REX American Resources Corp (REX) 2006 Q1 法說會逐字稿

Welcome to the REX Stores fiscal 2006 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. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Friday, May 26, 2006.

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

Thank you.

This conference call contains or may contain 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 or results to differ materially from those referred to in such forward-looking statements.

These risks and uncertainties include, among other things, highly competitive nature of the consumer electronics industry, changes in the national or regional economy, weather, the effects of terrorism or acts 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 sales of its partnership interest in synthetic fuel investments, the potential for Section [2945] (indiscernible) tax credits to be phased out based on the price of crude oil adjusted for inflation and a certain amount of synthetic fuel production resulting in income received from time to time from the Company's synthetic fuel investments.

Now, I will thank everyone for listening and talk to everyone about the first quarter.

Sales for the quarter were $86.1 million versus $87.9 million.

Comps were slightly up, about half of 1%.

Earnings this year were $1.5 million versus $6.1 million last year.

EPS, $0.13 versus $0.48.

Biggest cause of the earnings decline was synthetic fuel.

Synthetic fuel dropped from $2.1 million in earnings -- dropped to $2.1 million in earnings this year from $6 million last year.

In terms of our energy division, the synthetic or our energy operations -- our synthetic fuel operation got a blow when we received no legislative relief in the tax bill that just passed.

It was our hope that there would be some there.

That did not take place.

There are other bills where this may or may not get put into, but at this point in time, we don't anticipate any legislative relief.

Our largest partnership that we sold -- the one we sold to Florida Progress is a consequence of no legislative relief and high oil prices has announced that they are shutting down their operations.

Thus, with them shutting down, we -- and with other people making similar announcements, at this point in time, we don't anticipate any more income from the sale of those partnerships.

Unless people start up operations, the only thing that we can see in our opinion that would cause that would be some type of decrease in oil prices -- some type -- where it becomes profitable for them to run these operations again.

In terms of our investment in synthetic fuel, we took an investment that was a little more than $3 million and turned it into about a $110 million pre-tax, maybe even a little more than that and pre-tax income and another $45 million in tax credits that we were able to use against our -- some of which we have used against our general business, some that we will be able to use in the future against our general business.

In the energy sector, we look at our future as ethanol.

We have some announcements in that field.

It is not something -- we are prepared to talk about that, but we have announced -- we have some announcements and we are looking very, very hard for other opportunities in that field.

In the last six months, hired David Bearden, formerly President of Panasonic U.S., to run our retail operations and I am spending most of my time right now looking for ethanol investments and looking to make an impact in that business with a hope to make a similar impact in that business as we had in the synthetic fuel business.

In terms of the retail side, sales were basically flat.

We were hurt by product shortages in plasma television.

Having Dave Bearden onboard, the former Panasonic leader in plasma television, we hope that we will get a decent supply in the fall and where we think there will still will be some shortages is in exploding product category, but we expect to get a better share -- do a better job of getting product in the fall and taking care of our customers.

In terms of our increases, we have big increases in LCD, plasma television, light engine television and good increases in appliances.

These increases were offset by decreases in CRT televisions, especially CRT big screens, DVD, audio and camcorders.

It is our hope for a hot summer this year as everyone who has followed our Company knows, our summer business is tied in many ways to air-conditioning business -- from air-conditioning business, which we still do a big job and it is our hope, again, for a hot summer, which would stimulate our appliance business and our air-conditioning business.

In terms of plasma and LCD, we are uniquely positioned in that market.

We still have salespeople.

Most of our competitors don't have salespeople, but we think in the small towns we serve that a good salesperson that explains a product can give us a terrific edge over some of the bigger box retailers where people have to pick the product up off the shelf.

So I think we're ready to go there.

The prices are coming down, so we should be in the sweet spot for plasma and LCD during the fall and it is our hope that we can use those two categories to do well in retail.

In terms of our balance sheet, at quarter-end, we had about $15 million in cash.

We have a balance sheet that shows very little mortgage debt.

We own 157 stores.

We own three warehouses.

We are currently on the books for about 120 -- a little over $120 million and again very little mortgage debt against it.

We have a very, very strong balance sheet in that area.

We are extremely clean and very, very powerful.

In conclusion, it is our hope to replace the synthetic fuel business or the impact we made in that business with a big impact in ethanol.

In the retail side of the business, plasma and LCD coming on strong and with the pricepoints hitting the sweet spot in our market and with new management, who has maybe better access to the supply chain than I did.

New management working hard in that business.

We're very optimistic on the retail side also.

Thank you for listening.

On that, we could open for questions.

(OPERATOR INSTRUCTIONS).

Arnold Brief, Goldsmith & Harris.

I have got a question and then a follow-up question.

First question is how many retail stores do you anticipate closing this year?

We close on an individual basis.

We have one that came up recently.

The last one we closed we didn't anticipate it.

The landlord basically asked for a huge increase in rent, which we couldn't afford.

But at this point in time, there will probably be two or three stragglers that we may have to close just because market conditions -- they turn on us and we aren't generating enough profit to justify keeping them open.

Something like two or three for the year then more or less?

Two or three additional for the fiscal year would be my best guess.

The follow-up question --

But it could be -- again, one thing that we do and we look at very closely is the profitability of our stores and we look at that as one of the strengths of our operation.

If the store isn't making money in many cases, in fact most cases, we have been able to close that store, turn it around.

If it is an owned store, turn it around and either lease it or sell it at a profit.

It doesn't always happen, but the bulk of the time that has been what has happened and again, that is one of the strengths of our Company.

Okay.

The point of the question I'm trying to get at is that over time, you have been closing stores on balance.

I don't remember -- I think the last few years, at one point, you had 255.

You are down to about 218 now.

That's right.

It seems to me that your overhead, your advertising, your buying power are all moving -- making it more difficult to operate these stores, number one and number two, more importantly -- I don't know.

If I was a manager in your Company and saw the retail business contracting, I would question the future.

I was just wondering would the better management tend to leave and the good management tend -- the bad management tend to stay and -- I guess what I'm asking is do you have an exit strategy for the retailer or is it just going to continue to contract?

That is a valid question.

The truth is that sometimes if you cut out the cancers of an operation and if we can get the same stores growing, our people aren't salaried people in the stores; they are commission people.

If we can get better product to the stores, if we can do a better job of operating the stores, we have hired a new president, we can get the same-store sales growing.

They are going to make -- they are in this business to make money and the way they can make money is to grow their stores.

They know it and we know it.

And the key -- and we have had a few this quarter.

It wasn't up a lot, but it still had positive comps.

Being in retail isn't the number of stores.

The worst thing sometimes you can do is open stores for the sake of opening stores and try and grow your way out of problems.

The best thing you can do is use the assets to your best of your ability and do everything you can to have comp store increases.

If you have come store increases then things go right, not the number of stores, but the comp store increases.

We know that and we are working on that.

I have spent over 20 years in retail and I can assure you that by opening stores you sometimes -- contrary to thinking that you keep your better people, sometimes you dilute your better people and you take good people out of good stores and turn good stores into bad stores.

If you can show people, and that is what we are working hard at doing, showing people that we're going to grow their stores then they're going to be enthusiastic and be proud of the company they work for.

If we can get to the point where we show a decent return in retail then you can -- we can talk about opening more stores.

Well, I'm not being critical of the store opening program.

I tend to agree with you and I think there's a lot more competition coming into your market.

So I am just wondering how long you can keep closing stores and keep the people happy I guess is what I'm really --.

And again, to answer your question, if comps are growing, their income will be growing, everything else being equal because they are paid on the stores.

Our people are on commission.

So I hope that answers your question.

If the comps shrink -- and to be honest, comps weren't great last quarter. 0.5% is not good.

I am sure people in the stores would have rather done a lot better than that.

We have been doing better than that and we hope to do better than that.

Are you far enough along with any of the ethanol facilities in discussions to know if these plans will be strictly using corn as a raw material or whether you'll be able to use other raw materials, such as sugar or cellulose, when that technology develops?

The plants that we are building are planned to use corn, but most of these plants -- most designs are capable of using other raw materials should it come about.

I'll give somebody else a chance.

Thank you.

Thank you.

Appreciate it.

Rick Weinhart, Harris Nesbitt.

I have a couple of questions on the synfuel business.

First, there was I believe some production by Progress in early May.

Is that -- so are you expecting any synfueling come as a result of that or --?

We're just not anticipating any.

There could be some, Rick, to be honest.

I just don't want people like yourself -- if early May -- I don't want you to -- if we surprise you on that, it will be now on the upside because we are not anticipating any income, but we hope for income.

Okay.

And is there now -- with them having announced that -- first of all, maybe (indiscernible) on the call, you may have this, but what is the phase-out rate that you used in the first quarter?

Rick, we used about 75% as our estimate at this point in time.

75%.

Doug, he is asking the phase-out rate.

So when you say -- that 75% -- when Doug says 75%, we're saying that it was 75% phased out.

Okay.

And is there a chance that any of this in the first quarter would be reversed out at the end of the year?

There is a chance absolutely that it could be reversed out.

When we did the phase-out, we based it on the futures prices, which are higher than the current prices when we did our estimate.

So if oil doesn't go out, it could be reversed.

If oil goes higher than what the futures anticipate, then it could go the other way too.

It could go in either direction.

(indiscernible) this point in time.

Okay.

There's no chance of a reversal from prior years.

It is just this first quarter we are looking at, right?

Well, it's on a calendar year, so there might be a slight chance for January also.

Right.

Okay.

Exactly.

Okay.

Also were there any stores sold in the quarter?

No, there was not.

Because the investment income was a little higher than normal without a --.

That investment income is just the cash that we have got in the bank and the money we are earning on that.

Okay.

Great.

And then looking at the balance sheet, your inventories are still running pretty low here.

I imagine that is related to the shortage in flat panels.

Do you have any estimates as to where -- if you had all the inventory that you wanted, how much short you are in terms of dollars right now?

We could probably use a few more plasma, but the truth -- we are not -- in most categories, we are in pretty good shape.

We're not short; we are not heavy; we are okay.

Okay.

Last year, you were at about 130 million.

Is that roughly where you would like to be with plasma if you had it in place or is that too much.

I don't think we need that much.

If we had that much -- there are some great opportunities out there, that is all.

That is what it would mean.

And it sounds like you're not too optimistic about getting a supply in until the fall.

No, I think we are.

We are getting it in now.

I think it will be sooner than the fall, but the fall is the big selling season.

I see.

Okay.

That is -- the big fall season hits. (indiscernible).

Summer is a good season, but not the big season as the fall.

Huge, starting basically with football.

Okay.

And then looking at the product sales, do you have a sense of what percentage of the TV sales were flat panel this quarter?

Between LCD, plasma and light engine, it was probably between 60% to 65% of our television sales.

And by chance do you happen to remember what it was last year?

It was somewhere between 40% and 45%, approximately 40% to 45%.

And am I right in assuming that the TV business was up this quarter though as a whole?

That's correct.

And the appliance business, do you have a rough estimate for what that did in the quarter?

Appliances and television both positively impacted comparable store sales.

Appliances was a little stronger than the television as far as the positive impact on comp store sales.

So it did very well.

It did very well.

Okay.

Great.

And the last question, just on the ethanol, Stuart, is there any time frame when we can expect to see -- I believe you have an investment coming up due on one of these next quarter, right?

Or a couple of them in the next quarter.

How should we think about the time frame for getting more information in terms of not just the investment, but your percentage and so forth?

Is it fair to say that we will have that information in second quarter?

I think by the second-quarter conference call, you will know a lot.

You will know -- by the next conference call, you're going to know a lot more --.

A lot more.

Okay.

Thanks very much and good luck to you guys.

Mike [Neary], Neary Asset Management.

I just had a couple of quick questions.

In terms of the balance sheet over the next quarter, apart from anything done with ethanol, how is this going to change?

Is synthetic fuel receivables going to come into cash?

What happens with deferred income?

Can you just talk a little about changes to cash?

I think the biggest changes will be as we build up for fall inventory, build our inventories up for fall and Christmas.

It won't happen -- it will happen gradually, but cash will go down and inventories will go up.

That excludes the ethanol investments.

Okay.

And how much would you think inventory would go up over the next couple of quarters?

It could go as high as $100 million.

It has gone in past years probably over $150 million.

But you have fewer stores now.

And receivables -- everything will go up proportionally -- or payables -- excuse me, everything goes up proportionally.

Right.

And the synthetic fuel receivable, when do you expect to get that in?

For the most part, we probably won't get that in over the short term.

That would be at some point in the future.

We will get that in -- my best guess would be when they have -- synthetic fuel is tied -- the payment is tied to the tax credit.

Right now, that is in flux because it is in a phase-out period.

It hasn't literally phased out, but no one really knows exactly what the percentage is, so we won't -- the bulk of it we won't receive until that number is out there.

Okay.

So that would be after year-end at some point?

That would be might best guess.

Is that right, Doug?

I would agree with that, Stuart.

And then deferred income, what is the deferred income and how does that work?

The deferred income is from the sales of our warranty where we take that in over the life of the contract.

So we sell a three-year contract.

We defer all the income upfront and take it in over the three-year life of the contract after manufacturer's warranty has expired.

Okay.

And so as time goes on, you would have an associated cost and then the deferred income would get reduced?

That's correct.

We would have the cost of any repairs that we did on those units and as you said, the deferred income will roll into income over the life of the contract.

Okay.

Thank you.

Mike Christodolou, Inwood Capital Management.

On your ethanol plants, are those three sites, have they been disclosed what they are or are they listed in the Renewable Fuels Association --?

We filed 8-Ks on all three of them.

One of them is in Levelland, Texas, one of them is in Marion, South Dakota and one of them is in Lima, Ohio.

Okay.

And your thought is by the second quarter, we will have a lot more details on --?

We will have a lot more and like I said, we hope to make that a big business, but we're not prepared to talk about it today.

But that would be issues of permitting and status of completion of financing, capacity, infrastructure, all --?

Right.

And like I said, we hope to -- we have talked about it before -- but hope to do more than just -- we hope to have --.

More than three.

Right.

Well, we're working on other transactions.

Whether they come about or not, again we're not prepared to talk about it.

Arnold Brief, Goldsmith & Harris.

I'm trying to remember.

Don't you have one of those facilities, the financing is supposed to be finalized somewhere in June?

Yes.

I believe -- again, we will be ready to talk about it then.

We will be ready -- we are not ready to talk about that today.

Could I ask a theoretical question?

Sure.

I want to be clear as to what I am saying here.

I am not asking you what percentage equity interest you are going to have.

I am asking what percentage equity interest do you want to shoot for?

What is the minimum equity interest that interests you in a project theoretically?

Theoretically, minimum -- I look at it more on return on investment.

What would I like to theoretically look for? 50% return on investment in a project on current pricing on the way things are.

A better way to look at it is look at what we theoretically might invest in any given plant.

That is what I -- based on current conditions, that is theoretically what I would --.

A question I think you can answer, if you're willing obviously to make a major commitment to ethanol, could you give us some of your thinking on the risk factors in these investments? i.e. what if Congress decided to lower the tariff on imported ethanol?

What if they decided to mess with the tax credit on ethanol given the higher level of prices that currently exist?

Could you walk us through some of the risks that you see and how you have evaluated --?

Just based on our experience with synthetic fuel, it takes a lot to move Congress.

What you're saying is moving Congress and both ideas in a direction that seems to me not logical where we would have take away a product that we have a great domestic and do legislation that hurts our domestic production for the benefit of foreign importers.

I think that is sort of the last thing that Congress will do in this environment.

But again if either of those things happen, it would be a blow to the -- but not a -- it is very, very profitable right now.

Wouldn't be a lethal blow by any stretch of the imagination, but it wouldn't help things.

And the purpose of what we need -- and this is just me talking, editorializing, but I think the reason -- the beauty of ethanol is it is a domestic product.

What are the risks that you see?

Obviously any investment has a risk of --.

There are lots of risks.

The market could get flooded with oil.

Oil could drop in price significantly.

From our standpoint, that is good and bad.

The bad is it might hurt our ethanol hopes, but it would bring back our synthetic fuel business.

In a big way, our synthetic fuel business would become -- everyone would reopen all their plants and huge amounts of money would come on that side of the business.

But that is the biggest problem.

There are also products called DDGs, which is the protein that comes out of ethanol.

There could be plants open.

It could be a tough market to sell your DDGs.

Natural gas is a big component of ethanol.

Natural gas prices go through the roof.

That could hurt the profitability in ethanol.

It is a very, very interesting, exciting, thrilling business with lots of variables.

Any of those variables could go in either direction, which changes your profitability.

So as you pointed out, we know those minefields.

There is legislation.

Right now, there is legislation that could potentially harm the business.

But, again, all those things -- if you believe that oil prices are going to stay high and the gas prices are going to stay high then ethanol business should do fine.

It should overcome all those other things.

Rick Weinhart, Harris Nesbitt.

I forgot to ask you on the gross margins, you had a nice uptick and that is contrary to what we've seen in the last couple of quarters.

So I am wondering, one, what might have been driving that and two, speaking of the second quarter, because I know that is so much driven by air conditioners, but looking out to third and fourth quarter, do you expect that kind of trend to continue?

It is going to -- we had a nice uptick.

Sometime that's the benefit of product shortages, Rick.

You can charge a little bit more, just supply and demand.

Why give it away when you can't even get it.

So you can charge a little bit more for the product, but generally, I don't expect upticks in this business.

It is a very competitive business.

I would much prefer they are flat -- not have an uptick, but have flat or even slightly declining margins and good comps, everything being equal.

That is a healthier way to run the business.

Wal-Mart had declining margins forever and they had good comps and they are Wal-Mart.

So that is much healthier, but when we couldn't get the product, there was no reason to give the product away.

Okay.

Then I guess talking about the second quarter then, excluding the impact from air conditioners, assuming that your product shortages are still -- you are still a little bit struggling from that, we could still expect margins to be relatively strong versus last year.

Well, excluding the air conditioners, which I know --?

Yes, but on the other hand, last year, air conditioners, we sold a lot of them at very, very good margins, so it's hard to say excluding air conditioners.

But what you are saying -- while there are shortages -- basically if there are shortages in supply, you can make a little higher margin in general.

Okay.

Got it.

So it's a balance.

Thank you very much.

The one other thing, Rick, though this quarter -- well, it was the same way last year, but margins in general in the second quarter are helped by air condition and it's also the biggest -- it's a big appliance quarter and they are hurt a little by white good sales.

Got it.

Okay.

Thanks.

Mr. Rose, there are no further questions.

I would now like to turn the call back to you.

I'd like to thank everyone for listening and again it is exciting times for us.

Retail, we think with plasma and LCD hitting the sweet spot, having new management there that hopefully can do a good job at securing the product and working with our people to sell it through.

We are excited there and of course in our energy investments, we had a blow on the synfuel, but that has not stopped us in any way or not stopped me in any way from working as hard as I ever have on the ethanol side of the business.

Again, that is an exciting part of our business.

Thank you for listening and appreciate everyone being on the call.

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 good day.