REX American Resources Corp (REX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome do the Rex Stores first quarter results conference call.

During the presentation, all participants 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 Tuesday, June 9th, 2009.

I would now like to turn the conference over to Mr.

Doug Bruggeman, Vice President of Finance of Rex Stores Corporation.

Please go ahead, sir.

Good morning and thank you for joining the REX Stores fiscal 2009 first quarter conference call.

We will get to our presentation and comments momentarily, as well as your questions and answers, 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 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 I've described in today's announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's report on Form 10-K and 10-Q.

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

With that I would like to turn the call over to Stuart Rose, Chairman of the Board.

Thank you, Doug and thanks everyone for listening.

Our earnings this quarter or loss this quarter was $1.3 million or $0.14 a share, versus a profit last year of $1.6 million or $0.13 a share.

On the retail side of the equation, we showed a $453,000 loss, versus $713,000 profit on the ethanol side, a little bit over $2 million loss versus $428,000 profit.

Our cash right now, unrestricted cash is $84.3 million during the quarter.

We paid down $7.5 million of mortgage debt.

We repurchased shares, 154,563 shares for approximately $1.2 million.

During the quarter, we made, we exited many of our retail stores.

We also are in the process of opening our Gibson City ethanol plan, and in terms of the retail exit have pretty much gone according to plan and things in the ethanol business.

To date, we have been a little bit more fortunate than most that we are able to make our payments.

We run a very, very tight operation, watch it very, very closely, have been able to do a little bit better than most of the other people in the ethanol business.

In terms of going forward, opportunities as I mentioned earlier, we have $84.3 million in unrestricted cash that could be used anyway we choose.

Our debt, our ethanol debt is tied to individual projects.

It is not tied to that $84 million, and again it can be used anywhere we choose as approved by the Board of Directors.

Certain areas we are looking at and we are look at these things very closely.

First is in ethanol, the mandates are going to require refiners to take significantly more ethanol, a lot of ethanol that has gone out of production with the bankruptcies.

Verasun, Pacific and Pacific Ethanol haven't seen, so for Hawkeye, so forth.

So, we think with less, we think with less production and more demand out there, we can do a little bit better in our plants.

Also there's plants out there that are being offered for sale at significantly lower than replacement value.

Other people have looked, have bought a few of these plants, but there's, many, many more out there.

We are looking at them closely.

If it is something where we can, where we feel we can show profitability in a reasonable period of time, it is something we might consider.

But again, it would have to be better than all the other opportunities we have for us to do that.

Again we are looking at this time.

We don't have anything in that area at this point in time, specifically that we are working on, or that we are near a transaction on.

Other things that we are looking at are other opportunities in energy, we had our greatest profit and our return on investment in synthetic fuel a few years ago.

That has run out, Section 29 ended.

But there are other opportunities in energy.

Again it is similar to ethanol with prices down.

The opportunities might be out there.

But we can take advantage of opportunity.

We generally do best when no one else is looking at opportunities and we are, and again there might be some opportunities there.

We are spending time looking at other energy opportunities.

Again nothing specific to announce.

Last area where we are looking at is real estate, and again that's an area, especially commercial real estate, that is beaten down, banks won't lend on commercial real estate.

There are certain companies that are willing to pay very, very high credit companies that we think are willing to pay ten plus cap rate, which is is unheard of, but again it is because the developers cannot get financing.

So, retailers are having to pay a much higher cap rate, and they're not certain very, very strong retailers in that position.

We are also already in the retail real estate, commercial real estate business with our existing properties.

So, it is again something that most people would not consider worth looking at.

But if the price is right and with so much less competition out there for that, the yields have gone up considerably.

It is something that we are going to pay attention to.

Overall, we have always done well going where people aren't.

That's probably where we will end up using this money, going into opportunities that, that the masses or the herd is not headed towards.

We think there is opportunity there and we feel very, very strongly that we can do quite well in the future with this business.

And that's what we're all working towards.

And now to leave it open for questions and answers.

Thank you.

(Operator Instructions).

If there are no questions, I will thank everyone for listening and we will report back to you next quarter.

Sir, we do have some questions queued up.

Oh, good.

Our first question comes from the line of Richard Dearnly with Longport Partners.

Hi, Richard.

Good morning.

What did you pay for the 97,000 shares subsequent to the end of the quarter?

I have got that here.

It was about $1million dollars in total, is what we paid for it.

Okay.

And the derivative financial instruments, it looks like what you're hedging there is rising prices, because you had a little loss or $600,000 loss in the quarter, a $3 million, or almost $4 million loss last year.

That's not right.

We are not hedging the pricing.

We match our prices as best as we can.

That's interest rate hedges where we locked in long-term rates at a little bit higher.

Rates have since gone down a little bit.

If rates go up, that will come back.

It will come back no matter what.

It will come back no matter what.

So these these aren't long, lock interest rate swaps.

The longest one was three years, one was two years, one was three years.

So it will come back, no matter what.

I see.

And could you update us on the level and water, the water at the plant that's, what that is costing and where the litigation.

We are presently getting the water from the city.

We have dispute between us and the company that built the water plant and it is never quite worked properly.

But, we've been lucky to be in Levelland, where its a city, Levelland has worked with us in every way possible.

It is not a, even to fix it, it is not a huge problem.

But we don't feel it is our problem, and we are getting bids to fix it.

We're talking, my guess between $0.5 million and $1 million to fix it.

But we, again we don't feel it is our problem, and we feel strongly about that but someone will have to fix it shortly.

In the meantime, in the interim the city has been great about supplying city water which works fine.

That's good.

And when do you start collecting the lease revenue on the store.

We should start, they had some free rent period.

They aren't obligated to open everything until the debt that, the day where they have to either open everything or start paying rent, I believe is July 31st, some where around there, and so, we should start collecting rent.

On the other hand, they do have some offsets against rent in the way of free rent and some incentives to take the stores.

Are the offsets substantial?

I would say it is a couple of months.

For all the stores, it is about $0.5 million for all the stores.

So that's about the number.

Is that current per year.

That's two or three months rent.

What's that?

That's just one year.

So, in general, the $3.2 million of lease income starts slowing in the second half of the calendar year.

Correct, assuming that they're solvent and can make the payments.

Of course.

Well, how are they doing.

We think they're doing okay.

I've heard no complaints from them that they're doing poorly.

It is a privately held company.

So we get no more information than the rest of the world.

But again I like the way you watch expenses.

Strategically, and this is a ways off, would you expect that you would stop repurchasing the stock after you have about 1.6 million of options still outstanding.

And historically, you have bought stock basically to offset.

I think we have bought way more stock than we have issued in options over the years, but I hear what you are saying.

I would say, when my feeling on purchasing of stock it is not to, it has nothing to do with options.

If we can buy our stock way below book value, we are very close, and this is just my thinking but we are almost able to buy our stock for cash, and the real estate that we have in the Company and get the ethanol business for free.

In fact, I think we can buy it for that level and so to me, again we can almost get the real estate, during certain times when we are buying stocks we could get the real estate for free and buy it for less.

If you can buy $25 of book value for $10, or $11, and you believe in your assets, that's a pretty good investment.

It looks like there have been a couple of transactions of ethanol plants, and they seem to be centering around $0.80 a gallon.

One other thing about options, they're so close to being out of the money, it is not the cash strain you think it is because you get the cash from the options back in.

Right.

Yes, they're, there's very little.

It is not as much, between that and the tax benefits you get, it is not near what, it is not significant at this point.

Thanks for the follow-up.

The ethanol transaction seems to be around $0.80 a gallon.

Is that what you are seeing?

No.

We are seeing lately a little bit more than that.

There was a green plants energy, I think.

Again I don't, I even studied it closely but you may want to look that up.

I think they paid a little more than that, the last transaction I saw.

Yes, I thought that was $0.80, $0.90.

It could be right.

Maybe with working capital, it is a little more and I look at it a little different than just the transaction.

Right.

More importantly, you seem to be thinking that with supply down and demand firmer, that the economics of ethanol are going to get better.

Not an easy business today, but if the Government makes people do, just the laws that are on the books, no new laws, demand is going to increase every year, and supply is certainly, with all of these plants, they may come up but no one is starting to build new plants right now.

But there's, in my opinion, there should be different economics, assuming the Government doesn't change the mandates.

Well, the Government.

Also gas prices are going up.

That should, technically, that should be good for our business.

It should help a little.

The Government has mandated cellulose, and the technology doesn't exist yet.

Well, that's true.

The energy investments you're contemplating, do they all have Government subsidies of some sort?

No, not necessarily.

We have nothing to announce.

We are spending a lot of time looking at a lot of different opportunities right now, in places where we have been successful before.

Well, there's lots of chaos in commercial real estate land certainly.

While everyone else was doing poorly, we were lucky enough to get, to have a fairly large real estate transaction about a year and a half ago, a couple years ago.

And is there any progress on selling the distribution center?

We have sold one distribution center, another distribution center has for part of it a lease proposal that we hope to, I would give it maybe 50/50 chance, and the third distribution center hasn't had anything to speak of on it yet.

The distribution center was sold previously.

Right.

I remember it.

Okay.

Thank you.

Okay.

Thank you, Richard.

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

Please proceed with your question.

Hi, guys.

Hi, Mike.

Stuart, do you have any insight on the 10% blend cap for gasoline and what's going on there?

We know that the industry would like to move it up to 15%.

I don't know, I don't ever count on anything.

If it happens, it would be a great bonus, but I don't count on anything like that.

Okay.

I don't know.

We are not politically active.

Other people are.

We prefer just to run our operations and let other people deal with that.

Okay.

And for the ethanol business, Doug, can you provide more information in the reports, gallons sold, price per gallon, cost per gallon, your variable costs and things like that.

I can tell you the average price of ethanol that we sold was $1.55, and our grain costs were about $3.26 a bushel.

We will provide that in the Q but I don't have a lot of the other detail in front of me.

Can you provide some information, we can look at corn prices and we can look at ethanol prices, but what we can't look at is the costs to operate your plants.

And can you provide some of that information or what is the best way for us to look at that?

Well, in general, if you take a look at what the price of corn is, and you divide that by 2.8, assuming that's your conversion rate of the corn.

What Mike is asking, is that he would like to know what our operating, he knows how to do that, Doug.

He would like to know how much our, what it costs per gallon for us to actually run the plants on a plant by plant basis.

I don't think we.

I hear what you are saying, Mike, especially on these partnerships, it is really hard to do that.

We might be able to supply that.

We will look into it for the plants we own a majority of.

It is kind of hairy, the 40 million-gallon plant is going to be different from the 100 million plant.

Okay.

And when you look at the plants, we've got one coming on here and what should that do in terms of, at current levels, I would assume that would increase the losses from ethanol, at least at current prices.

We hope not.

We already have in these numbers $200 million, 100 million gallon plants where we have minority interest, and I don't think.

Yes if we had a quarter like last quarter, that might be the case, but again if it tightens up like we hope that might not be the case.

The plant that we are opening is in a great location in terms of getting better price for DDGs, getting better price for ethanol.

So we are very optimistic.

I have said it before, but in terms of a plant that has an IPO ability to distribute it product, I don't think there's a better one around.

Okay.

And it looked like Big River was actually profitable during the quarter.

Is that right?

Slightly, pretty much a break even, but slightly profitable.

Okay.

Great.

Well, thank you very much.

I appreciate it.

Thanks, Mike.

(Operator Instructions).

We have a question in queue, sir.

We have a follow up question from the line of Richard Dearnly with Longport Partners.

To follow up on Mike Neary's question, if One Earth came on at today's prices, would it be profitable?

At what it is doing, excluding start-up expenses, I think it would be marginally profitable.

Based on our sales for the, our little bit of sales that we've had.

We do what we call going out purchases of corn and going out sales of ethanol and we try to match them.

Based on those matches, at least on a cash flow basis, it would be marginally positive and again that excludes certain start-up expenses where you have to test the plant, that type of stuff.

And what were the metrics at Big River that got it profitable this quarter?

The biggest thing Big River has going for it is they have so much less debt.

That's why I say there's a big opportunity if we choose to go that route with these plants being owned by banks.

The banks like us, we make our payments, they consider us very good operators.

And we have a lot of respect in the field, if for no other reason we are still standing, and we have run it like a retail store, we run a very, very low overhead operation.

Again, looking at Big River, they are doing better because of the lower debt.

Or.

the lower interest payments.

That's something.

Levelland did better, some of the other months, it had some downtime during the month of February to do maintenance issues et cetera.

Subsequent to that, that plant actually performed a little better than it had earlier in the quarter.

I see.

How much of the $2 million loss was the down time at Levelland?

I don't want to put that number out there, but just to say it did perform better after we were back up and running.

Was it half of it?

What's that?

Would it have been, would it be half of the loss?

Again, I will just say it ran more efficiently after we were able to get back up and running, and certainly ran much more cash flow positive at that point.

It is a good part of the loss and we don't want to say exactly.

Okay.

And where is sorghum relative to corn through the quarter and now?

Through the quarter it was well under corn.

Now it has come up a little closer to corn because the way sorghum works, much more than corn, there's not as much storage and so it ends up being sold on, and the farmers tend to want to sell it and not store it on their farm.

So, during harvest you end up getting great prices during now when harvest, while we are waiting for the next harvest it could be a little bit worse.

But are you still happy with using sorghum?

Absolutely.

Proving to be a good thing?

For us, absolutely.

For that plant.

That plant wouldn't have made it if it had to use corn.

Okay.

Thank you.

And sir, there are no further questions at this time.

Well, thank you everyone for listening and we look forward to talking to you at the end of next quarter.

Thank you.

Bye.

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

We thank you for your participation and ask you please disconnect your line.