REX American Resources Corp (REX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, and thank you for standing by and welcome to the Rex Stores fiscal first quarter earnings conference call.

During the presentation, all participants will be in a listen only mode, and afterwards you'll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded Thursday, June 2nd, 2005.

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, and thank you, everyone, for listening.

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 using of forward looking terminology such as may, expect, believe, estimate, anticipate, or continue, the negative thereof for either 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 referred to and such forward-looking statements.

These risks, uncertainties include, among other things, a highly competitive nature of the consumer electronics, retail and industry changes in the national or regional economies, weather, the effect 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 vestments, the fluctuating amount of quarterly payments received by the Company with respect to sales of its partnership interest in synthetic fuel investments and other uncertain amounts of synthetic steel production and tax credits received from time to time from this Company's synthetic fuel investments.

Terms of last quarter, we had what we considered a very, very good quarter.

Comp store sales were up 7%, led by LPD television, plasma television and DLP television.

Earnings per share were up 50%, operating earnings up 36%.

Synthetic fuels continue to be going well, it was up 10% in income over the - - in cash income over the prev - - or in income, I should say, over the previous period.

Terms of the keys to the quarter, it was very agressive pricing; we did work on a little bit lower margin, but it stimulated an increase in comp store sales.

There was also a good time of year for television.

The winter season is usually particularly a good time for LCD plasma, that type of thing, as many of our markets, our indoor markets especially in the North.

Going forward this quarter, we are weather - - we're currently, I would say, in a way, weather dependent.

We count on air-conditioning sales.

May has been an exceptionally cool month; we're running down right now, roughly about 10% comp.

Again, we hope to make this up with any type of spike in air-conditioning.

It could happen, but we did have a difficult May.

Again, it was of very cold period of time.

It is something that we hope any type of heat wave can be made up pretty easily with the sale of air-conditioning.

Historically, our best months have been June and July.

Last year we had very, very little air-conditioning sales in June and July, relative to what we expected, anyway.

So.

We are counting on that for the rest of this quarter.

In the fall, we have gotten in the digital camera business.

We've got some fantastic pricing right now, on televisions.

We'll be very, very strong in plasma TV.

We'll be very strong in LCD TV.

We'll be very strong in DLP TV.

So, we think we're covering all our bases and it should be a lot of fun in the fall.

We did great in the winter quarter when it was television season.

The next real big television season is in Fall with the new programming football, that type of thing coming in place.

We should be ready to go.

And again, with digital cameras we have new products out, so anything we sell in that will help our comp store increases.

In syn fuel in the second quarter, in May, we sold our - - we received payment on $3.5 million from our Gillette plant.

That will come in to income in addition to our [inaudible].

This is a new plant, and it will be in addition to our other plants.

This is something over and above any - - this is a whole new plant, and was not - - there was no income on this in the first quarter.

We've already gotten, like I said, $3.5 million in the second quarter.

That's pure income.

We expect from here on in to continue to earn income from that plant, which, again, will be over and above all of our other plants that were - - all the other plants that were earning income.

We are seeing a continued drop in pricing and our key categories in the second quarter.

Again, that bodes well for our smaller, less affluent markets.

We hope to get a lot of our previous customers into some of the plasma and higher end televisions.

The other thing and probably one of the things that we have been doing on a continuing basis is using our income, both our operating income and our synthetic fuel income, to continue to buy back shares which then should contribute to all our shareholders receiving more income on the income we do own - - on the income on the shares they do own.

I will now, leave it open to questions if anyone has any questions.

Our first question comes from the line of Rick Weinhart at Paris Nesben.

Please proceed with your questions.

Good morning, Rick.

Hi.

Good morning, Stuart, how are you?

Great.

Great.

Can I, I guess, start with some questions on the syn fuel facility?

Your - - even before including this Gillette's, I'm assuming this is $3.5 million that you talked about, that is that, kind of a onetime contract payment?

One time contract payment.

Now going forward, we receive $1.50 per ton.

We hope to receive - - projections that we have received from the operator of 1 million tons for this year that's going to give - - so that would be $1.5 million in addition to the $3.5 million for the next two years.

He hopes, and I emphasize hopes, to do 3 million tons a year.

Okay.

You have to take a for what it is worth.

That is helpful.

So the 1 million tons, or the 1.5 million, that is not annualized, that, in other words is for the next three quarters in total.

Right.

So not - -

Yes.

That is what he hopes to do.

His forecast, right.

Okay, and even before adding that in though, I think you had, if my numbers are correct, a record quarter, just from your current plants.

Is - - was there anything one time in nature related to that, or anything unusual that we should know about?

I know you don't have a crystal ball in terms of forecasting this component of this business, but I'm just wondering if there was anything special.

We know that we don't have a crystal ball.

We know that things are looking up at our plants.

We have been audited by - - we received a clean audit.

The ones with the income that came on for this quarter, and so we think that sort of progress is ramping up our plants.

But, we, again, have no control, but it's our belief that we're going to continue to see good income from our particular plants.

One thing that was at one time during the quarter, was every year, in April, there was a true up based upon file published rates from the IRS.

We received an additional about 450,000 in April this year.

Than last year.

That was only about 120,000.

That is one thing that is - - will not recur the next three quarters.

Okay, great.

That's helpful.

Thank you.

Staying with the alternative energy, is there any update on the ethanol business or partnership?

At the moment, ethanol prices have fallen.

Again, we were in our due diligence period.

I don't expect - - our money is still in escrow, but at this point in time, our due diligence is not completed but we would, in my opinion, need a recovery in ethanol prices to even consider going through with that investment.

Is there - -

I would not encourage you to give any estimates on that right now, because of the collapse in ethanol prices.

Is there a time frame in which you would expect to have to make a decision on that or, in other words, when will be expect to see that - - I'm assuming it's in escrow until you make a final decision - -

It's in escrow and it's our choice of when we want to make that decision.

The final decision on that, I am not so sure when that will be made.

We'll probably - - we would like to leave the option open, but in terms of taking the money out of escrow, that will be the next couple of weeks.

A couple weeks.

Okay, great.

Thank you.

If we take the money out of escrow, then we'll have, obviously use of that money.

Right.

Okay, and then looking at the core business, just in the quarter, the SG&A in particular was a lot lower than I was expecting.

I guess, the question here, was there anything unusual in there or is this just - - or is you can just help me understand what is going on there.

What have you been able to cut to get it so low?

Rick, probably the biggest thing that we reduced was some advertising dollars.

Just an effort to continue to cut costs.

We had a little bit of a shift in the calendar, the way the Saturdays feel and things like that.

And then in addition, I think we may have [grant one less insert.] So, those two things combine to help.

The other thing is the stores that we closed over the past year were some of the higher cost stores.

So, that had certainly helped in our SG&A.

And then obviously we [inaudible] 7% comp store sales increased you get pretty good leverage in that area.

Okay, so what I - - is it a good assumption, if I were to model say 7% sales going forward as a comp number, but I mean that kind of leverage is what we expect to see throughout the rest of the year?

I really can't speak that we can continue to do same thing with the advertising that we did in the first quarter.

We will continue to monitor that.

I'm not sure we could get quite that much leverage in the next three quarters.

You didn't see, obviously, much of a drop in the sales with that drop of advertising?

That is apparent anyway.

It is one of those quarters where things, everything moves forward.

We were able to do better on the sales side with less advertising.

That, in my mind, is true comps when you can do that.

It's easy to increase comps just by sending more money.

That is real comps in my mind.

When it's done with spending less money.

Sure.

Okay, and the gross margins were about what I expected.

But, I wanted to check; what was the impact there?

You said you had been aggressive on pricing.

Was there particular categories?

What should we expect going forward?

Is that the kind of stance you're going to take - -

Extremely aggressive.

We are going after it.

That's all I can tell you.

It may hurt margins a little bit, but we feel we buy better than anyone else and we're going to start pricing better than anyone else.

We did during last quarter, and hopefully that is going to show up in the comps and make for better business.

Buy better and not sell the goods, you know when any goods, where people - - Ultimate, for example, just went bankrupt, that opens up a tremendous hole for our suppliers.

We tried to be the customer of choice to help out with their oversupply whenever that takes place.

We're going to be very, very aggressive.

Was there any categories, though, in particular that you felt you were more aggressive on or is it across the board?

Obviously the plasma [inaudible] TV was way, way up.

That is central to our business.

You mentioned the better buying.

I'm wondering, how would you characterize the environment right now, versus prior years?

It's phenomenal.

I would just have to sell [inaudible].

Like I said, ultimately, going bankrupt, the air conditioning, we have phenomenal buys out there.

The margins, if you get any type of hot weather, that will be very good.

In terms of television, a lot of sets certainly have to be made with high-definition tuners, even though they are not high-definition sets.

The requirements of the government, because of that, there has been some great buying opportunities.

In non high-definition sets.

As far as that end of the business, we have the goods; we are ready to go.

It should be a lot of fun.

One last question on the comps.

You talked about comps going down 10% in May.

Then the air conditioning sales certainly being a component of that.

Condition was part of it.

We were down in other categories.

It wasn't all air-conditioning.

It is not the main time for these categories.

We really, to get our comps, we need some air-conditioning.

We just did not get it in May.

The good news is we did not get it in June and July of last year.

Any type of hot seller with the buys we have out there, we will do fine.

Income wise, we already have the $3.5 million in our pocket.

Okay, great.

And then, last, let me just have a couple questions on modeling.

The tax rate this quarter, Doug, I don't know if you can comment on the 15%.

I mean, do you have an estimate what it will be for the year?

We are trying to work towards a we expected to be for the year.

We did a calculation of the first quarter, that was our best estimate at that time.

It's certainly is subject to fluctuation based upon continued production in the syn fuel facilities and what our income level is.

We will do a calculation every quarter.

For modeling purposes right now, that's what we used first quarter, and I think that is what we should model.

Okay, great.

Do you happen to have the CapEx number and what you expect it to be for the year?

CapEx for the first quarter, was about 1.5 million.

We don't have any stores.

We are relocating one store but that is about the extent of what we're doing.

Other than that it'll just be repairs and general maintenance at the stores.

And then, the last question I have for you, is on options expense for - -this is for next year.

Your K had been modeling - -of your K had been estimating based on new to the formula you used in that roughly $0.25, $0.26 cents, I think in expense, and then you had just recently put out another filing regarding the accelerated vesting which I think lowered that number probably by roughly $0.04 cents maximum.

I'm trying to get a sense of if you have an estimate as to what kind of impact you think that will have next year.

Roughly $0.20 plus or minus whatever, you know, $0.04 or $0.05 cents, kind of a good number to look at?

Rick, I really don't have that.

I prefer not to answer that question right now.

Okay, great.

Thanks very much.

Our next question comes from the line of Bernard Rabinowitz from Smith Barney.

Please proceed with your question.

Well, actually my question has been answered.

I just wanted to say great quarter.

I guess I did want to go over the May numbers in terms of the fact that it probably, it sounds like it doesn't necessarily mean that the quarter is a problem as long as we get some reasonably good hot weather.

Earnings will be, I feel very confident right now.

Earnings will be in great shape.

We do need some hot weather.

Absolutely.

Okay.

Well.

I will do the best I can. [Laughter]

All right.

Thank you.

[Operator Instructions] Our next question comes from the line of Gary Mervis at Investment Counselors of Maryland.

I just was wondering if you could comment, you mentioned this article in The Journal yesterday about LCDs and plasmas coming down in price and you were talking about pricing coming down.

I wonder when does that become a bad thing in your mind?

I think once it gets under - - I'm not worried about LCD and plasma being a bad thing.

We are a long way from that.

The thing that worries me is some of the, I call them light bulb sets, the DLP and that type of thing which that gets under $1,000 for a big screen, then it's mass marketable; one of our big edges is we have salespeople and these things are too high priced for someone to buy without getting the product explained, and taught how to use and taught the difference between LCD and plasma and DLP and many, many different formats.

With high def tuner, without high-def tuner, that type of thing.

If they get under $1,000, that is where the problem comes in.

On the big screen sets that we are not, the LCD, DLP we are not there yet, that is when it would be a problem.

What kind of - - how do you think about the life cycle of these things?

How long before you think that they kind of get under that $1,000 range?

I have seen things go very slowly down.

Plasma didn't.

Plasma did not slide down.

It is starting to slide down, and I have seen things like DVDs come down so quickly it made my head spin.

That is a better question.

I don't see it happening.

I can see for the next, through the fall, I can anticipate through the fall.

I don't see a collapse in any way pricing for the bulk commodities are going up.

A lot of these sets will require tuners this year.

They didn't require tuners last year.

We are in good shape for the fall, and for the next 12 months or so after that, I can't say.

Lastly, just on the price of oil as far as where you start to lose some of your credits, do you have any more insight into that?

Good question.

The longer we get into this year, the better off we are.

The price that you see quoted, the actual basket of oil that's used to figure the number is lower than that.

It is on an annual basis.

Oil drops part of the year, I think we are in pretty good shape right now, for this year, even if petrol spikes, if it stays in the $50 to $60 range, we will be in good shape to continue.

There won't be any lessening of credit.

Up $60, and if we were to stay above $60, that might be enough to [inaudible] that might be enough, plus a little bit production.

Where it is right now, like I said, it is on an annual basis.

And with - - the later we get into the year, and the longer it stays between where it is now or less, the better off we will be.

Lastly, wondering, with putting ethanol kind of on the back burner now, why not think about a dividend rather than being more aggressive on the share buyback?

We are giving serious thought.

More the buy-back than the dividends.

We are giving serious thought.

Or not serious thought.

We're doing it.

I intended that i a buy back is a dividend, the advantage of a buy-back versus the dividend, because first of all, it makes it liquid stocks for people like yourself, who are looking, there might have - - anyone that might have all large amounts, if there is no buy-back going on, then we're very thinly traded stock, number one, number two, a buy-back pays the money out to shareholders, and it reduces the number of shares which allows the rest of the shareholders to get a more significant gain on the earnings per share.

Our choice to date has been to go, pay our dividends through buyback instead of just pure hanging them out.

Thank you very much.

Great quarter.

Thank you very much.

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

I will turn the conference over to you for your closing remarks.

Great.

I'd like to thank everyone for listening.

Like I said earlier, we are excited; it was nice to have a 7% comp quarter, and we're excited for the rest of the year.

Looking forward to continuing to put earnings numbers on the table.

Thank you very much.

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

We thank you very much for your participation.

And ask that you please disconnect your lines.

Thank you and have a good day.