same-store sales actually seem to have increased a little bit even with the commodities.

I heard that in your comments.

That's the part I was kind of getting to.

I mean, is it --

I don't know -- again, we're going to do everything we can to drive marketshare in these products.

On the other hand, they should by nature be a little bit higher-margin products than the stuff that's going by the wayside.

I guess my question is in November, you didn't change -- you're continuing to be aggressive on pricing.

And even though you did that, your margins, you think, were still pretty good.

Is that what you're saying, or did you change the (multiple speakers)

By pretty good, they're pretty good relative to last year.

Okay, great.

Okay, and then just a couple of quick questions on accounting, and then I'll let someone else in.

First off, your tax rate was about 13 percent in the quarter -- your effective tax rate.

Is that what should be planned for in the fourth quarter?

I don't know if Doug's on the line, maybe he could --

Yes;

Doug Bruggeman, our Chief Financial Officer, is on the line.

I will let him answer that one for you.

Doug?

(multiple speakers) as we talked about the end of the second quarter, at the end of each quarter, we really need to be looking -- see on a year-to-date basis where has the production been on the facility that we still have got the tax credits coming from, which is the Somerset facility.

And we look at where our projected income is for the year.

And those tax rates are to going to fluctuate quarter to quarter, depending on what those production levels are.

And I can tell you the way I looked at it at the end of the third quarter -- year-to-date, our tax rate was about 20 percent less the fact that in the second quarter, we ruled (ph) out $1.4 million from a valuation allowance due to the conclusion of an audit on the Somerset partnership with the IRS for 1 year.

So --

Okay.

I think I (multiple speakers) -- so essentially it's tough to give guidance is what you're saying on the tax rate for fourth quarter as well.

That's correct.

Okay.

And then the last question while I have you, Doug, is -- I'm assuming this was a sale of 1 property that you received the gain on?

Actually, what it was, Rick -- we had some excess land on a couple of -- real estate that we owned.

So we sold land on the 2 properties.

You don't happen to have what the basis was for that --

I don't.

It will probably be in the Q, then, right?

You know, it's not a huge number --

(multiple speakers) Okay, don't worry about it.

Thanks very much.

Bob McDorman (ph), Investment Counselors of Maryland.

Does the income from synfuel investments or the tax regs (ph) -- is there any impact from fluctuations in oil prices in there as oil or coal or whatever it is goes higher, is it --

I'm glad you brought that up.

We are okay right now, and we'll be okay for this year.

And I believe tax credits start phasing out for as -- if oil were to average over -- and this is an approximate number, but approximately $55 a barrel.

Okay, so --

-- where it's not an issue -- now, if oil does spike up, it could be an issue.

We'd get less tax credits per ton of synthetic fuel that's sold.

(multiple speakers) And if it's at that price for 1 day, it's not an issue.

It's if it's at that price on an average for the year.

Correct.

But the total income --

(multiple speakers) The number we disclosed in the 10-K last year -- the 2003 phaseout started at 50.14 per barrel, and that gets updated every year.

Okay.

I guess I'd better go back and read that again --

(multiple speakers) 50.14 a barrel is a technical number that is not exact (ph) -- it does not tie into the price you'd be quoted of oil on a daily basis.

So if oil prices go down, it doesn't have any impact.

It has no impact whatsoever.

It only impacts going up.

As you say, you're as excited as you've ever been -- recently, anyway, about the retail business of selling consumer electronics.

Yes, we're finally hitting -- we've waited a long time for this.

And we still have to overcome some products that we used to make money on that have become commodities, which we have been having to deal with for a long time.

That hasn't ended.

But it percentagewise should become less.

Products that aren't commodities -- the big screen -- seems to be in our markets more -- the prices.

We sold virtually no plasma a year ago.

So in the quarter, a lot of plasma so -- (multiple speakers) plasma TV, which is a big job for us.

Things in consumer electronics seem to become commodities pretty quickly these days.

Are you thinking this is going to be a longer cycle for these big screen TVs --

(multiple speakers) I look at it for 12 months.

Ask me in 12 months to make -- I can't tell you, Bob.

I don't know.

Everything seems -- the high-definition big screen a year ago -- it's already been replaced by the LCD and DLP picture (ph) and already being replaced.

It happens.

It's just the nature of the business we're in.

But right now everything is at price points, and we have all the technology in our markets to be in there with anyone right now.

And we have all the lines -- we have Sony, Hitachi, Samsung, and Panasonic -- in our minds, all the important lines.

For the next foreseeable future, is the number of stores going to be about the same, so really, it's same-store sales growth that's going to be the key to --

(multiple speakers) Certainly.

We look at it.

We're going to reevaluate after Christmas.

We have very valuable real estate.

And we have to make that decision.

And we will after Christmas.

If a store is not making money, historically, we've closed them and tried to make money on the real estate.

(OPERATOR INSTRUCTIONS)

If that's all the questions, I would like to thank everyone for listening.

And I appreciate your support very, very much.

Thank you.

Mr. Rose, there are no further questions at this time.

Okay.

Thank you.

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.

Have a great day, everybody.