REX American Resources Corp (REX) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the REX Stores fiscal 2007 fourth quarter earnings conference call.

During the presentation all participates 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 today, Wednesday, April 2nd, of 2008.

It is now my pleasure to turn the conference over to Mr.

Doug Bruggeman, Chief Financial Officer, please go ahead, sir.

Good morning, everyone, and thank you for joining REX Stores fiscal 2007 fourth quarter conference call.

We'll get to our presentation and comments momentarily as well as your questions and answers, but first I'll review the Safe Harbor disclosure.

In addition to historical facts or statements of current condition, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance, as such actual results may very materially from expectations.

The risk and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities & Exchange Commission, including the company's reports on Form 10K and 10Q.

REX Stores assumes no obligations to publicly update or revise any forward-looking statements.

With that I'll turn it over to Stuart Rose, Chairman of the Board, for the presentation.

Thank you, Doug, and thank you for listening, everyone.

Our earnings last year were $33.9 million versus $11.4 million earnings per share, $2.89 last year versus the year before $0.98.

Retail earning were roughly $9.8 million versus $5.8 million the year before on a down comps of 6.7%.

Alternative energy last year was $22.4 million versus $.2 million.

Again, large increase over last year.

For the quarter, earnings were $5.9 million versus $3.6 million.

Earnings per share $0.52 versus $0.30.

Retail virtually doubled, $3.6 million versus $1.8 million.

Comps were up 2.4%, alternative energy $3.4 million versus $1.5 million.

And talking about retail, we feel very proud that during a very, very difficult year, we were -- we managed to show nice increasing -- nice increases on our continuing operations.

There were a few things that caused that.

Biggest thing is we now have a very, very healthy base of stores.

We have employees that work hard.

Traditionally we do better in tough times because of our opportunistic buying.

Put it all together, we actually not just increased the earnings but increases comps in our industry.

Again, that's something that's -- we're very proud of.

The other thing that people should notice is our equity in retail is way down from what it was before, probably excluding real estate, around $20 million at year end.

And, again, that number -- earning $9.8 million -- and again, there is no rent factor on some of our real estate, but a lot of it there is now.

That's a healthy number and the first time in a long time we can say that our retail is doing well on a return on investment standpoint or return on investment basis.

For the current year, I expect a benefit from a couple of things.

One, the amount of the checks being sent out by the IRS over -- the extra checks should be about the right size for people to buy our digital flat screen television sets, so we think that should be a huge boost to our industry.

The other thing is it the final phase out of analog television.

Again, a lot of our customers still have analog TV, so we hope a fair amount of them replace them, and we hope to be the company that they replace the TVs with.

So we are optimistic on the current year.

Our comps are still running positive, again, in a very, very difficult environment.

We are still running slightly positive comp sales for the first couple of months of the year.

In terms of alternative energy, we have now closed down all of our synthetic fuel plants.

We made approximately $6.9 million in 2007.

Those plants are now closed, and we have refocused our energy in that area to our ethanol plants.

During the year, we made about $24 million on the sale of an ethanol plant.

It was a millennium plant, which sold to US Bio, and we have cashed in all of our shares, and -- so the $24 million is a real gain.

It's not a paper gain any longer, and that shows up on our balance sheet now in the cash side.

In terms of other plants we're invested in, Big River, we have been invested in an operating plant now for over a year.

It was profitable last year, and continues to do well.

We have $21.5 million invested in a plant in Levelland, Texas.

That's opening as we speak right now.

We have a $16 million in a plant called Patriot outside of Davenport, Iowa, that will be opening some time during the summer is our best expectation.

And the final one is Gibson City, which will be opening next year.

We have $50.8 million invested in that.

And that's -- up in Gibson City is located out of Champagne.

The key to our strategy and what we think gives us an edge in this business is, we own all of these plants with farmers, and we think that should give us a big advantage on the corn side.

We are working directly -- we can -- in many cases won't be dealing with the middleman.

We'll be dealing directly with our farmer owners.

And we always felt corn was a key ingredient to the ethanol, we think with this type of arrangement, our overhead and our cost of goods sold will be very, very competitive to the industry.

Also, with oil at $100 a barrel, there is more and more blenders competing for our product.

We think with oil where it is today, and the price of unleaded gasoline where it is today, this will be a profitable business for us.

In terms of where we stand in -- on our balance sheet, we hit $127 million in cash on the balance sheet, $97 million of that was available to us, and could be used for any operations or for any future endeavors, including looking at other alternative energy opportunities or share buybacks or the like.

We did buy back a fair amount of shares last year.

We also have $45 million of real estate still on our books, including about 50 properties and three distribution centers.

And again, we think this is something that we may -- we -- in a sale last year, we did very well, and we think these pieces of property are worth significantly more than they are presently shown on the balance sheet.

Again, in conclusion, it was a tough, tough time last year in retail, and the tougher times get our people seem to just thrive.

People shop a little bit more and with salespeople on the floor, we are able to close a few more deals -- a few more transactions than other people.

Also during tough times there's more buying opportunities, people cancel orders, people go out of business.

We have always made ourselves a company that suppliers like to go to for that product because we respect their integrity in the marketplace, we pay our bills.

So we generally do better in tough times and so far our numbers are showing that.

At this time now I'd like to leave the forum open for questions.

Any questions?

(OPERATOR INSTRUCTIONS) One moment, please, gentlemen, for the first question.

And our first question comes from the line of Rick Weinhart with BMO Capital Markets.

Please go ahead, sir.

Hi, good morning, Stuart, good morning, Doug.

Hi, Rick, how are you?

Good, thanks.

Couple of questions.

First, the -- on the stock buyback program, you have had significant uptick in the volume of your stock recently, and I think under the regulations it should allow you to be a little bit more -- if you choose to -- be a little bit more aggressive in buying back your stock through open market purchases.

I'm just wondering what your thoughts are on the stock buyback given the amount of cash you have got and the window of opportunity you have here?

At that point in time, we still have, Doug, correct me if I'm wrong -- about 200,000 shares outstanding on the old buyback.

Again, we -- like we buy our stock like we do everything else, if there's an opportunistic place to buy it.

We don't just buy it arbitrarily because we can, we buy it to support what we consider basically ridiculously low levels.

Yes.

That's how we have historically done it.

And so I would not -- we have some authorization left over, and as you pointed out very, very clearly, we have plenty of money to do another authorization should the Board choose to do one.

Okay.

But I think historically you have talked about a good value price for the stock.

You looked at book value, you looked at market value of your assets, on all those relative basis, the stock still trades at a discount.

So is there any reason to suggest that you don't think this is a good value price even here at [20]?

No, there's not.

Okay.

Moving on one question on the -- in the results for the fourth quarter, this finance charge, or unrealized loss on financial instrument, I believe.

Doug, can you just clarify what that is for us?

Has to do with interest rate swaps for the ethanol facilities, and we consolidate a Levelland/Hockley and One Earth, and both of those entities entered in to interest rate swaps in December.

Some required by the bank in order to fix the rate, and obviously with what has happened to the interest rate environment since the early part of December, it's turned into a negative evaluation at that point.

It's a noncash item and it will turn itself around.

In the case of Levelland it will turn itself around over that time period.

Taking that charge now will lower our interest rate over the period of time.

It's related to some fixed-rate debt that --

Got it.

Okay.

So yes, your cash rate will be perhaps a little bit higher than what you were originally reporting.

That's correct.

Okay.

And --

In the overall it's not huge.

Yes.

No, right.

I just wanted to understand, so if we -- in the future what it means.

Yes.

On the real estate, can you refresh our memory, I thought you had saying can't number -- I think it was 19 stores that were on a month-to-month lease as of January --

Yes.

-- from the last real estate transaction -- the large real estate transaction.

It didn't look like you closed too many of them in the quarter, if any at all.

Can you kind of update us on the status of those, what the plans are there?

We close them if they are not -- we would close them if they weren't doing well.

As you can see our retail has done a lot better, and again, we have the opportunity with -- to -- they are doing -- they -- they're not at a level -- they are covering the rents and in some cases making a decent return, so at this point in time, we didn't deem it necessary to close them.

Okay.

So those 19, anyway -- the nine that we saw closed in the quarter, those were not related to that.

Yes, 14 properties on the month-to-month basis, basically.

Okay.

Great thanks.

And then Stuart last question on the real estate, the distribution centers, now that you -- as you continue to shrink the store base here, any updates or plans on what you might do with the additional capacity?

We have too much capacity for our stores today.

And I'll let you -- again, we know that, and we're working on it.

Okay.

And then the last question, Doug, is on the CapEx in the quarter.

Do you have that?

And if you could just to get a feel for what the number was, and what it was for each project, I guess, so we can break it out.

Actually, I don't have it for the quarter.

I do have it on a year-to-date basis.

That's fine.

It was 1.

-- on the year REX has $1.8 of capital expenditures, Levelland/Hockley $40.6 million, and One Earth about $26.5 million.

Okay.

So Levelland we're done with at this point at the end of January, or do you have some left on that?

Yes, there's still some left to be done on that yet.

Okay.

Okay.

Great.

Thanks very much.

Thank you, Rick.

Yes.

Our next question comes from the line of Mike Neary with Neary Asset Management.

Please go ahead.

Hi.

Guys.

Good.

Could you please provide an overview of cash and debt, what is going to happen over the next year and a half to cash and debt just from the ethanol expenditures?

And again, out of the $127 million a lot of that is consolidated, but the $97 million is all of we have left to spend on -- the $97 million that's available, we're basically, unless we choose to put more in, we've honored our commitments.

The $97 million is -- as I mentioned earlier free and clear and usable any way we choose.

In terms of debt, most of the debt is -- some -- it's -- it gets a little complicated because of the consolidation of the ethanol plants, but, Doug, do you want to go over that, how much is debt on real estate, and the rest is --

Yes, I can do that.

Go ahead.

$13 million of the long-term mortgage accident on the real estates assets, about $24 million was from Levelland/Hockley -- actually I'm sorry about $22 million was from Levelland/Hockley.

There really wasn't anything outstanding on One Earth.

Over time One Earth borrowings will probably get up to about $100 million over the term of the project, and Levelland will also have some additional borrowings.

To better answer your question, each one of these plants stand on their own independent projects or corporation.

REX has not in any way -- REX itself has not guaranteed any of that debt.

Right.

Okay.

And --

So it's -- they are all individual project, all -- many with different banks, and they are all -- the projects have to stand on their own, each individual project.

Okay.

And you said you had $51 million invested in Gibson and One Earth, Gibson City.

Yes.

I thought the amount was higher than that.

Did your ownership change or was that what it was always going to be?

$50.8 million I thought was what it was always going to be.

I think we might have said, we could end up investing more than that.

It was open for a little while, but now that is the final number.

I see.

Okay.

And you talked a little bit about the advantage of having farmers as your partners in the plants.

Do you have any firm purchase contracts in terms of corn, in terms of what you have to buy, or what you -- the prices you can get?

There's a little bit in Levelland, and I'm sure Big River has some, but the big advantage is -- I don't know if you read the "Wall Street Journal," but the [spot] market is significantly lower than what you are seeing on the CBOT.

So we -- we hope to take advantage of that.

I know in Levelland, we're getting sorghum from our farmers at what we feel is a lower -- a significantly lower price than we would have to pay if we bought corn shipped into us.

Can you give some type of sense in how much lower the [spot] market is you feel in these plants?

Be able to a bit better next quarter.

Levelland is just opening now.

Big River is opening right now, and they are running, again, by significantly lower it's in the pennies, not the dollars or anything, but it's -- every little bit counts.

Yes.

And can you give some sense of -- I know we're not there yet, but in terms of your cost per gallon at the plants, or just overall would your plants be profitable at these levels?

Can you --

I can give you some idea.

I think what you are getting to, our break-even cost -- our break-even price on ethanol today at $6 corn give or take a little bit would be about $2.40.

Okay.

I expect the price of ethanol to -- like I said to remain strong because there's a $0.50 blender's credit that blenders get because they're technically -- and if wholesale gas is at $2.40, it is really at $2.90 so there's huge room in there, so more and more blenders are coming on board.

And so, again, the other side of the -- there's three parts to the equation, the other part is PDG -- another part is PDGs, which is the food material that's left over after the corn or the sorghum is turned into ethanol, and that's used for cattle feed, and the price of that has gone up significantly.

And the other thing is natural gas, which -- dependent -- the fuel that runs these plants and that fluctuates and has a lot to do with the break-even price.

Okay.

And last question, obviously your future value is going to depend a lot on how well you invest that $97 million, and you've done a very good job in the past of investing money.

And please don't tell me anything that would interfere with your ability to negotiate good deals or anything like that, but can you just give a sense of, are you seeing good opportunities today to invest that money?

Is it in the traditional places you have invested in the past?

Is it in other places, or what are your current thoughts?

We look at everything.

We look at a lot of different things.

We have nothing eminent.

And I don't think it's the worse thing in the world right now in this economy during these times to be having cash.

We look at that as a benefit, and we will look to buy anything we do opportunistically, just like we always have, and try to maximize our return on investment, and maximize the transaction for the shareholders, but there is nothing that we -- that I would call eminent related to the use of that cash at this time.

Okay.

Great.

Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Richard Dearnly with Longport Partners, please go ahead.

Good morning.

For clarification, the interest rate swap loss, is that essentially recognizing the spread for the whole two and five year period?

Yes.

Oh, okay.

And we would -- but we took -- and we were required to do it -- but the very conservative route of marking to market.

What we could have -- what it really is is a spread between what we could have done at year end versus when we could do it.

Remarked is all through January 31st.

Right.

And because interest rates came down drastically, that's where that loss is.

It's a noncash loss.

And it will come back in.

So you are just prebooking -- yes.

And so then as the loans amortize over the two and five year period, does that flow back in?

It does flow back in.

Our cash outlay will be greater than our reported number.

That's correct.

Okay.

And then the -- what was the gain, then, the $839,000 of interest rate gain?

That actually represents the minority partner's portion of the loss from consolidations.

Okay.

In other words we booked our own loss, but we don't have to book it all, because we have minority partners.

Right.

And what was your share of your share of Big River's revenue in the fourth quarter?

10% -- we have a 10% ownership interest, but we don't book the revenue, we just look that --

Right.

-- online item.

Could -- another way of saying it was could you give a feeling for what Big River's revenue were in the fourth quarter?

We don't disclose that.

We just pick it up as a one line item.

Is the $417,000 of profit from Big River, a lot of ethanol manufactures had losses in the fourth quarter.

Well, we think that's, again, evidence of our strategy.

It's a farmer-owned plant.

It doesn't have huge corporate overhead associated with it.

It doesn't -- we think again it goes back to our strategy of having a lower break-even number than a lot of these other public companies.

Yes.

The -- you bought back almost 800,000 shares in the year, and your share count went up 200,000 on average.

Is the -- if memory serves, the old five year option agreements should be about over.

We haven't issued options for years, but I -- but it's related -- that's why the share count went up -- that's the only reason it went out because of the vesting of the ones -- and that, like you said, should be -- it's been a long time since we issued options.

And is that vesting about finished now?

Doug?

It was a five-year vesting period, but there's 10-year life on the options.

There are still about three million options outstanding.

But I think the question was a lot -- the vested ones, I believe are included in the share count.

I think the question was on the unvested ones.

Is that almost over with?

Yes, I mean -- I think there will be remaining vesting over the next, I think, year and a half yet, approximately.

And how many shares would that represent?

I don't have that right in front of me, but I'll get that for you.

Do you want to just take a wild guess?

I mean is a lot or a little in.

Like I said, the total options outstanding is about three million options outstanding.

Most of those are vested.

There's a minimal amount that still needs to vest.

It's a shrinking number.

Yes.

Whether they are vested or not, they are included in this dilution --

And then while we're talking about --

One of the reasons -- and this is getting very complicated, but one of the things that share price relates to the number of shares because of the option, relates to the number of shares outstanding.

It's a complicated --

Right.

-- number.

At year end we had three million options outstanding, and 2.8 million of those were exercisable.

So there's a minimal amount left to [vest].

Okay.

And then the extraordinary volume that you had a week or so ago, what was going on there?

We have no clue to be honest.

We have tried to -- we have called the market maker, they didn't know.

We -- no one has contacted us.

I wish -- I would like to know, but I do not know.

Okay.

Okay.

Thank you.

Appreciate it.

Thank you.

Thank you.

Our next question comes from the line of Rick Weinhart with BMO Capital Markets.

Hi, guys.

I had a couple of follow-ups.

One, there was an article in one of the local papers on Patriot talking about biodiesel potential in the future and using the corn oil, making corn oil from some of the biproduct or side products.

Can you -- is -- I'm assuming that is probably very early stages, but can you give us a little -- any information on that in terms of --

There is technology out there to do that, and we'll see what happens.

It's -- I'm -- we're -- my philosophy on that is let other people do it first, and if they are successful, then -- I think at Patriot we don't control that Board, so they could or could not do something against our wishes, although they never have.

But on the ones we control, my feeling is to let someone else show good profits doing that, and if they do, we'll jump on board, but let someone else make the investment and learn.

We'll learn off of their knowledge.

Okay.

So you are looking -- it sounds like you are looking at it and waiting to see what the outcome is with some other --

We're very well aware of it.

And then I just wanted to if we can talk a little bit about Levelland which is now up and running.

You mentioned the sorghum, are you currently able to get sorghum, or are you still -- are you shipping in corn initially?

Right now because the warranty is tied to corn, we're shipping in corn, but we'll ship to sorghum as soon as the plant is proven up to capacity.

Rick, we're right now in the test mode with that plant.

There's a seven-day test period that we're in right now.

I see, okay, and then --

And that by contract we're required to use corn for that.

Right.

Okay.

And then when that period is over, though, is there -- have you -- I'm assuming at this point you probably have a rough idea how much sorghum is in the marketplace.

Will you be able to -- sorghum?

We have bought sorghum gone out for -- I believe for May.

Through May.

Okay.

Okay.

And then just on the -- I mean, in terms of the output, the ethanol, I mean, have you entered any contracts on this, or are you at this point selling it on the market for spot market or how are you handling that?

Because we wouldn't enter into contracts until we were certified to be up to capacity in that type of thing.

Okay.

We have entered into a couple of contracts for some production over the next couple of months, but we have left ourselves open for some also.

Okay.

Is it -- so it's a split kind of at this point?

Yes.

Alright.

And any updates in terms of the other plants?

I mean, is -- are we still on time for these -- from what you have -- the expectations you originally set, or any update there?

There may have been a little bit of slippage, Rick, not a tremendous amount.

We'll update that when we file our K over the next week or two.

Okay.

Great.

All right.

Well, thanks very much.

That's all I had.

Thank you, Rick.

We do have another follow-up question from the line of Mike Neary from Neary Asset Management.

Please go ahead.

Stuart, the break even that you gave, is that an operating break even, or does that include financing cost?

No, that's total including depreciation and everything.

And including financing costs?

Yes.

Okay.

Thank you.

Any other questions?

Yes, we do have another follow-up question from the line of Richard Dearnly from Longport Capital Partners.

Hi, Rich.

Hi.

To clarify two questions ago, the -- you said you sold a few ethanol contracts forward.

You had also said that you were mostly buying spot corn because it was cheaper than the forward corn.

My impression --

I said Big River was.

Now, Levelland is different.

That's a sorghum market, not a corn market, and we're being -- to get the proper warranty on this plant, we need to buy -- we -- our farmers farm sorghum in that market, which is usable instead of corn, but to get the warranty from everyone into -- per the contract we're required and per the financing during the seven-day test period --

Right.

-- and we're only talking a very short period of time we had to buy corn, and that was more expensive.

And is sorghum work the same way as corn -- you get 2.8 or whatever it is gallons --

The yield may be a little different, but it's not significantly different.

And sorghum also has an advantage in that it's not an export -- it does haven't the export market of corn, so we think that that's -- in that market, that should be a big advantage.

And -- and is -- I take it sorghum is -- haven't looked at sorghum, versus corn, it is cheaper than corn?

It is, yes, for us anyway in that market it is.

Again, depending on which -- cheaper than CBOT corn, yes.

Or -- at -- in today's -- this morning's price, where does sorghum stand relative to corn as you would buy it in the spot market?

I believe that we have bought sorghum, roughly about $5.80 for the -- for next month's production.

And what would corn be for -- if you would have bought it the same day?

I don't know.

I haven't had to do that.

Okay.

But back to the -- at Big River my impression was that spot ethanol was going higher than future's ethanol.

That's for sure.

So why are -- and you said you had sold a few ethanol -- some ethanol forward.

Is that just to --

No, Big River did, which -- that's one we -- understand we only own 9% of that, and they have done -- they have done -- what they were able to do and again, going forward, I'm looking back, they were able to match their corn per -- their corn going forward with their ethanol.

I see.

Yes.

And lock in some profit.

Right.

You sound like you are relatively sanguine about the ethanol pricing because the blender uptake and infrastructure build-out and all of that.

Is that what I'm --

I -- at $100 oil, I will be shocked if ethanol doesn't follow the price over the long term of unleaded gasoline at $100 -- and we get a $0.50 advantage, so you put all of that together, I'm very optimistic about the ethanol business.

Even though there is a lot of gloom and doom out there, people aren't realizing that we have a biproduct, the [DDG] said that is going up in place, and we have the main product, the gasoline, which is going up in price.

When -- yes, we are paying more for our raw product, but we also should theoretically, and I believe will, get a much, much higher price for the end product.

Yes.

Yes.

I see.

Okay.

Thank you.

Sure.

Mr.

Rose, there are no further questions at that time.

I would like to turn the conference back to you.

I would like to thank everyone for listening, and I -- again, thank your employees for putting together what I call -- what I think is a terrific year, and again, we appreciate everyone's support.

Thank you.

Good-bye.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you very much for your participation.

And we ask that you please disconnect your lines.

Have a great afternoon everyone.