REX American Resources Corp (REX) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Rex Stores fiscal 2006 second-quarter results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded Wednesday, August 30, 2006.

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.

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, the negative thereof or other variations thereon, or a comparable terminology.

Listeners are cautioned that there are risks uncertainties that could cause actual events to differ materially from those referred to in such forward-looking statements.

These risks and uncertainties include the risk factors set forth from time to time in the Company's filings with the Securities and Exchange Commission and among other things the highly competitive nature of consumer electronics industry, changes in the national or regional economy, weather, the effects of terrorism or acts of war on consumer spending patterns, availability of certain products, technological changes, changes in real estate market conditions, new regulatory tax, or tax law changes related to the Company's synthetic fuel investments, a fluctuating amount of quarterly payments received by the Company which reflects the sale of partnership in a synthetic fuel investment, potential Section 29, Section 45 tax credits (indiscernible) phased out and the price of crude oil adjusting for inflation and the uncertain amount of synthetic fuel production-related income we receive time to time from the Company's synthetic fuel investments. (indiscernible) relates to ethanol and investments, risks and uncertainties include, among other things, uncertainty of constructing plants on time and on budget, on the volatility of corn distillers, dry distiller grain, ethanol gasoline and natural gas.

In terms of the quarter, last quarter, our sales were 82.1 million.

Comps were up 3.5%.

Earnings were 1.5 million or $0.13 per share versus 8.7 million or $0.70 a share last year.

The primary cause of lower earnings was the $7.7 million lower income in synthetic fuel on a pre-tax basis.

Breaking down the quarter further, we ended up with, on the retail side, about a 1.5% lower margin caused mostly by a change in mix.

It was offset by a lower SG&A, again reflecting our ability to control expenses during these tough times.

We had higher investment income due to having more cash to invest and higher rates.

We had lower interest expense reflecting less borrowing.

We had a higher tax rate, reflecting the loss of synthetic fuel tax credits.

We also, during this quarter, had a $1.7 million real estate gain primarily related to the sale of one property.

In terms of our biggest categories and in terms of our biggest and worst retail categories, the biggest categories down were DVD, which is basically product saturation and continued pricing that has made that a category that is less and less viable for a company of our type, so we had declines in rear projection in most tube sets.

This reflects the transition to LCD plasma and light-engine products.

Also, we're seeing right now many of our products that were previously very good products being required to put in high-definition tuners, which has raised the price considerably and cut demand considerably on those products.

It's a situation that is very, very -- we are anniversarying some tough numbers and don't have impact in one category -- $0.35, $0.36, very little product that made period because it's just not -- it's been phased out with (indiscernible).

In terms of product up, appliances were up; that was mostly related to hot weather.

Light-engine television was up.

Light-engine television (indiscernible) LCD and VLP product and that is basically (indiscernible) replace or replacing rear-projection television.

It's not up enough to cover the loss in rear-projection television.

In that category, most manufacturers have gotten out of the business, so -- and we're trying to replace with light engines.

We're not totally done, so LCD product was up over 100% and plasma was up over 50%.

And again, these are the future of our business as prices come down, these products we expect people in our smaller markets to continue to buy more and more of that type product.

On the energy side, our synthetic fuel was hurt by higher oil prices which caused the people that we sold our plants to cut back production.

We still made about 700,000 pre-fax.

Over the history of these projects, we've generated roughly 112 million in pre-tax income and 47, a little more than 47 million in tax credits.

Last year, we generated, in these businesses, 30 million in pre-tax income and roughly 6.4 million in tax credits.

We have been spending a lot of time over the past couple of years knowing that this could be phased out or knowing that it's eventually going to go by the wayside, looking for ways to replace this income.

We've looked at a number of different alternative energy-type projects and after a lot of effort and time have settled in on what we think is a unique strategy.

Our strategy is to invest with the farmers and basically farm our own projects where we can allow our input and our expertise in alternative energy combined hopefully be an add-on to the farmers who know the corn, who know the ethanol business, and we have a vested interest in these projects.

To date, we have 80 million in potential investments subject to a few criteria and a few more things that we need to be mostly getting the final lending commitment and then this money at that time will be committed.

We, at this point, have already one project that has already broken ground; two others likely will follow by the end of this year.

A fourth project that we've talked about will take place -- which should break ground sometime in the first half of next year.

In conclusion, retail right now is going through a rough patch.

The tube sets and the stuff without high-definition tuners is phasing out in a very big way and we are trying and are basically treading water in that area.

We are replacing it with LCD plasma and VLP product but again, once this phases out and the sales of (indiscernible) and plasma come to the prices for our markets, I hope that there will be a huge boom in the television business.

In alternative energy, the drop in oil price caused much lower synthetic fuel income.

We are encouraged right now that oil is roughly $70 a barrel.

If it drops roughly another 10%, it's our hope and expectation that some of these plants will start producing more next year, and we could see one more year of income in synthetic fuel.

Over the long-term, we're very optimistic about our ethanol investment.

It's good for the farmers; it's good for the country and it should be good for our shareholders.

We are going in and again with the farmers and farmer-owned projects.

We think that's the right way to grow.

Corn is going to be a major, major factor.

EDG is a byproduct that comes out that again is something that corn farmers know how to handle and we think that this is a unique strategy that can be very, very good for our company.

That leaves the forum open for questions.

(OPERATOR INSTRUCTIONS).

Arnold Brief, Goldsmith and Harris.

A couple of related questions -- could you give us some indication of -- you mentioned four investments totaling -- which totaled 340 million gallons of ethanol.

What is your participation in terms of -- what is your equity interest in terms of gallons?

I'm guessing about 50 million but maybe you could -- (multiple speakers).

I think, again, we haven't disclosed that yet, but one of them we mentioned that it could be over 50%, and that was in -- if we make the full investment that was in our press release.

The others I think if you use the number 25 to 30%, you are safe.

On each one of them?

Yes.

One, they may be a little more or a little higher.

I'm just looking for an approximation.

Somewhere in there, you are pretty safe.

Okay.

Are you considering any other additional investments in ethanol?

Yes, we are.

Okay.

Could you tell us how many shares -- (multiple speakers)?

(multiple speakers) -- projects, we want to invest with the farmers.

Okay.

It's a unique strategy in that most of the competition in ethanol that we're going to have prefers to own their own plants.

We think they're going to have a hard time finding, in our opinion -- corn is going to be the key and we think that farmers have a vested interest (indiscernible).

Our projects and our strategy is going to look very, very good two, three years from now. (multiple speakers) -- right now, everything looks very, very good but we think ours is unique and we think it's something that is different from everyone else out there.

Is there any limitation?

Could you give us some idea of what your ultimate goal in terms of capital commitment might be?

Well, let's put it like this.

I would -- our goal, in terms of ultimate goal, obviously, if we get a good running business out of this and it can generate its own capital, that's a whole different story.

But a better way to look at it is what can our balance sheet support today and -- (multiple speakers).

Okay, that's probably what you were going to ask.

I would say up to 120 million is what our balance sheet potentially could support.

Okay.

Could you give us some idea of how many shares of stock you bought in the quarter?

We didn't buy any.

Okay.

The sale of one property was a store, I would assume.

Yes, that's right.

Are there any other plans for sale of stores in the last half of the year?

There's always the possibility and that's -- again we're going to look at raising money and there are many different opportunities in our real estate.

We feel, without getting into specifics, it's undervalued and there are many opportunities in that area of our balance sheet to potentially raise money.

Okay, I will let somebody else ask some.

Thank you.

Rick Weinhart, BMO Capital Markets.

Good morning.

A couple of questions -- can you comment on how air conditioner sales did in the quarter?

Yes, I can give you a pretty good number.

The air conditioner sales were positive for the quarter, but they were really relatively consistent with what our comp-store sales increase was -- our comps 3.5 and if you back out air conditioners, it stays real close to that number.

Okay, great.

(inaudible) area that was down, Rick that I didn't mention was audio, which is the iPod.

Yes, that's consistent with your prior in those couple of categories I would imagine.

You talked a little bit about the projection TV business and flat panels replacing.

I'm wondering how your supply looked in flat panels this quarter.

Did you have enough in the stores to be able to offset that as the transition was occurring?

Yes, I would say we offset it, give or take a little bit.

Supply was fine in everything except I think we were a little short in low-end LCD products.

Okay, in terms of the --.

(inaudible).

That's the only product I can see where we might be short right now, or where there might be some industry shortage (inaudible) everything else there is no shortage and in fact, there might even -- might have even going to the other extreme where there's overages.

Okay.

What I'm getting at I guess in terms of the shortage, though , and not so much from an industry perspective which I know has happened at some points, but in terms of your lineup and your selection in the stores.

I mean, do you have the brand selection and the number of SKUs that you want relative to your TV mix right now?

Except for -- again, except in the -- (multiple speakers) -- LCD, we absolutely have -- we might even have more SKUs than we want right now.

We are in good shape there (inaudible).

Okay, great.

The only exception is (inaudible).

Okay.

Doug, maybe this is for you.

The difference between your comp growth at 3.5 and your total sales growth in the quarter was a bit larger over the last couple of years.

So I'm wondering what that is.

I mean, two things that come to mind is that the stores that you are closing were doing a little bit more revenue than the previous stores you were closing.

The other thing that comes to mind is perhaps there's some non-core revenue that's not calculated in the comp.

Yes.

I mean, there's a couple things there, Rick.

Probably the biggest thing is that when we did the leases with Dollar Tree, those stores did not come out of -- they stayed in continuing operations instead of going into discontinued operations, because we've got a continuing involvement with the stores.

So by not dropping those out, you're getting a little bit more disparity than you normally would.

Okay, that makes sense.

Then moving down the P&L, your gross margins in the quarter -- can you talk about what some of the factors were that drove those margins down?

One of the things was mix; we saw a much greater, a higher mix of appliances.

Also, our air conditioning margins even though they were good were not -- last year we had a lot of closeouts that we bought in air conditioning.

We didn't have as many opportunity buys in that category, and we also again lost some of what was previous high-margin business, especially in the big screen category, the regular big screens, rear-projection.

Okay, so when I'm looking out to third quarter, you have I think a much easier comparison this year.

Last year, I think you did around 27.5 versus almost 29.5 in the second quarter last year.

So --.

Last year's second quarter was really just I wouldn't say distorted but we had some great buys in air conditioning and it was a good season as it was this year, but the margins were better last year.

Okay, so when I look at the run-rate for the business, I mean, can we assume that, your year-over-year comparison or your decline in margins will be much less in the third quarter than what you saw in the second quarter?

Rick, I would look more at year-to-date our margins have been about 27.75%, and for the second quarter about 27.5, so you know for the year, it's been relatively consistent, so I would probably be looking at it more that way than -- (multiple speakers).

In trying to guide you, though, I would caution you that was a big HDTV rear-projection season last year.

Which was higher or low margin for you?

Because I thought last year, you had a problem with the margins relative to what you did most of the year.

Right.

That generally over the year has been a good margin for us.

Appliances is also growing in their business just in terms of a general mix, which will cause some erosion in margins (inaudible).

Okay, that's helpful.

Audio is shrinking, which is one of our highest-margin categories for all that stuff (inaudible).

Okay.

That actually leads into my last question on the margins.

Can you talk about what perhaps you're going to be doing to offset what is probably more of a secular decline in the business for margins in a lot of your categories, and within the plasma and LCD?

You know, that's the growth business and certainly should help your comps, but being a lower-margin product, what kind of changes maybe you're instituting or what you're looking to do to help offset that erosion?

I expect that there will be some overages in those products, which has always been in the past a benefit to us, although in these products the prices are falling so fast we have to be extremely, extremely careful.

We are making better effort.

We are looking at taking on other -- at least another accessory manufacturer.

We are probably the lowest -- again this doesn't come in right away because we account a little different than everybody else; we bring in the income over the life of the contract but we are one of the lowest in the industry right now in selling service policies, which is a high-margin product, and so we're going to maybe do a little better in that product.

The big thing like I said is to try and get the add-ons out, which if we can do that, we can offset some of the decline you are talking about.

Okay, that's helpful.

On the SG&A, that seemed to be a lot lower.

That was probably the bigger surprise for me in terms of the quarter.

Can you talk about what's driving the SG&A at this point to the lower levels, and also if there's an impact in there from the real estate at all that you had done, the real estate sale?

The real estate sale is not in there.

That's just a one-line item.

We continue to do a pretty good job managing the advertising costs and driving down the advertising cost.

One of the things is, with the lower corporate profitability, the corporate bonuses have also come down and lower occupancy cost and just a general across-the-board just really trying to control costs, Rick.

Okay, I guess what I meant was not from the real estate sale this quarter but for larger ones that you did at the end of last year, where I think you're accruing, you are actually getting rent on those, and I believe that's an offset to your SG&A.

Is that correct?

We're running that through our net sales and revenue.

Oh you are?

Okay.

Great.

Then just on the balance sheet, a couple of things -- you had a $5.5 million accrual out there, receivable.

What's that for?

That's money we advanced on one of the ethanol projects.

We advanced that while they were getting their financing.

Oh, I see, so that shows up on the balance sheet, okay, great.

Then the real estate sale that you had, do you know what the base was for that piece of property -- the book value?

It was extremely low.

It's a property we've had and it was extremely low.

Okay.

Okay, great.

I had some more questions on the ethanol but why don't I get back in the queue in case there's some other questions from other folks?

So I will be back in a second.

Thanks.

Mike [Neary], Neary Asset Management.

I will go ahead and ask some questions about ethanol.

Can in you review overall -- you mentioned, on a previous call, what price deck are you using for your projects?

What type of IRR do you hope for or expect?

Well, we would like to -- at the current levels where ethanol is selling for, if we were in production today, the IRR would be well over 50%.

We are using a low enough price of ethanol and a high enough price of corn, which is higher and lower.

That would drop at -- we have (indiscernible) and we will be very happy with 20%.

(multiple speakers) -- much, much more than that.

It's between -- 50 is very light when I say 50, but we're not up and operating (inaudible).

Right, and the price may come down.

So what price deck are you using for the 20% that you budget, or I mean --?

We are using, again it models out at a 20%.

Every project is different but we can sell ethanol at roughly $1.30, $1.40 and do fine.

Okay.

Can you talk about this Levelland/Hockley project in detail?

I ask about this one because you mentioned it.

To the extent you can't say things, please don't but why does this project work at that size at 40 million gallons?

What is your corn source -- (multiple speakers)?

(multiple speakers).

I will talk a little bit about it.

Texas has a small producer incentive in ethanol, so actually the return on equity is higher because Texas, (indiscernible) and it's supposed to continue for ten years.

Assuming it does, this plant will make roughly $3 million a year in state (indiscernible) incentives, cash incentives to produce ethanol.

In this case, we are actually better off.

In most cases, you are 100% right; bigger is better.

In Texas, that's not necessarily the case.

Bigger is higher return in Texas; that's not necessarily the case.

Okay.

You have a corn source there?

Do you have a buyer for your ethanol?

We are using, we will be using one of the leading marketers of ethanol.

I don't think we're ready to announce who it is yet but (indiscernible) who again will market it wherever the highest price is.

In terms of a corn source, most of the corn there is sorghum, which works just fine.

Instead of corn, it's sorghum.

In the net location, do you need to transport it far to sell it or -- I'm not familiar with it.

We will have to transport to sell it, but it's a lot cheaper again to transport ethanol than to try and transport corn, which some people are trying to do to a different coast.

Yes, okay.

Then a couple of other questions -- on the synthetic fuel, it looked like once I take out the phase-out that you -- I think you said you had a 75% phase-out in the first quarter, so it looked like that would have been 10 million pretax without that.

Is that the type of potential rate we could see next year if some of these facilities start back up?

Well, again, I talked about returns and it depends how much we invest.

I would say you won't see the whole thing.

These facilities take between 12 and some of them as long as 20 months to get built, so you're not talking next year.

There's a good chance at least some income next year, but it won't be fully -- you won't see the large amounts for a couple of years. (multiple speakers) the full effects of the investments for a couple of years.

Yes, I assumed that.

I was actually asking -- (multiple speakers).

(multiple speakers) -- no difference in every public ethanol company out there right now; they all are selling on the plants that are under construction, not on their current (inaudible).

They are selling on some type of multiple on the plants that are going to be built (inaudible).

For this synthetic fuel piece that is currently not doing much, it looked like that would have produced 10 million in pretax in the first quarter, before the phase-out.

Is that correct?

Again, that's roughly what it made last year in the second quarter, so again in an ideal scenario -- and this is on the energy side of our business -- synthetic fuel comes back into operations next year.

Legislatively, it can come back into operation.

It was phased out because of the high price of oil.

If oil were to drop another 10%, it's our opinion that a lot of these plants would get started again.

That income could come back in a big way.

Then the following year, ethanol would in there at a big way.

So one would just -- we would move right from one to the other. (multiple speakers. ) that would be ideal, the ideal scenario on the TV.

A lot of people with tube sets realize they're going to lose their signal and they come running to our stores, buy high-definition sets.

A lot of people have tube sets in our markets.

We've sold a lot of them and I think we've taken very good care of them but we will get that business.

Last couple of questions -- CapEx for the quarter and the year, and then how many options were outstanding at the end of the quarter?

Let's see.

Capital expenditures was -- it's been minimal.

On the year-to-date basis, it's about 330,000 on a year-to-date basis.

It's not been a large amount there, and as far as the outstanding options, it's about 4.4 million.

Okay.

Do you anticipate keeping CapEx at this level for the next year or so?

(multiple speakers) -- based on the ethanol (inaudible)

Right, I guess other than just with the quarter business?

At this point in time, I would not anticipate large capital expenditures in the core business.

Okay, thank you very much.

Ari Levy, Lakeview Investment Group.

My question has actually been answered.

Thank you.

Arnold Brief, Goldsmith and Harris.

Yes, I've got the answer to this question buried in my notes but you can save me the trouble of looking.

As in industry standard -- I'm not asking specifically in terms of Rex but as an industry standard, what is the capital investment to produce a gallon of ethanol?

As the industry standard, between $1.50 and $2.25 a gallon.

Yes, that's what I thought.

I thought it was about $2, and I'm having trouble reconciling your investment with the amount of gallons of ethanol that you seem to be -- that you indicated you controlled, and I'm missing something somewhere, I think.

I think we might the closer to the bottom of that number I just gave you.

Then it reconciles pretty (inaudible).

Okay, okay.

Thank you.

If you're using $2, I think we might be closer to the bottom.

Okay, thank you.

But again, that's off the top of my head and at the next conference call, I will try and break it down better for you.

Let me ask one other question, which I (inaudible).

In terms of your retail business, you are selling off stores gradually.

You're not investing a lot of money in --?

Arnold, one other thing you are not taking into account -- there's leverage on every one of these plants.

That's a big -- that's a difference.

No, I was doing that on a total investment basis.

I wasn't doing equity versus debt.

Say, if it costs $1 or $2, then that usually is 40% equity/60% debt, and we are involved in that but we are not actually putting that much per gallon in.

Okay.

In terms of the stores, you're not investing a lot of money on maintenance; you're closing stores as you can.

I -- (multiple speakers) -- ask this question before, but in terms of keeping your employees happy and advertising per store, I mean, it's very hard to keep the retail business healthy if it's not expanding.

The future for your employees is limited; there's not growth, etc. and so forth.

Is -- (multiple speakers)?

If I tell our employees that right now -- and our books are open -- right now, we have to do better in the stores we have, and we can do better.

To talk expansion when -- and you know the numbers as well as anyone, when our current return on equity in the retail side is what it is -- (multiple speakers).

But that's my point.

In fact, it is not only a question -- I'm not advocating store expansion.

If you look at it the other way, you are not even spending a lot of money on store maintenance, so I mean the future retail looks somewhat limited in terms of what you're willing to invest in it or what you are willing to do with it.

I'm just wondering how long you can operate a retail entity in a contractual mode without losing people and having fixed costs rise too much.

I'm really almost asking you if you have an exit strategy.

It may look to you like we are not investing in bricks and mortars, which we are not investing a lot in, but we are investing and certainly are trying to carry the latest technology more so than we ever did, and that's the key.

People -- if you think -- one of our biggest competitors today, I hate to say, is the warehouse clubs and we certainly have nicer stores in every way than they do.

What we have to do is what we do well and if we have the right product, I believe we can make money.

So again, on the other hand, we have to look at what you're looking at and so there has to be, for our shareholders, a return on investment.

So that's -- we have to look at -- I guess to give you some comfort, we do and we continue -- and our board continues to look at exactly what you are talking about.

Thank you.

Just one last question -- are you considering any other alternative investments besides ethanol?

At this point in time, no.

We have looked at solar; we have looked at wind; we have looked at bio diesel; we've looked at a number of things.

Oh, one other question I did want to ask -- are the plants that you are involved with capable of converting to other material, other raw material sources if they -- (multiple speakers)?

I don't really know the answer to that.

They are made to use either in one case -- they are made to use corn-type products but whether they are or not, I don't know at this time.

It's not something -- no one has invented the technology yet that economically works -- that I know of, anyway -- other than used in agricultural products.

So until we know what products -- what else we're talking about, it's all a hypothetical question.

Okay, thank you.

Well, I'd like to thank everyone for listing and I appreciate everyone taking their time to hear our conference call.

Thanks very much.

Bye.

Ladies and gentlemen, that does conclude 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.