REX American Resources Corp (REX) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rex Stores fiscal third-quarter earning conference call.

[OPERATOR INSTRUCTIONS]

Our presenters today are Doug Bruggeman, Chief Financial Officer, and Stuart Rose, Chairman and Chief Executive Officer.

It is now my pleasure to turn the conference over to Stuart Rose. Please go ahead, sir.

Thank you.

This conference may contain and contains forward-looking statements within the meaning of the Private Securities Litigation act of 1995. Such statements can be identified by use of forward-looking terminology such as may, expect, believe, estimate, anticipate, or intend 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 the actual events or results 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. Among other things the highly competitive nature of the consumer electronics industry, changes in the national and regional economies, weather, effects of terrorism, or acts of war on consumer spending patterns, the availability of certain products, technological changes, changes in real estate market conditions, new regulatory restrictions, the tax law changes related to the Company's synthetic fuel investments, the fluctuating amount of the quarterly payments received by the Company with respect to sales with its partnership and interests in its -- in synthetic fuel investments, potential for section 29, 45 tax credits to be phased out based on the price of crude oil adjusted for inflation, and the uncertain amount of synthetic fuel production and results in income received from time to time from the Company's synthetic fuel investments.

Relates to the ethanol investment with risks and uncertainties include among other things the uncertainty of constructing plants on time and on budget, and the price volatility of corn, dried distilleries, grain, ethanol, gasoline, and natural gas.

In terms of our quarter this quarter, we -- income was down from -- last quarter was $9,322 million pretax, this quarter, $5,335. Two biggest reasons for decline in income or two biggest elements in the decline were retail sales and synthetic fuel investment which I'll both talk about later.

In terms of retail, our sales fell from 80 -- from $91.8 million to $85.2 million. Same-store sales fell 5.6%. Operating income was at a loss of approximately $771,000. The biggest declines came in -- or the largest reason for the declines in same-store sales and also in income, was in the television category where we lost a lot of tube business and a lot of big screen business. Some of which was offset by large gains in the plasma and LCD area, but it wasn't enough to offset the other categories.

The thing that we're up against right now is phasing out of the old products with as the new class of LCD phases into our markets. And we're probably hurt a little bit more than some of the others just because we are in smaller, lagging markets, and these products were still significant products last year.

In terms of synthetic fuel, all the plants that have been previously shut off are now back in operation. We received income -- we sold all our interests but received income based on the tax credits these plants generated. They -- all of our plants are back and operating. Though the income wasn't as high as last year because they didn't get operating until later, we were able to show much better income than the previous quarter, $5.865 million, and in that includes both the operations of this quarter and adjusting our prior quarter income to account for -- for the fact that oil prices have fallen and we will be getting maybe a little bit more income than we had previous anticipated.

In terms of our real estate, we sold seven locations during the quarter for $6.8 million. In that we had a gain of approximately $2.2 million pretax. In terms of our ethanol investment, all our plants that we had previously talked about seem to be moving along. Levelland in Texas, was financed -- our financing was completed with Merrill Lynch Capital. And that one we've committed right now roughly $16.5 million and could possibly -- $16.5 million including equity and subordinated notes and another $6.5 million could be committed to that one.

It is committed on a contingent basis and we could be spending another $6.5 million on that one. Patriot, another plant we're financing has been completed. $16.0 million, that's 100-million gallon plant, 16.0 -- $16 million has been committed on that one. Millennium, another $100 million-gallon plant in South Dakota. $14 million has been committed on that, again financing completed.

We have one other One Earth Energy plant that still is waiting financing. We expect that to be -- expect our obligation to become not contingent sometime in the first half of next year. That one -- right now our contingent commitment is $24.9 million. We've also invested in an operating business, Big River, where we've committed to date -- spent $5 million and committed another $15 million, investing in that particular company.

Going forward, we expect to be impacted at least a couple more quarters by the loss of the big screen and tube business. It is rapidly going by the wayside, much quicker than we anticipated. We're -- we are increasing our -- our business drastically in LCD and plasma. But certainly not enough to make up for that.

November same-store sales were similar to the last quarter. Also in especially the plasma area, there has been significant price erosion, and there's been significant competition from people like Wal-Mart, Best Buy, just about everyone in that particular category. And that deflation in that category is -- even though units are growing very, very well, it's causing some problems. Our appliance business has remained steady.

In terms of the other parts of our business, they've become not -- between appliance and television, that's become the biggest part of our business. In terms of synthetic fuel, production is totally dependent on low oil -- on oil prices. Plants were put into production as oil prices have dropped. They are starting to -- to move up a little bit, and we are watching that.

And certainly the price of oil will affect the production of next year, will affect the tax credits that these plants generate. And will affect our income. The lower the price of oil, the more income we expect to receive, higher the price, the less income. In terms of ethanol, all our projects are moving ahead quickly. They're -- they're all in our opinion excellent projects.

Farmer -- our strategy has always been to go with the farmers, to go into a partnership with farm -- with leading farmers throughout the Midwest, and -- and as far south as Texas and -- again, we think our strategy will be validated next year with the price of corn and maybe even some shortages of corn. Our partnership with strategy -- our partnership or our strategy of a partnership with farmers we think is unique and something that separates us from all the others. And again, when all these plants are built, we'll have a capacity.

We will be invested in plants with a capacity of over 500 million gallons of ethanol. And again we think it's a great product, it's good for our country, good for our farmers, good for -- hopefully it will help us become little bit less dependent on foreign oil and, in the meantime, give our -- keep the money that is presently being sent over seas, keep that money locally. So, again, we're excited about it. It moved very, very quickly on that.

I will now leave the forum open for questions. Operator?

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Rick Weinhart from BMO capital markets. Please proceed.

Good morning, sir. Good morning, Doug. How are you?

Good. How are you?

Good, thanks.

A couple of questions on the retail business. I apologize, I missed the first 30 seconds or so of the call. If you already mentioned this. Can you talk about the appliance business? I know you had a tough comparison there. Was that up versus last year?

Yeah. The appliance business. In most categories was up.

Was up. Okay.

And do you expect that to continue given the -- I think the comparison becomes even more difficult in the fourth quarter with the sales --

In markets -- ex-hurricane markets. We were in a lot of hurricane markets where appliances were -- where appliances were used. So ex-hurricane markets are expected to continue.

And, you know, it's not up -- up -- give you an idea just for the quarter, washers were up 5%. Dryers maybe 6%. That type of thing. Wasn't 100% increases or anything like that. And I expect ex-hurricane markets, that business to remain good. It's one of the few businesses we're in where there's actually price inflation instead of deflation.

Right.

For the first time in our -- that I can remember in a long time, we can hold unit sales and show some increases in volume.

And is -- is any of that related to the Energy Star Programs, and do you expect that --

Some of it. We're big proponents of the Energy Star Programs, and I don't know if it's related to that or not. But that doesn't hurt anything.

Certainly. Okay.

And on the flat panel business, how are you in terms of inventory?

We're -- we're where we should be. We're -- I don't think there will be -- I don't think -- there will be maybe shortages in certain -- there might be one -- you might not have one brand but you'll have another brand, that type of thing in there, too. At least pockets where stores sell much more than they should on any given day and be out of it. But plenty of time to get it in for Christmas.

They can write the order and have it for Christmas. I think we're in good shape, in good shape -- not over inventory. If anything we may be a little light inventory. But we think we can replace product and buy product as we need it to make sure that we don't run out of any key products. Maybe a couple brands but not key, key product.

Okay.

And what about on the tube and projections inventory? Sounds like with that business slowing, is there any risk to the inventory have with those products?

No. If anything, our inventory oh a lot of the tube sets is going to become worth more because they're going to require a high-definition tuner to be put in, and most customers who are buying the inexpensive sets don't really want to pay that extra money.

And that -- what we have in tube should be very, very -- the price will go up and so what we have will be, in my opinion, more valuable.

Okay. That makes sense.

And on the gross margins for the business -- especially given the Thanksgiving day weekend promotions which, you know, those are post the quarter, what -- what's kind of your expectation for gross margins in the fourth quarter?

My guess is on -- again on the retail side only, there's synthetic fuel. We have almost an infinite gross margin. On the retail side I expect it to be down a little bit. I don't know how much yet but I expect it to be down.

The biggest problem being the plasma, what's happened in plasma. We're finding companies like Wal-Mart, even Best Buy, which is surprising during the Thanksgiving weekend. Some major brands have come on items. I wouldn't say loss items but very low profit items. The Panasonic plasma in particular.

Right. Okay. All right, thank.

That's it for my retail questions. I'll get back in queue for the rest. Thanks.

Thanks, Rick. Appreciate it.

Sure.

Thank you.

Our next question comes from the line of Arnold Brief from Goldsmith and Harris. Please proceed with your question.

A couple of questions. One, I -- I have no problem on the ethanol with the demand side. On -- obviously going up dramatically when it get to 11 or 12 or 14 billion gallons, somewhere out there. Pretty much assured, I think.

The question I have is I haven't seen any numbers, people put together the -- on the supply side. There's tremendous expansion going on in the industry as you know. And you've made a major financial commitment. You must be looking at some -- some supply side capacity numbers which you --

Again we'd like to -- we think -- we wouldn't invest in this if we thought supply side was going to -- was going to way outstrip demand side. There's analysts out there who -- and again, it's all over the place because you never really know which plants are going to get built because some will, some won't, some can get financing, some can't get financing.

Some can't -- some are in markets that aren't particularly suitable for corn. That type of thing. May not get built. It's just real hard to know what is going to get built.

Is there any numbers at all that give us some feeling of leeway?

Again, there's analysts out there that -- we have our numbers which --

That's why I'm asking, your numbers --

Proprietary. Again, what we think will be built. But that's -- That may not be right, Arnold, and I certainly don't want to give a number.

Okay.

Could you give us some idea of -- you emphasized the importance of partnering with the farmer. And you're an investor. Where is the management and the infrastructure for the -- for these kind of plants coming from in terms of actually not just growing corn and --

In most cases, what -- the farmer co-ops will do, one of them is going to run it themselves. It's a co-op that's a -- it's where Archer Daniels, where the co-op already has -- their grain silo is in a partnership with Archer Daniels Midland. In that case they're going to run it themselves.

In another one we're going to have outside management come in and run the plant. In each one of these operations- the one thing they all have in common is they are owned by farmers who at least to some extent by farmers who actual go and farm and all the way down to the bottom of the supply chain, the corn.

Okay.

Could you give us, assuming all your investments and all the contingent investments are completed, what your capital investment will be and how many gallons of ethanol you'll --

I can give you a rough number. If everything gets built roughly, $100 million.

And how many --

Roughly 600 million gallons. But that is not -- we don't own 600 million gallons.

Right. How much do you own?

We own anywhere from -- in the plant that's already operating, when the investment's completed in that one, it will be little less than 10%. The others it's anywhere from a little over 20% up to potentially over -- approximately 60% on one of the plants.

So could we assume that your gallonage that will accrue to you so to speak would be, what, 100 million, 150 - 180 million, what -- what's--

I'll get back to you on that number. I'll talk -- again, until -- while these are contingent, I don't like to count them. And there is one that's still contingent which is a pretty good size one. But if you figure -- I'll go over each of the plants and will tell you the capacity. And I'll tell you anyway, and then you can figure from there.

Levelland capacity is roughly 40 million gallons. And again, people count capacity different. Some people -- on these 100 million--gallon plants, some people add another 10% because of the denaturate that it has to be part of the -- put into the ethanol.

But Patriot is 100 million-gallon plant. Millennium is 100 million-gallon plant. One Earth is 100 million-gallon plant. On those three we'll own anywhere from 20% -- somewhere between 20% and 40% roughly on those.

Big River is rapidly growing operation on its own that's building new plants. That's the one that we'll own less than -- less than 10% when it's all done. Capacity on that one is -- is dependent -- well in excess of 200 million gallons once everything's completed. And could be way, way more than that. And again, that one is already operating and generating a little bit of income for us.

That should give you some rough idea.

Okay.

Finally, your -- your store base has been contracting for some years, and I guess my concern is that at some point the advertising support per store, the infrastructure cost per store, your buying ability, all of this has to be affected to some degree.

I'm -- I don't recall seeing any announcements of cutbacks or -- or cost efficiency programs in the infrastructure. I mean, how -- how long can you keep attracting a base without affecting the operational aspect?

I hear what you're saying, and we've always kept our business variable on the sales level. Another is obviously some overhead related to corporate overhead.

But my feeling is we'll continue on a store-by-store basis to evaluate where we stand and continue to look at it. And look at it and try to continue to wait out the turnaround in the video. And the video will turn around.

Meantime, we're going hurt very badly by some of the phaseout on the old products.

Are there any more store closings this year?

There could be in January which is our fiscal year.

And we did close three stores subsequent to the end of the quarter. We sold those properties and got them closed after the end of the quarter.

So you're up to ten this year?

And the one thing I wanted to point out, you mentioned advertising. The majority of these markets are stand-alone advertising markets. It's not like we're getting a national advertising platform out there. So for the most part when we close a store, it was a stand-alone advertising market.

Okay.

Just one other question and I'll get -- let somebody else.

I mean, just roughing the numbers on the ethanol, on 100 million investment, it looks like you're controlling roughly whether it's 90 or 110, roughly 100 million gallons of ethanol, which is a one-to-one relationship.

I'm not sure I understand that because it usually requires more dollars per gallon. Could you discuss your investment relative to gallonage?

Some of these plants have been in the planning stage for years, and the cost to build these plants is not anywhere near what some of the other people are paying today. So that's one thing we have going for us. This isn't something new that we've been working on. We're not -- and especially some of these plants aren't new.

We may have come into the plants recently but they've been on the drawing board for a long time. And if contractors had permitted to maybe better pricing than someone is trying to do it real quickly right now, again, we -- we're trying to run this business like a real business where we -- where we have looked at things like grain supply.

And again, that goes back to our strategy of partnering with the farmers. They're going to be major investors. We expect to have either a better edge with supply, or a better edge maybe in pricing, that type of thing that remains to be seen. But certainly having the -- the people are growing the corn are our partners we think is a big advantage.

So again, straight down the line, we've watched our -- we've gone into plants that have watched their expenses and that's probably why it looks so much less. We also in terms of promoters, very little -- there is some promotion, but it's not anywhere near what other people pay.

Could you give us some idea of -- obviously we can all sit here and multiply our estimates of gallonage times the price of ethanol. Assume the gross margin.

But what -- what is your infrastructure, what is your SG&A line look like, or are you just paying a management fee? I mean, how -- if we try to put a model together, what -- what--

Our SG&A factor, again, we're not, I would expect -- Doug, correct me if I'm wrong, where we break out everything at the end of the year.

By year end we may be breaking that out. But with that not being a operation we're under.

I'm not asking a specific number. I'm asking, you know, are you going to have your own SG&A, is it going to be a management fee, is it --

We'll have some SG&A. It won't be huge to answer your question. In most cases, we'll get some sort of management fee for sitting on the Board. And that type of thing.

But again, don't look for big management fees. We're not -- one of the things that I hope to add to the party is sharing of knowledge between one plant and another plant. That's a tremendous thing that we hope to bring to the party.

So with the whole family --

Separate our group from virtually every other group in the country.

So when the whole thing is over you'll basically be showing equity and earnings with these facilities with minus maybe just a small amount of overhead that you've got in your operations?

Correct.

Okay. All right.

Next question?

Thank you. Our next question comes from the line of Mike Neary from Neary Asset Management. Please proceed with your question.

Hi, Mike.

Hi. For the ethanol facilities, how do you get your cash out? Can you sell your interest at some point, or are they required to --

Some of those have small, little -- we couldn't -- the way eventually we're going to -- we're partners in this these plants. And once the financing is paid off, they'll pay dividends.

They'll pay -- are they required --

They'll pay, they'll make distributions. Be up to the Board in most cases, in most of these companies we're the larger shareholders so we have significant say in that.

Okay.

And we're on every Board.

Okay.

And I know you wouldn't want to at this point time, but could you sell your interest at some point if you wanted to?

We certainly have the right to. If someone came along and offered us for our $100 million investment some ridiculous price, yes, we would have the right to do -- to take it.

Okay.

In terms of the stores that you sold, you sold seven, but did you only close three of them and the others were leased back?

Doug, do you want to talk about that?

Yes. Three of them we closed after the end of the quarter. We were in the process of doing the close and sell at the end of the quarter so they weren't closed until after the quarter. One of the stores had been closed previously.

Okay.

So none of them were a sale lease-back, they were all sold?

Of the stores that were -- yes, that's correct. Earlier in the year we did have one store that was a sale lease-back but these were not.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of David Berman from Berman Capital. Please proceed with your question.

Hi.

Looks like all my questions were answered. So if you don't mind, just sharing with us your thoughts about the holiday season. From a retail standpoint, and in consumer electronics.

Appreciate that. Thank you very much.

Be happy to, David.

So far, my feeling is a lot of people bought a lot of goods on Black Friday. A big day for us, a big day for I think everyone. It's been since then a little bit slow.

At this point I'm not that concerned because there was so much business done on Black Friday. But it happens -- it isn't at this point of the first week, people have gone back to rational pricing. So there's no real craziness going on during the first week. But also business at least from our standpoint was soft. I don't know if it was that way for everyone.

So we're -- if it was that way for everyone then the craziness could get back into the pricing again if it does it during the Christmas season like it did Black Friday. Then I would expect us and every other consumer electronic company they have -- they have margin pressure.

I'm sorry. I missed -- I misunderstood that.

What's that?

You're sales are weak since Black Friday as well?

Black Friday was good. Since then it's been in my opinion slow.

Black Friday was good -- obviously it draws in customers every year. You get better and better discounts. Was it good from a --- how was the profitability standpoint?

Ugly day. An ugly day. You have to give away more and more. The customers seem to be getting smarter and smarter, they wait all year long for Black Friday.

They know retailers are going to be giving it away. What it tends to do is they'll -- I don't think it kills the business leading up to Black Friday as much as each year the week after Black Friday is tougher and tougher.

See, but the fact that it's a longer holiday season could be accounting for it?

For the week after?

It could be that people have raised their prices and the customers are waiting for us to all give stuff away again. One or the other.

Right. Right, right, right.

I don't think it's just us, because we certainly participated big time in Black Friday and the volume that was out there. Like a lot of retailers. Very good prices to get the business.

What percentage would you say the prices are down on some of your bigger categories like plasma?

Well, plasma -- I remember last year we were the same item that we were selling for maybe $2,499 this year before discounts is probably $1,799. So that same product, people were running at $999.

Right. Right, right, right.

Talk about a Panasonic plasma.

Right. Right. Okay.

Now everyone's back to $1,799, less maybe 10% or some reasonable level. Even $1,499, the new prices that we buy could be considered reasonable. But $999 is --

Right. Okay.

Well, good luck, Stu.

Thank you, David. Appreciate it.

Are you going to go to the consumer electronics show this year?

I'm not sure yet. Definitely possibly.

Take it easy. Good luck.

Thank you. Our next question comes from the line of Richard Dearnly from Longport Partners. Please proceed with your question.

Good morning. How many of your stores are within the -- the national footprint for your advertising?

We don't do -- we don't do a national --

Within the -- You were saying you were selling -- selling stores that -- that weren't within a -- a regional footprint.

I don't think -- I don't think that -- I apologize if that's how it came out. We're selling stores that weren't profitable.

Yes. What we were saying was that most markets are stand-alone advertising markets. That as Stuart's saying, we don't have a national footprint. Most of them are stand-alone advertisers.

So -- okay. So --

We don't -- we don't advertise nationally. So I think the point is that we can close this store and our advertising percentage in many cases will go down, not up. Because a lot of these stores had high -- because they didn't have much sales they had high percentages of advertising. When we close the store we can actually cut out that advertising because all of our advertising is local.

And -- and it was an answer to the question of if the store's closing, how do we reduce our expenses? And my point in general was that our expenses to a large part are variable.

Okay.

And when we have a decline like we did last quarter in overall same-store sales, that's -- that's going to very badly affect our bottom line. But if we could ever get increases in same-store sales, even with less stores.

Well, a year ago, the -- the hope was that this would be the year as the prices came down. And lo and behold --

Well, I -- it has been the year for plasma and LCD. There's no doubt about it. But what I didn't anticipate was the -- the huge dropoff, especially in big screen television. That we've experienced.

Just to give you an idea in LCD we were up, and this is in -- this is in volume, not -- in dollars, not in units. But for the quarter, we were up rough -- roughly we were up 222%, according to the sheet I'm looking at. 32% in plasma. Though we were down 71% in HDTV-- the category we call HDTV projection television. And that -- that category alone we lost approximately $8 million in volume.

And that -- that really, we couldn't overcome that even with the other -- between that category and the losses in tube television. Between the group of those things and even light engine television, we couldn't overcome that with our big increases in plasma and LCD.

Right.

I -- our local paper today had a -- an announcement about Sanyo, which has a tube plant nearby with five lines. They're going to lay off most of the people and shrink five down to one line. So --

We had our Panasonic tube plant that for years was one of the biggest employers in our area. It closed down completely.

Okay.

I would say the tube business will probably -- domestic tube business will probably be done in a short period of time --

In a short period --

There will be some brought in from China.

Okay.

Or Mexico.

Well, on the two contingent pieces of the ethanol business, the $6.5 million additional at Levelland and the One Earth, are those contingent on getting other financing?

Yes.

All right.

One of them is contingent. Not on other financing. One of them is a commitment we've made to -- to Merrill Lynch Capital. Giving them that right to ask for that should they choose and the other is contingent on getting financing.

I see.

And could you say who -- who the other financing partners -- if they're recognizable names like Merrill Lynch Capital are on the other plants.

I -- I would like to and again, I better -- Doug, if we reach -- if we can we'll put it in the 10-Q. I need get permission from them before I say anything. It's the only problem.

Okay.

I don't have -- I have Merrill Lynch Capital's permission, I don't have the others.

Right. Okay. And --

If we can we will put it in. If we can't, we can't.

Yes. I understand. Well, some would be interesting.

You mentioned that you would have 500 million gallons-plus of capacity. But you've only identified --

We'll be the larger shareholder, except for Big River and roughly -- over 500 million that's correct.

Well, you've identified if my math is correct, three plants at 100. One -- Big River going to 80. And then Levelland at 40. So that's 400 --

I have, when their all said and done, over $200 million.

I see. Okay.

And possibly much more than that. There's -- that's an amazing operation.

Oh.

Why is it amazing?

It was built -- it's been in operation. It's not a -- It's owned by -- the CEO is probably the most capable -- acknowledged by almost the whole industry as the most capable.

We've looked at a lot of people in the industry, in my opinion the most capable person in the ethanol business. And he runs -- makes a lot of money and has very, very big plans. And we're thrilled to be investing with him.

Oh. Good --

Also the beauty of that one is -- this is a plant running, working, we can use the knowledge that we gain on that one hopefully to have just as good operations with our other plant.

Good. Thank you very much.

All right. Thank you.

Thank you. Our next question is a follow-up question from the line of Arnold Brief with Goldsmith and Harris. Please proceed with your question.

Yes. I asked this question last time. I'm just curious.

Are these plants capable at a later date of being converted to other raw materials, whether it be sugar or cellulose based materials?

There is a company trying to convert a symbol [Broin] has announced where they're going to try to convert one of their plants into a plant that uses a whole corn material that stocks everything. So it depends on the technology if someone comes up with it.

There are people out there looking for ways to convert these plants, whether that becomes a leader or -- or whether you have to build whole new plants, I can't tell you at this time.

But that's a good question. And my guess is that it's easier instead of creating a whole new, state-of-the-art industry, the most logical thing that makes the most sense will be to convert the existing technology, the existing infrastructure over, and there's certainly people working very hard at that.

Thank you.

Very good. Are there any more questions?

If not, I'd just like to thank everyone for listening and I think we had a really good call. It's very much appreciated. Thank you. Bye.

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.