REX American Resources Corp (REX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Rex Stores third quarter conference call.

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

Afterwards, we'll conduct a question and answer session.

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

I would like now to turn the call over to Doug Bruggerman, Chief Financial Officer.

Good morning and thank you for joining the Rex Stores fiscal 2008 third quarter conference call.

We'll get to our presentation and comments momentarily as well as your questions.

But first I'll 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 meanings 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 and the Company's filings with the Securities 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.

I would now turn the call over to Stuart Rose, Chairman of the board.

Thank you.

I'd like to thank everyone for listening.

In talking about our Company,we'd like to divide it into retail and alternative energy.

The first part of the company I'll talk about is retail.

Sales were $41.2 million versus the $53.4 million on the comparable quarter last year.

Income was $2.8 million this year versus $2.5 million last year.

Comps were down 13.6%.

The biggest reason for the gain in the retail income was the sale of our Cheyenne warehouse which contributed approximately $2.3 million to that number.

Going forward, we have hired BGL to examine restructuring proposals and restructuring opportunities.

In retail we've received to date three proposals, two of which we're still evaluating.

We're also a little more optimistic about retail in that Circuit City and Tweeter bankruptcies in a very soft market across the board, not just at our Company but everywhere, has created some buying opportunities that is something in the past that we have taken advantage of and possibly will have the chance to take advantage of that in the future, should we not do any restructuring.

In terms of ethanol, we had a loss of roughly $4.96 million.

The biggest part of that loss, or a large part of it was $2.4 million related to negative gross profit.

In Levelland Texas that was a plant where we started late in the first quarter and have not had a chance to take advantage of the relatively low prices of sorghum.

Now we're starting to take advantage of those prices of sorghum, and I'll talk about that a little bit later.

We also had two non-cash charge-offs, $0.9 million, related to derivative swaps, $1.3 million writeoff of goodwill.

There's obviously no good will in any ethanol plant today and we chose to write that off.

We also had a $1 million increase in interest expense which again we expected as we're now paying interest on that plant.

Going forward, during the quarter we saw corn at a very high price, ethanol at a high price but low price relative to the corn.

Now we're able to -- that goes for sorghum also during that quarter.

Now at the harvest then we've been able to buy sorghum better and even though ethanol prices have come down, our spreads have gone up.

And at least based on November, margins have improved and now the outlook is a little bit better.

So we'll see what happens.

Terms of our cash position, we had roughly $66 million of unrestricted cash on the books.

We expect that to go up by year end as we liquidate some or our inventory to get it more seasonally in line.

We've used some of that for the buybacks.

Every time we buy a share, we're increasing our equity per share.

The cash will also help us weather the recession that we're in and it is a very tough recession.

Business continues to be like I said earlier fairly tough.

We look at sometimes the recession as a place for someone with cash to find opportunistic opportunities, and we continue to look for those.

We continue, like I said earlier, to work on restructuring retail which may or may not happen.

And again, although we are in very tough times, although retail is very, very tough, there with the balance sheet that we've built up over the years, we're in a better position than most to withstand this.

And as companies fall off by the wayside, which has happened with VeriSun in ethanol, it's happened with Circuit City in retail, we think that when the recession ends, -- (inaudible)

At this point, let's turn the call over for any questions that people may have.

Would you like to take questions right now?

Yes, that would be fine.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Arnold Brief.

Please go ahead with your question.

I'm just wondering.

You highlighted the cash position of the company and indicated of course, that it helps you get through a recession and you can buy stock all of which is to the plus.

But you also mentioned the cash.

I don't remember exactly how you phrased it, but you said something about exploring other opportunities.

Could you elaborate at all?

I don't think you'd invest more money in ethanol at this point.

Correct me if I'm wrong.

You're certainly not expanding the retail business.

What plans do you have for the cash, apart from buying in the stock?

At the moment we're using it to buy in the stock.

In terms of plans, we'll see what opportunistic opportunities have come our way.

There's a lot of people out there in far worse shape than we are and we feel again buying in the stock is the best use of the cash that we know of right now.

On the other hand, if something better comes along, we're in a position where we have the cash to look at that.

We have not seen -- and again we're in a very deep recession, not many industries, not many businesses are making money right now.

But if the opportunity came along to find something like we previously had in synthetic fuel, we have the money to do it.

And these are the type of times where opportunities do once in a while come along like that.

And so having cash isn't the end of the world.

One other.

And I know it's available, but I just haven't looked it up.

The amount of options that you have left that can be exercised.

I can get that number.

At the current price I think they're all under water at this point.

The number of options outstanding is approximately 3 million shares.

Thank you.

Thank you very much.

And before we proceed to our next question, Mr.

Bruggerman, Mr.

Rose is back on the line.

Okay, great, thank you.

And our next question comes from the line of Mike Neary.

Please go ahead with your question.

I have a couple questions.

Hi, Mike.

Hello.

Who is depreciation and base CapEx during the quarter, and what is the CapEx need for the retail business going forward do you think?

Most of our CapEx for the year to date has been on the ethanol part of the business.

Capital expenditures on retail year-to-date has been about $600,000 and about $75 million for the ethanol part of the business.

Okay.

And what was depreciation in the quarter?

I've got the depreciation on a year to date basis.

It's about $2.6 million overall with $1.2 million of that being on the retail portion of the company.

Okay.

And can you give a little more color on the ethanol business for us?

Right now, what kind of operating costs we have?

You mentioned November that the gross margins improved.

Was November profitable?

Can you just give some kind of sense of what that business looks like currently?

We don't to date have the final November statements.

But we do know that the gross margin improved in the main plant.

The biggest reason being we're able to now buy sorghum freshly harvested sorghum before we were paying at or over, in many cases, Chicago basis because the sorghum from the crops had already been spoken for although the sorghum usually sells for less than Chicago basis.

Now we're able to buy for less than Chicago basis.

That along with the better price of ethanol relative to wholesale gasoline has allowed us to do a little bit better.

The other thing that we hope going forward will make a difference is the federal mandates where refiners have to buy ethanol are in effect and if there's less production from some of the companies in financial trouble, we hear of plants being slowed down, plants being canceled, plants going bankrupt.

The biggest in the industry went bankrupt.

If there's less supply out there, then the pricing should be better and we think at that particular plant it's in a sorghum market with a lower basis of corn it's in a very good market in terms of being relatively close to the refiners.

We're optimistic that we can do considerably better in that.

We have a new plant coming online next year.

Same story.

We think it's a perfectly positioned plant.

We've looked at lots of plants all over the country and we think that one's as good as any.

We are not unoptimistic.

We don't think it's an industry that this government is going to let fail.

Obama was a big supporter of ethanol.

It's one of the few products that in a significant way lessens our dependence on foreign oil and it also helps our farmers and our farm base which is right now one of the few parts of the economy that's going relatively well.

So we are optimistic on that business.

Okay, and in terms of when I think about sorghum and DDG, is it the same kind of relationship as corn and DDG?

Can you sell the byproduct?

Absolutely.

Can you give some kind of ratio to corn price?

Or how do we look at --

It is it's own market.

Our experience has been roughly a third of the price per bushel of corn is what DDG would sell for.

And how does the sorghum relate to corn prices?

A third might not be exactly right.

But again, it does depending on where corn is, it goes up and down with the price of corn.

What was the next question?

Sorghum generally should be our experience in November was significantly under corn.

Okay.

We don't want -- we do not want to disclose that number right now for competitive reasons.

But it was significantly under corn.

Okay.

And all the debt associated with those plants I know is non-recourse to the company.

Can you give some type of the color in terms of, are there certain EBITDA requirements?

How long can the plants operate at losses if necessary before the debt gets called basically?

They do have debt covenant calculations involved in them.

And that's part of the ongoing process on the majority of the ethanol plants have to deal with.

Okay.

Okay.

My gut feel is as long as we're paying the interest and generating a positive cash flow, and we're running our plants efficiently, that it would not be in the best interest for anyone call those loans.

I think it's the best they can hope, for someone else to pay their interest.

So I don't expect that to happen.

But there are covenants in all these plants.

Okay.

And in the $11.4 million of debt that the Company has, that's all mortgage debt on buildings, is that correct?

That's correct.

Okay.

Thanks very much.

Thank you very much.

Thank you.

And we'll proceed to our next question from the line of Mr.

Arnold Brief, of Goldsmith & Harris.

Please go ahead with your question.

A couple of little ones here.

You said you sold a warehouse.

Could you tell us how many square feet was involved in that?

It was about 140,000 square feet,and then we leased back about half of that warehouse.

It was the warehouse in Cheyenne, Wyoming.

You sold the warehouse and leased half of it back.

Yes.

We have a three year lease on that, Arnold.

And what was the sale price on that again?

There was the building and there was a piece of land attached to it.

In total the sale price was about $5.1 million.

Okay.

I think you gave us the right answer on that ethanol question.

But I was just wondering, is the cash flow of ethanol at this point sufficient to pay the interest?

Or are you loaning the money?

Or where is the money from the interest coming from, on the debt for the ethanol facilities?

I'm not talking about your share, I'm talking about their share.

Levelland/Hockley up to this point has been able to pay their mortgages but we are in discussions with them about perhaps having to fund some additional money for them in next quarter here to help them with their cash flow and their grain purchasing ability.

A lot of that will be tied to opportunistic grain purchases.

We feel that if they have money, the price of grain right now is very advantageous to us.

Based on your statements, I'm assuming you're not locked into higher cost grain contracts?

Not long term.

We might be a week or something out.

Grain has fallen in the last week.

But to answer your question, we're not locked into anything long term.

We might have committed to something a week ago that it comes in this week or something.

More of a rollover kind of thing?

Right.

Could you indicate whether for the ethanol whether they were in the black in the month of November?

We don't have our November financials.

We have our estimates and all I can say is they did considerably better and we're hopeful cash flow-wise that they were in the black.

And finally, I'm not sure that you want to disclose what you're discussing in terms of the retail solution, could you give us some time frame on when a decision might be made, one way or the other?

As I said, we've received three proposals two of them which we're evaluating.

I would hope by the end of our fiscal year to either say that none of them were worthwhile to our shareholders.

We're evaluating them on two levels, with our shareholders and our employees.

And so we hope to have the process completed by our fiscal year end and I think there's a good chance of that.

Thank you.

This is if I could clarify the earlier question, the number of options outstanding at October 31st was about 2.7 million shares as at average exercise price of $9.60 and some of the options are actually in the money but that's the average exercise price.

That's good enough.

Thank you.

Thank you.

Thank you very much.

We have no further questions at this time.

Please continue with the presentation and closing remarks.

Okay.

Very good.

I'd like to thank everyone for attending.

And I appreciate your listening very, very much and even during these tough, tough times we have reason for optimism.

So hopefully, things will improve and we are certainly in a position to withstand what's going on now and are hopeful for future.

Thank you.

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 and have a good day everyone.