REX American Resources Corp (REX) 2008 Q2 法說會逐字稿

Ladies and gentlemen, think you for standing by.

Welcome to the REX Stores fiscal second quarter conference call.

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

Afterwards, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, September 9, 2008.

I would now like to turn the conference over to Doug Bruggeman, Vice President of Finance.

Please go ahead, sir.

Good morning, and thank you for joining REX Stores fiscal 2008 second quarter conference call.

We will get to our presentation and comments momentarily, as well as a question-and-answer session, but first I will review the Safe Harbor disclosure.

In addition to historical facts or statements of current conditions, 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 vary materially from expectations.

The risks and uncertainties associated with the forward-looking statements are described in today's news announcement in the Company's filings with the Security and Exchange Commission including the company's report on Form 10-K and 10Q.

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

With that, I will turn it over to Stuart Rose, Chairman of the Board.

Thank you.

I'd like to thank everyone for listening and now get into the numbers.

The sales this quarter were $67 million versus -- approximately $67 million versus approximately $48 million last quarter.

The biggest increase came from alternative energy, the ethanol plant, Levelland, which was $24 million this quarter, versus zero the year before.

Retail was down $42.5 million versus $48 million last year.

Income was $1.2 million this year for the quarter versus $5.8 million last year.

Earnings per share, $0.11 per share versus $0.48 per share.

The biggest change in those numbers was due to the end of synthetic fuel, got phased out last year.

This was the last quarter where we had large income.

We should not be up against anywhere near these type of comparisons in the future.

In terms of earnings in retail, there were $774,000 this year versus approximately $1.9 million last year.

Biggest reasons for the drop in income were comp store declines, 3.9%, margin declines from 31.8 to 29.8.

Again, both of those things we feel is related to a tough economic environment, and we feel our results are indicative of what's going on in the economy today.

In terms of product that declined, we were down in DVD, camcorders, analog, projection TV and air conditioners.

It was offset by large increases in LCD and plasma television, which were up 46%, but still not enough to offset the declines in those other areas.

We have hired in the quarter Brown, Gibbons, and Lang to do a strategic review for retail and real-estate operations.

We will update you.

We have nothing to report at this point in time.

If anything material does happen, we will update you at that time.

The business environment in retail is still extremely tough.

Excluding air conditioners, August and September sales were down approximately 7% on a store-by-store basis.

We lost some business due to hurricane Gustav.

We still have two stores that are closed.

They may or may not reopen, but we do not expect large losses from those stores at this time.

But there will be some write-off related to the storm.

Since the end of the quarter, we also have sold some is land in Cheyenne, Wyoming surrounding our warehouse, and that should help us on the positive side of the ledger.

In terms of ethanol, earnings this quarter were 783 versus $746,000 -- excuse me, $983,000 versus $746,000.

They were up a little bit.

Big River continues to perform well, our interest in that plant.

Levelland, Texas is now open.

It was slightly profitable during the quarter, but it's still suffering from high grain prices.

We are not at the new sorghum season, and we're throwing in a large demand on top of an end of a season situation, and since the end of the quarter, we've had ethanol prices drop, so we -- for the first couple of months, did have some losses in that plant.

We hope to do much better starting in October when the new crops come in.

Sorghum has historically sold for a lower price than corn, and it's our goal to buy the sorghum at a lower price than corn.

If we can do that, then we should have a very, very good plant there.

But that's the key, is getting the sorghum at the right price.

The demand for ethanol in that area has been excellent.

We've had no problem placing the ethanol product and the DDGs, which is a byproduct from the ethanol plant, placing those two products at a decent price.

A third ethanol investment, Patriot is now open.

We think the timing on that one couldn't be better.

The crops are starting to come in.

We're ironing out the kinks right now.

We're very optimistic on that one.

The other investment that we have, One Earth, is scheduled to open sometime early next year.

It's a little too early to give a progress report, except to say that we continue to think that that location is as good, if not better than any location of an ethanol plant in the country.

With that update, I will leave it open to questions.

If anyone has any questions, please.

Please let us know.

Thank you.

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

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

Please proceed with your question.

Hi, a couple questions.

You said there are two store -- how many stores in total are currently closed, that you're shopping the locations for?

What I mention was two stores were -- we had two stores that are currently closed because of the hurricane, that were put out of business because of the hurricane.

Oh, okay.

That had nothing to do with -- they may or may not reopen, depending on what happens and damage and that type of thing.

They were -- so we'll see on that.

But Doug, you can answer the question of how much -- I think your other question is how many stores are we marketing that we own.

Right.

Can you answer?

I believe it's currently four stores that are closed that we're marketing.

Okay.

We've done a really good job is, not just a pretty good job, historically when we have closed a store, being able to make money on those closed stores.

I don't know if that will happen on these four, but historically that's been a second chance for us, if we don't do retail, we've done okay.

Okay.

And in terms of the balance sheet, how much of the cash on there is unencumbered by future needs for ethanol?

Of the cash, 75 -- about $75 million of it relates to REX Stores Corporation, then about $3 million is for alternative energy.

Okay.

And on the retail side, what are net assets there currently on the balance sheet?

I see the total assets, but do you know what the net number is?

I don't have in that front of me right now.

Were you saying net of the liabilities?

Yes, the retail liabilities.

And also, does the retail number does, that include the deferred tax and deferred income?

Deferred tax is in corporate, and then the deferred income, yes, is in the retail section, and it would be liability, obviously, against the asset.

Okay.

It looks like you've been pretty aggressive buying back stock.

I would just like to tell you again, I think that's fantastic.

I think it's a good investment for the company and I support it completely.

Thank you, Mike.

Thank you very much.

I did not mention that we have been aggressive doing that.

We've repurchased 706,000 shares during fiscal 2008, and that's a lot for the number of shares we have.

Our feeling is that when you can buy assets at X cents on the dollar, and that's what we're talking about with our share buyback, that it's very wise.

We think they're good assets, very good assets.

We think it's a wise use of shareholder money, and we still have an open to buy on shares.

Every time we buy a share, we're increasing the book value of the stock.

I agree, thanks.

Thanks, Mike.

Our next question comes from the line of Richard Dunly from Longport Partners.

Please proceed with your question.

Good morning.

Since we're talking about the share buyback --

Can I make one amendment?

I meant the book value per share of the stock, not book value of the stock, I apologize.

Just wanted to clarify that.

Go ahead.

Could you -- how -- what you spent, or the average price of the purchases during the quarter and subsequent to the quarter?

For the quarter and the quarter, the average price was $12.81.

Subsequent to the end of the quarter, I don't have it in front of me, but something --

About the same area.

Yes, about the same area.

And then, would you clarify your discussion of the -- first of all, where is sorghum relative to corn now?

And what's the normal discount to corn?

And then, were you saying that since the new sorghum crop at Leveland hadn't come in, obviously you were using more corn --

No, no, we're still using -- I'll be happy to explain that to you.

We're in a very good sorghum area, but our plant creates a huge demand in the area.

Because of that, we've had to go further outside.

We're still using sorghum, but we've had to buy sorghum at places further and further away, and price has been above corn.

Historically, sorghum should run significantly -- by significantly, roughly 90% to 95% the price of corn.

So we -- again, with the new crop coming in, we're trying to make arrangements as we speak with local -- with the locals, some of which are our partners in the plant, to lock in sorghum at a price below corn.

If we can do that, then we should have a really good plant.

Is that working?

We're working on it hard.

We have no agreements at this point in time, but we hope to shortly.

It will work great if we can get that done.

That's our plan of what we have to make this plant better.

If you have to either pay the same as corn or use corn in the plant, what would that do --

If we pay the same as corn, we'd still after good plant, as long as the industry doesn't completely fall apart, which we don't believe it will.

Some people do believe it will, but we think -- we still are very high on the industry with oil where it's selling for, with gas where it's selling for, with -- especially in the sorghum area.

It's not a human food crop.

We think it's -- and we think there's room to expand sorghum production for our plant.

If we can -- like I said, we think we'll -- we think it will be a good plant.

Where the ethanol and the DDGs, price we've gotten for those two products has been up to or better than our expectations.

And what again makes the Warner location so good?

As I mentioned before, the whole key, in my mind to this business is buying -- I come from a retail standpoint, and if you can make a good buy on the product going into your plant, and you do that better than everyone else, you should have a good chance to do better, especially a commodity like ethanol, you should do better than everyone else in the end.

We're surrounded by grain elevators, so we should have a significant advantage in the purchasing of corn in that area.

There's way more than -- our plant won't make a significant impact.

It will be an impact, but not as huge an impact on that area as it is where we are.

We also have two major railroad lines, which is very unusual with access to our plant, which should give us, again, access to more markets than most people have for our end product.

We're also further -- far enough away, some of the plants are a long way from the DDG market.

We're not a long way from the DDG markets.

Although we won't get as good a price as Texas, the DDGs is basically cattle food, we'll get a better price than a lot of ethanol plants.

And as -- thank you for the clarification there.

Sure.

In terms of new investments in alternate energy, or anything else, I would think, given what has been the depressed state of the ethanol markets, there are opportunities.

Obviously, you haven't announced anything, but have you been shopping?

Are you active?

We would never comment on whether we've been shopping, but there are definitely opportunities.

There's people looking both ways, I guess.

To me, there's a lot of excitement in this business.

We've always sort of done better than most people in bad times in retail, and we'll see what happens in ethanol.

Okay.

Thank you.

Thank you very much.

Our next question comes from the line of Arnold Brief from Goldsmith and Harris.

Please proceed with your question.

Hi, Arnold.

Good morning.

Could you give us -- I'm not asking what the conclusion is, or the timing on a transaction, but could you just tell us when the strategic review itself will be completed?

I would think that everything should be completed by the next conference call that we have.

I would hope, but you never know.

Okay.

On your balance sheet, you list your assets by retail, ethanol, then you have $107 million of corporate assets.

What is that comprised of?

Primarily cash.

We list our corporate cash there as well as the deferred tax assets.

Okay.

There's no real-estate involved in that at all?

No, we keep the real estate with the retail section.

With the retail, okay.

I should know the answer to this one, but I just don't remember.

You have a $5 million note that you can convert to equity.

What's the impact on the equity participation, if you convert the note?

We're currently at about 57%.

I think it would take us to about 63%.

63.

I think.

All right.

I just had a couple others here somewhere.

At current prices of corn and ethanol, assuming they prevail, would all your plants be profitable?

Everything changes from day to day, Arnold.

It's tight margins.

I wouldn't -- at current prices, Leveland is not profitable today, because like I said, we're not expecting -- we're expecting better prices in October, but today's prices, it's not profitable.

Big River continues to make money.

We'll see on the other two.

And does the completion of your ethanol facilities require any more investment than the $3 million that you indicated before?

Do you have to invest any more money in ethanol to complete the --?

Doug, do you want to answer?

I'm sorry, can you repeat the question?

I can answer it.

We're not required to make more investments, although we would not rule out making more investments.

We are not --

You don't have to lay out any more cash unless you want to.

Correct.

Any increase in outlay would result in further gallonage increases, so to speak.

Absolutely.

Or it might be convertible debt, which doesn't increase our gallonage, but it gives us a chance to increase it later on.

Okay.

Thank you.

Similar to what we did in Levelland.

Sure, thank you, Arnold.

Our next question is a follow-up question from the line of Richard Dunly from Longport Partners.

Please proceed with your question.

Hi, Richard.

Hello again.

Were there any significant option exercises in the quarter?

I don't think there was any significant during the quarter.

Subsequent to the end of the quarter, Larry Thompson did exercise and hold his options.

That would have expired at the end of the -- toward the end of this year.

How many, loosely speaking, was that?

I think it was about 140,000 that he exercised and held.

Okay.

And with the change in the ethanol economics, as you see it, how do the farmers view investing in ethanol plants these days as opposed to before?

Farmers -- I don't know how much they like investing, but they love ethanol plants, as they should.

The price of corn has more than doubled, thanks to, at least a small part to the ethanol plants, which, of course, were criticized.

The industry is criticized every day.

But the farmers basically love the ethanol industry.

They like the prices.

Yes, they do.

It looks as though the -- of course, we have a presidential election and rhetoric is cheap and plentiful, but it seems as though the political issue is kind of blown over.

Do you read it that way, or --

I think it's certainly not going to be a presidential political issue.

Whether they start up again next year, I don't know.

I agree with you, I think it's blown over.

I think the Democrats were always in favor of ethanol, and the Republicans yell and scream and talk all the time about energy independence, and ethanol has to be a big part of it, whether it's just ethanol or cellulastic ethanol down the road.

I think at the moment, we're not going to be a political issue.

Okay, thank you.

Thank you.

Gentlemen, we have no further questions at this time.

I will now turn the conference back to you.

I'd like to thank everyone for listening, and I appreciate your support very much.

Thank you very much.

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 great rest of the day, everyone.