強鹿 (DE) 2003 Q4 法說會逐字稿

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  • Operator

  • Good day ladies and gentlemen and welcome to the LESCO, Inc.

  • Fourth Quarter and Year End 2003 Results Conference Call.

  • At this time, all participants are in a listen-only mode.

  • My name is Mike and I'll be your conference coordinator today.

  • If at anytime during the call you require assistance, please press star followed by zero and then a conference coordinator will be happy to assist you.

  • I will now read the "Safe Harbor" Statement.

  • Portions of this presentation and other statements relating to sales and earnings expectations, the amounts of the charge associated with the sale of the accounts receivable portfolio, new service center openings and profitability, the Company's ability to impose price increases and other statements that are historical information are "forward-looking statements" and as such reflect only the Company's best assessment at that time.

  • Investors are cautioned that "forward-looking statements" involve risks and uncertainties.

  • Said actual results may differ materially from such statements that investors should not placed undue reliance on such statements.

  • Factors that may cause actually results to differ materially from those projected or implied in the "forward-looking statements," include but are not limited to the final resolution of certain contingencies relative to the collection of identified accounts receivable.

  • The Company's ability to add new service centers in accordance with its plans which can be affected by local zoning and other governmental regulations and its ability to find favorable store locations to negotiate favorable leases; to hire qualified individuals to operate the services centers and to integrate new service centers into the Company's systems.

  • Competitive factors in the Company's business include pricing pressures, lack availability or instability and the cost of raw materials which affects the costs of certain products.

  • The Company's ability to impose price increases on customers without a significant loss in revenues, potential rate increases by third-party carriers which affect the costs of delivery of products, potential regulations.

  • The Company's to affectively manufacture, market and distribute new products, the successes of the Company's operating plans, regional weather conditions and the condition of the industry and the economy.

  • For a further discussion of "Risk Factors" investors should refer to the Company's Securities and Exchange Commission Reports including, but not limited to Form 10-K for the year ended December 31, 2002.

  • And I would now like to turn the program over to your host for today's conference, President and Chief Executive Officer, Mr. Michael DiMino, please proceed sir.

  • Michael DiMino - President and CEO

  • Thank you and thanks for joining us today.

  • We'd like to accomplish three things today with you.

  • First, I'll provide an overview of our business.

  • Second, Jeff Rutherford our Chief Financial Officer will give a financial overview the full-year 2003 in the fourth quarter ending December 31st as provide guidance for 2004.

  • And then finally, I'll provide an update on our strategies and the 2004 business outlook.

  • As we look back in 2003, I thought it would be helpful to give a brief overview of what we've accomplished this year and how we are repositioning LESCO for long-term sustainable growth.

  • While some of our initiatives completed during the year may restrict our short-term results, we strongly believe that will ultimately the Company and it's shareholders.

  • 2003 was another year of transition, but we rose to the challenge and put in place a financial platform while fine-tuning our operating model.

  • Overtime, we believe we can achieve meaningful growth, improve returns and gain market share.

  • Early in '03, we advanced our hub and spoke logistic systems with three new distribution centers in Chicago, Atlanta and Plano, Texas.

  • We've talked about this before.

  • Each distribution facility is designed to support more than 70 centers and 30 Stores-on-Wheels with regional restocking effort and improved transportation services while simultaneously enabling us to expand our store footprint.

  • The hub system should enable us to take advantage of full truck loads, help minimize shipping costs and ensure that customs received their orders in the most timely and efficient manner.

  • This along with direct shipments should lead to greater efficiencies of the distribution channel.

  • Another critical result in the opening of these hubs is that it has allowed our salesmen to spend more of their time selling and less energy ensuring deliveries are on time and accurate.

  • Ideally we should have experienced an immediate gain in incremental sales, but towards the end of 2003 we finally started to realize some of the beneficial results we had originally planned for.

  • Furthermore, we expect to see additional selling leverage over time.

  • The system is working well now.

  • With a stronger infrastructure in place, we were able to open new LESCO Service Centers for the first time since 1998.

  • I think it was very important that we open the service - the hubs first before we attack the service centers.

  • In fact we inaugurated 21 service centers in 2003 bringing the year end total to 247.

  • This was a substantial undertaking for our Company because we hadn't opened new stores in quite a long time.

  • The new service centers contributed $9.8 million in revenue, nearly two percent of the total revenue and $3.0 million in full gross profit, for roughly a 31 percent margin.

  • The reduced margin is a direct result of a higher mix of lower margin producing equipment sales relative to existing service centers.

  • Combined are 21 new service centers produced a pre-tax loss of $646,000 from operations or $0.05 a share.

  • Although we expect it will reach breakeven in year two and profitability by year three, we actually had six stores reach profitability and one broke even for 2003.

  • These positive results from our experience in '03, give us confidence that opening new service centers will provide the best return on invested capital for the long term.

  • With the right infrastructure in place, the Company can commit it's time and resources to maximizing the performance of the new stores while positioning and educating our current locations to take full advantage of opportunities to drive same store sales.

  • One of the commonly asked questions involving our new service centers is how are they impacting existing stores and whether there's any affect from cannibalization on a short-term basis.

  • Based on what we've seen so far, taking into consideration surrounding stores within a reasonable driving distance, we estimate approximately a 50 basis point cannibalization rate on our same store comp sales.

  • In other words, of the $9.8 million in revenue from the 21 centers opened in 2003, a full $7.4 million was new incremental business.

  • We will be diligent in monitoring cannibalization rates for our class of '03 stores as well as the class of '04, but we maintain that the overall market is vastly under penetrated and we are years away from true saturatization.

  • On December 31, 2003, we dramatically improved our balance sheet as we recapitalized the Company through debt restructuring and a refinancing of our line of credit.

  • Going forward we will have the flexibility to sell funded growth since we no longer have to commit working capital to finance accounts receivable.

  • The recapitalization completed one of the most important initiatives in our repositioning process.

  • The restructuring of our debt which included the sale of our receivables to GE Business Credit Services for about $56 million enabled us to outsource what had become an inordinate and expensive component of our day to day operations, mainly conducting credit checks and collection.

  • We can now focus on our core business providing professional lawn care firms and golf courses with the high-level products, service and expertise they have come to expect.

  • Together with arranging a new three-year loan facility with P&C Bank, we've shored up our balance sheet considerably and greatly improved our debt-to-equity ratio.

  • Another significant issue for 2003 was the dramatic rise in urea costs which forced the Company to implement numerous price increases throughout the year.

  • This caused unneeded [inaudible] for our sales force and was confusing to our customer base.

  • Just to put things in perspective, urea stood at $124.00 a ton in the first quarter of 2002.

  • Although prices held steady for the remainder of 02, by the end of first quarter '03, the cost had risen to $150.00 per ton and continued to climb during the year to approximately $188.00 per ton.

  • On average, we paid about $50.00 more per ton year-over-year or it costs us an incremental $6.8 million.

  • To protect the Company this year, we have hedged all urea requirements.

  • That offers us greater transparency in setting and maintaining our prices.

  • This will lead to a more stable pricing environment for the Company and positively impact our expectations for improved margins in '04.

  • With that, I'll turn the call over to Jeff.

  • Jeffrey Rutherford - Senior Vice President and CFO

  • Thank you Michael.

  • As Michael said, I will review the 2003 results as well as guidance for 2004.

  • Then Michael will provide a strategic outlook before we turn the call over for Q&A.

  • Due to the seasonality of LESCO's business, the fourth quarter is one of the lowest sales periods of the year and historically a quarter that generates net losses.

  • Consequently, I will begin my remarks with the review of LESCO's results for the full year ended December 31, 2003, which we believe are more meaningful due to the quarter lumpiness of the green industry.

  • We have also made a decision to try and simplify the LESCO story by breaking the Company into two customer segments.

  • Golf and lawn care.

  • While we're still a vertical operation, we believe that analyzing the business in this manner and providing detail on a geographic basis will provide a comprehensive and easily understood story.

  • In addition, same store sales will still refer to our 226 service centers that have been in service for two full calendar years.

  • That said, let me review our income statement.

  • One thing that may help everyone on the call is attached to our release today as a reconciliation of our adjustments in 2003 and 2002 to our GAP results and as we go through the presentation today, we would be referencing both GAP results and adjusted results.

  • For the full year 2003, net sales increased 2.3 percent to $523.5 million up from $511.7 million in 2002.

  • Same store service center sales increased 5.1 percent or $16 million to $336 million from $320 million while total service center sales increased 8.1 percent or $26 million to a total of $346 million.

  • Lawn care gross sales for 2003 increased 4.1 percent to $388.3 million while golf gross sales were $137.8 million versus $140.3 million in 2002 a decline of 1.8 percent.

  • The 21 new service centers contributed $9.8 million in sales in 2003.

  • Geographically, the strongest performing regions were in the mid-central up 5.1 percent to $120.9 million in sales and the southeast up 4.9 percent to $94.3 million while national account sales declined 6.5 percent to $62.5 million.

  • Cost of sales were $350.8 million compared to $341.3 million in 2002.

  • Including the $9.2 million cost of sales inventory markdown taken in 2002 gross profit on sales increased 150 basis points to 33 percent of sales compared to 31.5 percent last year.

  • On an adjusted basis that is excluding the $9.2 million markdown, gross profit margin declined 30 basis points year-over-year.

  • This decline primarily relates to the portion of the dramatic urea costs increases which could not be passed through incremental price increases due to the inefficiencies of our pricing systems.

  • It is worth noting that we have made adjustments to our pricing systems, particularly in July of 2003 which corrected certain of these inefficiencies.

  • Distribution expense for 2003 was $47.7 million or 9.1 percent of sales compared to $44.2 million or 8.6 percent in 2002.

  • This increase is directly attributable to LESCO's long-term decision to invest in incremental fixed distribution capacity and the task of actually moving inventory from around the country into these newly opened distribution houses in Atlanta, Chicago and Plano, Texas.

  • Selling expenses were $85.5 million or 16.3 percent of net sales compared to $79 million or 15.1 percent of net sales a year ago.

  • The decrease in selling expense leverage is a result of $3.1 million in operating costs for new service centers; $1.4 million related to the Company's New Point of Sales Systems and other incremental payroll costs of approximately $1.1 million realized in the first half of 2003.

  • During the first half of 2003, we launched a plan to increase sales through the addition of 61 direct sales representatives.

  • A reduction in this force occurred in June 2003 eliminated 41 of these incremental positions.

  • Pre-opening expenses which are also included in the selling expenses were $602,000 for 2003, as we opened 21 stores and made preparations to open over 25 new service centers during the first half of the 2004, but began incurring expenses related to those stores in the fourth quarter of this year.

  • Merchant discounts and bad debt expense were $2.8 million compared to $2.4 million in 2002.

  • General and administrative expenses were $29.3 million compared to $30.6 million.

  • This decline was due to many factors including increases in insurance related costs offset by workforce reduction and lower incentive base compensation.

  • Income from operations on a GAPP basis was $1.2 million compared to a loss from operations of $14.3 million in 2002.

  • In 2003 the Company incurred charges of $2.3 million related to early retirement of debt as well as $4.6 million related to a loss on the sales of the receivables portfolio.

  • The $2.3 million included an approximately $1.0 million write-off of deferred financing from a previous facility as well as $1.3 million related to the buyout and termination of our interest rate [inaudible] Agreement.

  • Of the $4.6 million charge related to the loss and the sale of the receivables, 1.6 was attributed to what we call strategic accounts which could be realized in 2004.

  • These are really contingencies related to the sale that we were not paid for the sale by GE and if they collect the money going forward, then on a contingent basis we would realize that money back to us.

  • Excluding these charges in 2003 EBIT on an adjusted basis would have been $8.2 million compared to $14.9 million.

  • LESCO's 2002 EBIT on an adjusted basis excludes the following charges: $9.2 million for the previously referenced inventory marked down; $12 million for an asset rationalization charge; $3.9 million for severants costs and $4.6 million for debt refinancing at the beginning of 2002.

  • Interest expenses were largely flat at between $4.8 million and $4.9 million in both years and obviously those will come down dramatically in 2004.

  • During the year, the Company also sold it's investment in commercial turf products which is our joint venture with MTD.

  • We sold our interest to MTD for $935,000 Promissory Note and a Release from 50 percent of certain TTP liability guarantees including approximately $8.0 million IRB.

  • The deal falls in mid-November and resulted in an immaterial gain on sale.

  • We also entered into a five-year Supply Agreement with MTD to source certain of our equipment, including our LESCO Exclusive Equipment and the amount that we've committed to was based upon our historical commitment to that joint venture.

  • Net loss for 2003 was $5.3 million or $0.63 per diluted share including a non-cash charge of $2.8 million or $0.33 per diluted share associated with the establishment of a deferred tax asset valuation reserve.

  • This compares with a net loss of $17.59 million or $2.06 per diluted share in 2002.

  • The Company's establishment of a valuation reserve on the deferred tax asset is a result of three years of GAP losses and the uncertainty associated with deferred tax assets future realization.

  • This valuation allowance represents a non-cash expense and has no impact on adjusted cash flow.

  • In 2002, we recorded an $889,000 or $0.9 per share valuation reserve for deferred tax income tax assets generated from state net operating loss carry forward.

  • For comparability of earnings per share on an adjusted basis, we exclude the provision for deferred income tax valuation allowance from both 2003 and 2002.

  • Excluding those charges, our net income was $2.1 million or $0.23 per diluted share in 2003 versus net income of $6.2 million or $0.70 per diluted share in 2002.

  • Turning to the fourth quarter net revenue for the three month period ended December 31, '03 was relatively flat at $109 million versus $108 million in the same period in '02.

  • Lawn care sales were $74 million and golf sales were $35.9.

  • The 21 new service centers contributed $2.79 million during the quarter and same store sales declined 70 basis points.

  • The cost of sales were $75.2 million in the fourth quarter compared to $73 million in the fourth quarter of '02.

  • Including the $356,000 credit in inventory markdowns taken last year, gross profit on sales declined 180 basis points to 30.8 percent of sales compared to 32.6 percent in the fourth quarter of last year.

  • This reduction was largely due to the timing of physical inventory results.

  • Historically, we have taken physical inventories in the second half of the year, but beginning in '03, we outsourced to an independent inventory specialist who now perform physical inventories on an interim basis an adjust the inventories on an interim basis.

  • Distribution expense for the fourth quarter was $10.5 million or 9.7 percent of sales compared to $9.6 million or 8.9 percent in the fourth quarter of last year.

  • The increase is directly attributable to the incremental fixed costs of the distribution network referenced by Michael.

  • Selling expenses declined $165,000 to $21.7 million or 20.2 percent of sales compared to 21.6 or 20.3 percent of sales a year ago.

  • Pre-opening expenses were $180,000 during the quarter as we made preparations for the openings in '04.

  • Merchant and discount and bad debt expense was slightly down to $345,000 from $499,000.

  • General administrative expenses were $7.5 million versus $7.8 million a year ago.

  • Overall, loss from operations was $13.3 million compared a loss of $3.6 million in the fourth quarter of 2002.

  • The Company has historically recognized the loss in the fourth quarter.

  • Net loss for the fourth quarter was $11.9 million or a loss of $1.39 per diluted share.

  • On an adjusted basis, net loss was $4.5 million or $0.53 per diluted share.

  • This compares with a not loss for the fourth quarter of 2002 of $3.8 million or $0.45 per diluted share or on an adjusted basis a net loss of $3.5 million or $0.41 per diluted share.

  • Now I would like to provide some highlights of our balance sheet.

  • As we enter 2004, we believe we will be able to reinvigorate our lawn care business while we seek golf related sales remains challenging.

  • Additionally, we have utilized protective measures to limit the Company's exposure to rising urea costs which combined with implementation of pricing controls will add stability and consistency to our pricing structure while limiting our sales forcibility to varied pricing on a customer by customer basis as they have done in the past.

  • As Michael discussed earlier, our balance sheet was meaningfully strengthened by the GE transaction.

  • Our accounts receivable balance dropped to $17.9 million compared to $68.2 million as we sold the majority of our portfolio to GE.

  • We also significantly reduced our debt levels.

  • The current portion of our revolving bank debt dropped to $15.59 million from $57.2 million in '02 while our long-term debt were $5.9 million compared to $10.2 million last year.

  • Furthermore, we bought back our preferred stock for $1.7 million and terminated the interest rate swap agreement.

  • We are pleased with the financial flexibility will enable us to self-fund our new service centers going forward.

  • In terms of guidance, the Company anticipates full year 2003 revenue growth between three to six percent including a three to five percent increase in same store sales.

  • By customer segment, lawn care sales should increase five to eight percent while golf is anticipated to be flat to down three percent.

  • As weather and other seasonal related issues, affect the Company's quarter-to-quarter results, we do not provide quarterly earnings guide.

  • For the full year, the Company expects earnings per share in the range of $0.30 to $0.40.

  • This outlook is based upon various assumptions which include industry trends and internal expectations but are not limited to following:

  • The opening of 25 to 30 new service centers.

  • Industry trends; gross profit margins in the range of 33 percent to 33.5 percent.

  • Improvement in distribution expense leveraged to 8.6 percent of net sales.

  • Selling expenses will continue to increase to approximately 18 percent of sales due to the new service centers and an increase merchant discount related to the outsourcing of the Company's accounts receivable program.

  • General and administrative expenses are expected to be flat.

  • Average borrowings are expected to be $20 million and an effective interest rate cost of approximately four percent and effective tax rate of 39 percent.

  • I will now turn the call over to Michael again for a few words on our strategic outlook.

  • Michael DiMino - President and CEO

  • Thanks Jeff.

  • A lot of information there.

  • We believe we can and should outperform the industry due to many initiatives we've implemented in the past few quarters such as the new service centers, the hedge on urea and our continued efforts to maintain consistent product pricing as well as not handling the anniversary expenses associated with the opening of the new hub distribution centers.

  • Remember it is still early in the year and we believe being conservative is the prudent for the Company to follow relative to the outlook and guidance for the year.

  • With that said we have certainly poised and ready for the selling season and we expect comparable service center sales growth will be sustainable.

  • The combination of new store openings, operational improvement and financial discipline should result in a more efficient and profitable operation over time.

  • As Jeff mentioned, we intend to open additional 25 to 30 new service centers this year; 25 of which will take place in the first half of the year.

  • By pushing the openings earlier in the year, we can capitalize on sales in the second and third quarters which due to seasonal factors are our busiest periods of the year.

  • In fact, we just opened facilities in Brookfield, Connecticut and Coconana, Wisconsin in the last few weeks and two service centers in North Carolina today.

  • One in Matthews and one in Wilmington.

  • We envision over the long-term we can add an additional 500 service centers each producing $1.3 million in sales at maturity as we back sell existing markets and enter new ones.

  • Depending on the source industry projections forecast between three and five percent growth in the lawn care industry on an annual basis over the foreseeable future as a combination of favorable demographics and strong housing starts contribute to higher demand for professional lawn care service.

  • This affords us a tremendous opportunity to grow our business and gain market share and we fully intend to rise to the occasion.

  • We foresee over 50 million households becoming prime users of our customers services over the next decade as the baby boomer generation ages and is less able or interested in servicing their own lawns.

  • In addition, busy lifestyles and higher disposable income have made professional lawn care less of a luxury and more of a necessity for homeowners interested in maintaining a well manicured lawn without the time and trouble needed to do it themselves.

  • Solid growth in housing starts over the last few years despite the difficult economy will also contribute to the growth of professional lawn care services.

  • The golf market on the other hand will remain challenging for the foreseeable future.

  • Total rounds of golf played per year per golfer are still down and although the number of total golfers is roughly the same, that number of rounds per golfer is the problem.

  • On the bright side we are better positioned than our competitors and have gained market share at their expense in a less than favorable market.

  • Where we will be successful is expanding our golf penetration by adding more golf territories.

  • That is teams of salesmen combined with our unique Stores-on-Wheels model that targets specific markets and demonstrate how we are best equipped to handle their ongoing maintenance or immediate needs such as stemming diseases or other turf problems.

  • Over the long term, we believe the number of rounds will rebound as an aging population begins to spend more time on the golf course.

  • That's not an immediate situation for us going into next year.

  • We have set a long-term goal to raise less [inaudible] ROIC to above 10 percent.

  • We will accomplish this by investing in new stores, educating our employees and our customers while controlling our expense structure.

  • We have invested in infrastructure technology and the results should be improved operational efficiency, stronger margins and increased profitability.

  • While this will not happen tomorrow, this is an evolutionary process and will result in increased shareholder value over time.

  • So it's a lot of information for us and we're looking forward to your questions.

  • We'll open it up at this time.

  • Thank you.

  • Operator

  • Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone.

  • If your question has been answered or you wish to withdraw your question, please press star two.

  • Once again, please press star one to ask a question.

  • And the first question comes Michael Whitney (ph) with Taylor Investment Associates, please proceed.

  • Michael Whitney - Analyst

  • Hi.

  • I'd like you to comment on the same store sales in 2003.

  • I think you said on the call - on your prepared comments that they were down year-over-year.

  • Could you talk about the factors that drove that?

  • Michael DiMino - President and CEO

  • Well Michael the fourth quarter numbers were down for same store sales but same store sales for the year of '03 was 5.1 percent off.

  • Michael Whitney - Analyst

  • OK so what happened in the fourth quarter?

  • Michael DiMino - President and CEO

  • Well first and fourth quarter are traditionally our worst quarters and we always and historically have lost money in those quarters.

  • I think we just had a rough - you know again the weather at the end of the year wasn't as applicable as it should have been for us but there's nothing we can do about that situation.

  • Michael Whitney - Analyst

  • OK so it was really weather driven?

  • Michael DiMino - President and CEO

  • For the most part, yes.

  • Michael Whitney - Analyst

  • OK thank you.

  • Operator

  • And the next question comes from Darrian Hightman (ph) with Schneider Capital.

  • Please proceed.

  • Darrin Hightman - Analyst

  • Thanks.

  • Hi guys.

  • Michael DiMino - President and CEO

  • How you doing Darrin?

  • Jeffrey Rutherford - Senior Vice President and CFO

  • Hi Darrin.

  • Darrin Hightman - Analyst

  • The selling expense guidance for '04 seems pretty high to me.

  • So maybe you could flush that out for me.

  • Michael DiMino - President and CEO

  • Yes Darrin, you know what's in there that's probably - that probably you're not picking up is - in that selling expense is the merchant discount and bad debt line and as we have discussed that what's going to happen next year since we outsourced the credit function to GE - what's going to happen is we're going to significantly cut our interest expense, but we're going to start incurring merchant discounts from GE.

  • Darrin Hightman - Analyst

  • OK so basically your interest expense goes down, but you're selling expense goes up?

  • Michael DiMino - President and CEO

  • Right and what we're going to do for visibility is we're going to break that line out separately.

  • We didn't provide separate guidance for that.

  • Darrin Hightman - Analyst

  • OK.

  • Michael DiMino - President and CEO

  • But what do you have in selling expenses for next year is basically the base business selling expenses are going to relatively flat or the core business - I shouldn't even say the base - the core business selling expenses are going to be relatively flat and the reason for that is there's going to be some inflation in there, but you remember in the beginning of last year we did some things that we're now repeating this year like the direct sales growth, at $1.1 million.

  • What the increase is in selling expenses year-over-year are going to be the base is flat and that's without the 2003 and 2004 stores.

  • The 2003 stores will be open for an entire year, but there's going to be an increase in selling expense for the unit week - the incremental unit week for those stores to be open for a full calendar year and then there's going to be the operating costs, the 2004 class of new stores.

  • So just - when you strip out merchant discount and bad debt basically what you get in selling is a flat in the base and then increases from the 2000, 2004 stores.

  • Then on a merchant discount, bad debt what's going to happen is what we have in there now in that line that's in the release is the merchant discount from the multi-program credit providers, Visa, MasterCard, American Express and then the net costs of our credit program.

  • That number is going to increase because what we've done is to some extent traded interest for merchant discount.

  • Now what we should see is some benefit in that total number going forward as we better leverage the use of the GE transaction and in incremental sales and so forth, but the initial movement is going to be from interest up into merchant discount bad debt.

  • Darrin Hightman - Analyst

  • So is that roughly $4.5 million?

  • Michael DiMino - President and CEO

  • No, no.

  • It's going to be about - a little less than $4.0 million [inaudible].

  • Darrin Hightman - Analyst

  • Can you quantify what the store impact is?

  • Michael DiMino - President and CEO

  • Um --

  • Darrin Hightman - Analyst

  • I guess I just -I didn't have time to do a you know a lot of work here on the spreadsheet, but it looks like your selling expenses are going to be close to $100 million.

  • That's a $15 million increase unless - it's possible I did something wrong because I haven't had much time to look at it.

  • But is that - am I looking at it right?

  • Michael DiMino - President and CEO

  • Well you know the guidance we gave was up 18 percent, but what you have to do is you have to take the selling expenses plus the merchant discount that we provided, right?

  • Darrin Hightman - Analyst

  • Yes.

  • Michael DiMino - President and CEO

  • And then take it up 18 percent and you're probably pretty close to what it's going to be in total.

  • Darrin Hightman - Analyst

  • OK.

  • Going forward, '05, '06 and in out years then we should start to see that come down as a percent of revenue?

  • Michael DiMino - President and CEO

  • Well the model would be obviously is that we're always going to be adding new stores and as those new stores reach maturity, we'll start seeing a leverage of our overall expenses.

  • That's the way the model works.

  • Our costs in operating a store for example - a store that will be open for the full calendar year in '04, our costs are relatively fixed relative to payroll and rent and utilities and so forth.

  • So those costs as that store ramps up in leverage - in sales and gross profit, we'll be able to leverage those fixed costs.

  • Darrin Hightman - Analyst

  • OK thanks.

  • Michael DiMino - President and CEO

  • Alright Darrian.

  • Operator

  • And the next question comes from Rick Nelson (ph) from Morgan Joseph, please proceed.

  • Rick Nelson - Analyst

  • Good afternoon.

  • Michael DiMino - President and CEO

  • Hi Rick.

  • Jeffrey Rutherford - Senior Vice President and CFO

  • Hi Rick.

  • Rick Nelson - Analyst

  • Hey how are you?

  • Could you elaborate some further - or give some further commentary on the hedge contract you've got - what the strike price is.

  • What you're looking at in terms of what's your downside protection actually is going forward?

  • It is a full year contract isn't it?

  • Michael DiMino - President and CEO

  • Yes.

  • We've hedged the purchase of urea with our current supplier and they have gone out and done the actual GAP hedge.

  • So we are buying in at less than the market price right now, and we have that guaranteed for the remainder of '04.

  • We're in the 188, 180 ball range - somewhere in there on a cost per ton and the current price of urea is above that.

  • Now you know gas prices are going to have to fall in order for us to have to do anything.

  • They're going to have to fall considerably and so far we don't see any evidence of that.

  • Well not only that, it has to be converted through urea also.

  • Rick Nelson - Analyst

  • OK very good thanks.

  • Michael DiMino - President and CEO

  • Sure.

  • Operator

  • And the next question comes from Paul Resnick with J.M.

  • Dutton & Associates.

  • Please proceed.

  • Paul Resnick - Analyst

  • Hi.

  • A couple of questions.

  • First, sometime back we had a store model that you alluded to a bit about you know when does storage become profitable and clearly that model seems to have been too conservative.

  • Are you using a different store model now and is that going to be shared with the analysts?

  • Michael DiMino - President and CEO

  • No, no actually we haven't significantly modified that model and Paul what we don't know yet obviously is how the models' going to perform in the out years.

  • You know it was favorable in the first year, but we're right now sticking with that model and we'll continue to monitor it, but we have not changed any of the out years of that store model.

  • Paul Resnick - Analyst

  • OK and secondly while moving the credit responsibilities off to GE is a great help to streamlining your business and becoming more effective in your general administrative costs are looking great - could you discuss any of the customer service risks or customer relationship risks that you see in a move like this?

  • Michael DiMino - President and CEO

  • It's actually interesting.

  • I don't know now far we want to go with the discussion, but Paul what we've found number one is that obviously this is GE's business - you know it were GE Business Credit Services obviously GE has numerous businesses, but the GE Business Credit Services this is their business.

  • They have the systems and they have the expertise to provide customer service and what we've found so far with the folks that we've worked with over there is they are very customer oriented - the customer being both us and our customers and they have taken the portfolio and they are doing some very good things relative to credit limits and relative to service and they will be able to provide certain functionality to our customers that we would never have been able to provide without significant systems upgrade and time and a lot of money.

  • So what we were able to do very quickly was to convert the portfolio over to them.

  • There were obviously numerous financial reasons to do that, but in the long run, we believe very strongly that with their expertise and background in providing commercial credit that we're going to also see the benefits on the top line.

  • Paul Resnick - Analyst

  • Thank you.

  • Michael DiMino - President and CEO

  • Alright thanks Paul.

  • Operator

  • Once again ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone.

  • Please standby to see if there're any further questions.

  • And there are no further questions at this time.

  • Mr. DiMino please proceed.

  • Michael DiMino - President and CEO

  • Well we want to thank everybody for their participation on today's call.

  • We look forward to speaking with you as soon as we get near and into the first quarter and we can talk about the earnings at the end of first quarter.

  • It's important for us to keep you updated and we will do so if anything is important to do before that we will update you as well.

  • So thank you for your participation.

  • We enjoyed spending time with you and we look forward to seeing some of you in New York.

  • Thank you.

  • Operator

  • This concludes your LESCO, Inc.

  • Fourth Quarter and Year End 2003 Results Conference Call.

  • Thank you for your participation today.

  • You may now disconnect.