強鹿 (DE) 2004 Q1 法說會逐字稿

Good afternoon and welcome to LESCO's first quarter conference call on Webcast.

At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode.

At the request of the Company, we will open up the conference for questions and answers following the presentation.

Portions of the presentation and other statements relating to sales and earnings expectations, new Service Center openings and profitability, the Company's ability to impose price increases, and other statements that are not historical information, are forward-looking statements.

Investors are cautioned that forward-looking statements involve risks and uncertainties and that actual results may differ materially from such statements.

Investors should not place (inaudible) reliance on such statements.

Factors that may cause actual results to differ materially from those projected or implied in the forward-looking statements are set forth in the Company's Securities and Exchange Commission Report, including but not limited to Form 10-K for the year ended December 31, 2003.

In addition, some of the information that will be discussed today may include non-GAAP financial measures.

A presentation of the most directly comparable GAAP measure on a reconciliation of the differences between the non-GAAP financial measure and the comparable GAAP measure are described herein and are posted on the LESCO Web site at www.lesco.com.

A copy of the release on PowerPoint presentation related to today's call can also be obtained through the Company's Web site.

I would now like to turn the conference over to Michael DiMino, President and CEO.

Please go ahead, Sir.

Thank you, and thanks to all of you for joining us today.

With me today are Jeff Rutherford, our Senior Vice President and CFO, and other key members of the management team.

And we'd like to accomplish the following, number one, we'd like to provide an overview of our business.

Number two, Jeff Rutherford, our CFO, will give a financial overview of our first quarter, as well as reiterate our guidance for the full year.

And then finally, I'd like to provide an update on our strategies and business outlook.

After two years of transition, the LESCO team has created a platform for sustainable growth, which will ultimately benefit the Company and shareholders.

As our first quarter results indicate, many of the initiatives we put in place last year are already beginning to pay off.

First quarter net sales increased 8% with comparable Service Centers going at 5%.

We were able to hold our overall product margins flat in the first quarter, which are highly correlated to commodity prices, particularly urea.

This, in light of urea prices actually rising 30% over prior year.

The contract on urea rounded took last year, combined with the pricing discipline we implemented on our sales force will enable us to generate a more consistent product margin, as well as opt the pricing clarity for our customers in '04.

I want to reiterate that the least expensive means of distribution of our products is to ship full truckloads from our blending facilities directly to our service center or our customer.

We then utilize the hub-and-spoke system to fulfill demand for product not currently in the production schedule.

This strategy should help minimize shipping costs and ensure that customers receive their orders in the most timely and efficient manner possible.

In the first quarter, the results were, that we realized, 160 basis point reduction and distribution costs.

We also demonstrate improvement in our selling expense leverage as a percent of sales, due to a more properly staffed sales force.

Additionally, G&A costs remain flat in real dollars.

Although we, like all public companies, are experiencing expense increases relative to most stringent government guidelines we have implemented (inaudible).

In addition, our balance sheet showed dramatic improvement from a year ago.

We sharply reduced our debt levels, which in turn lowered our interest expense, and seasonally replenished our inventory to take advantage of the spring selling season.

Last year, we opened 21 new LESCO Service Centers.

We intend to up the anny in '04 by opening between 25 and 30 this year.

As of today, 17 have been opened.

To fill in existing markets and in four new markets, including Kaukauna, Wisconsin, Wilmington, North Carolina, Charleston, West Virginia and Panama City, Florida.

Those are the new markets where we don't have any other stores.

We view new service centers as the primary method to leverage our cost base and grow earning consistently over time.

For example, in the first quarter, the class of 2003, the 21 Service Centers we opened last year contributed 2.9 million in revenue, nearly 3% of net sales, and four-wall pre-tax operating loss of $207,000.

The class of '04 service centers, which totaled 9 at the end of first quarter, generated 450,000 in net sales, and four-wall operating loss of 409,000.

In general, the new Service Centers are operating even more efficiently on a four-wall operating basis than we originally modeled and planned for.

We maintain that cannibalization of existing stores is being managed, and the overall U.S.

Market is far from being penetrated, and we are years away from saturation.

The positive results from this experience gives us confidence that opening new Service Centers will provide the best return on invested capital of the long-term.

With the right infrastructure in place, the Company can commit its time and resources to maximizing the performance of new stores, while positioning and educating our current location, to take full advantage of opportunities to drive same-store center sales.

We'll have the brief overview of our quarter.

I'd like to turn it over to Jeff Rutherford, our CFO for more in-depth financial analysis.

Thank you.

As Michael said, I will review the results for the first quarter of 2004, as well as reiterate our previous guidance for the full year.

Due to the seasonality of LESCO's business, the first quarter is the lowest period, lowest sales period of the year, and historically a quarter that generates net losses.

Similar to how we conducted the fourth quarter 2003 conference call, we have tried to simplify the LESCO store by presenting the Company's sales by two customer sectors, Golf and Lawn Care, and by two channels of transactions, Service Centers and other.

While we are still a vertical operation, we believe that analyzing the business in this manner will provide a comprehensive and more easily understood start.

In addition, same store sales will still refer to our 226 Service Centers that have been in service for at least one full calendar year.

In other words, we will include new Service Centers in comparable store sales in their second full calendar year of operation.

That's at, let me review our income statement, for the first quarter net sales increased 8% to 102 million up from 94.5 million in 2003.

Lawn Care growth sales for the quarter increased 10% to 85.7 million from 77.6 million in 2003.

Gross Golf sales were 17.2 million versus 17.9 million in the same period last year, a decline of 4% year-over-year.

Same-store Service Center sales increased 5% to 64.9 million from 61.8 million in 2003, while total Service Center sales increased 10% to 68.3 million from 62 million.

The 21 Service Center's opened in 2003 contributed 2.9 million in sales, and the nine Service Centers opened in 2004 contributed 450,000 in revenue.

Prior cost was 68.9 million compared to 63.8 million in the first quarter, '03, which was flat as a percentage of sales resulting in gross product margin of 32.4 million for both years.

First quarter margin dollars increased for the first time in four years.

We view this quite positively, in light of the margin erosion we experienced last year, due to increasing urea costs.

Distribution costs for the quarter were 9.5 million or 9.3% of sales compared to 10.3 million or 10.9% in '03.

This decrease is directly attributable to the fact that we are comparing against the hub-and-spoke startup cost from '03.

Plus, the focus on Full (ph) Truckload Distribution as reviewed by Mike.

Selling expense increased to 21.8 million from 20.7 million.

This increase included new Service Center, that is Service Center's opened in '03 and '04, selling expense of 1.2 million in '04 versus .3 million in '03.

In the first quarter, '04, there were 30 new Service Centers operating versus 10 in the prior year.

Excluding new Service Centers, selling expenses were 20.6 million versus 20.5 million and improved as a percentage of net sales by approximately 80 basis points on a year-over-year basis to 20.9% from 21.7%.

One of the reasons 2004 first quarter selling expense compares favorably with first quarter, '03, is due to the significant reduction of the Company's direct sales team, that is, in the first quarter of '03 we had expanded our direct sales force, and then we reduced the number of direct salespeople in June of '03.

The incremental cost savings in the first quarter '04 was approximately $0.8 million.

Pre-opening expense was 222,000 compared to 166,000 for the same period a year ago.

During the quarter we opened 9 stores and made preparations to open an additional 16 to 21 new Service Centers in the balance of '04.

General and administrative expense for the quarter was 7.3 million compared to 7.4 million last year.

We are committed to holding G&A costs flat, as we grow sales in the number of Service Centers.

Merchant discounts provision for (inaudible) expense was 1.6 million compared to 530,000 in the first quarter of '03.

Conversely, interest expense was down significantly from a year ago, 384,000 versus 1.3 million, as we lowered our total debt to 23.4 million from 102.1 million, a 77% reduction.

These changes resulted from the General Electric Business Credit Services transactions executed in the fourth quarter of '03, and then improvement of approximately 37 million in cash flows from operation on a year-over-year basis, on a GAAP basis.

Excluding the effect of overdraft balances, which are reclassified on a GAAP basis to financing activities, we achieved a $27 million improvement in operation-in cash flows from operations.

For the first quarter, pretax loss from operations was 7.6 million compared to a loss of 9.2 million in '03.

Net loss for the first quarter on a GAAP basis with 8 million or 92 cents per share, compared to a net loss of 5.7 million or 68 cents per share in '03.

This includes the $340,000 tax expense versus the $3.5 million tax benefit in the first quarter of '03.

I want to explain the income tax situation we are currently experiencing.

Our GAAP results do not reflect a tax benefit related to the Company's first quarter, '04, operating loss because of the required accounting treatment for Lessee's deferred tax assets.

Assuming a 39% tax rate, which we used to compare a year-over-year performance, the Company would have reduced its loss to 4.6 million or 54 cents per share compared to last year's first quarter loss of 5.7 million or 68 cents per share.

This represents an improvement of 21% on a per-share basis.

The tax expense of 340,000 I previously mentioned for the first quarter of '04, reflect an adjustment to our estimated tax refunds from prior years.

Those adjustments--we didn't give up the 340,000, the adjustment that defected the refund and the 340,000 that was then added to deferred tax assets, and then we had to take a reserve, to reserve for that tax asset.

Now, I will provide some highlights of our balance sheet.

As you can see, our balance sheet was (inaudible) strengthened by the GE transaction.

Our accounts receivable balance dropped to 17.3 million compared to 81.8 million a year ago.

We also significantly reduced our debt levels.

Our revolving bank debt dropped to 17.6 million from 92.1 million in March of '03, although it is up slightly from December, '03, due to seasonal borrowing requirements.

Our long-term debt stands at 5.9 million compared to 9.9 million a year ago, and is flat with the fourth quarter.

Although our inventory is up approximately 5 million from a year ago to 114.9 million, this predominately reflects the inventory required opening 20 Service Centers at the end of the first quarter of '03.

We continue to believe that there are opportunities in inventory reduction, particularly of non-seasonal product.

Our sharply improved balance sheet gives us the financial flexibility to self-fund our new Service centers, which we consider the best means to achieve consistent earnings growth over time.

In terms with our guidance, we are optimistic, relative to the trends we experienced in the first quarter; however, the second quarter is our largest selling quarter.

We continue to anticipate full-year, '04, revenue growth between 3-6%, including a 3-5% increase in same-store sales to which we achieve the higher end of the range in the first quarter.

By customer segment, Lawn Care sales should increase 5-8% (pH), while Golf is anticipated to be flat to down 3%.

As you know weather and other seasonal related issues effect the Company's quartered quarter results, therefore we do not provide quarterly earnings guidance.

For the full-year of the Company, it is reiterating the expense expects earnings per share in the range of 30 to 40 cents, and that if anything materially changes, we will notify the market.

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

Thanks, Jeff.

We are certainly poised and ready for the selling season and expect the comparable Service Center sales growth that we achieved in the first quarter of 5%, that which will be sustainable during the year.

The combination of new store openings, operational improvement and the financial discipline that we've installed, should resolve in more efficient and profitable operation.

As Jeff mentioned, our initial plans call for the opening between 25 and 30 new Service Centers this year, nine of which we've opened in the first quarter, and eight which will be opened in the second quarter.

We intend to open an additional nine this quarter, and one to four in the second half.

By accelerating the openings to earlier in the year, we can capitalize on sales in the second and third quarter's, which due to seasonal factors, are our busiest periods of the year.

We envision adding an additional 250 Service Centers over the long-term, each producing 1.3 million in sales at maturity as we back the existing markets and enter new ones.

We believe we can successfully grow our business and gain market share in the $7 billion Lawn Care industry by reaching or exceeding its 5% projected growth rate.

We have favorable demographics of over 50 million households becoming prime users of our customer's services over the next decade due to an aging baby-boomer generation, and busy homeowner's unable or unwilling to maintain their own lawns, which present a tremendous opportunity for our industry.

This, combined with strong housing starts, contribute to even higher demands for professional Lawn Care service.

As we turn to Golf, the Golf industry is considerably smaller at 1.2 billion, and has fewer catalysts to rebound significantly in the near future.

Although we are beginning to see a favorable trend in rounds being played, we have not seen a meaningful increase in the budgets of golf course superintendents.

I'm sure that many of you read the recent "Wall Street Journal" section on the Golf industry, which highlighted many of these issues and facts.

The ability to capture incremental Golf market share is limited, as distribution of our products to the Golf industry is dominated by a few national and regional distributors.

We anticipate that we will be able to expand our presence in Underserved markets, but we are not planning any major expansion of Stores-on-Wheels or direct Golf sales in the near future.

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

I certainly hope I get to do that.

Before we go to q-and-a, I'd like to conclude with two key points.

We have made a lot of progress in the past two years, but there is still a significant opportunity for LESCO.

As we have stated before, we are committed at generating ROIC (ph) above 10% over the long term.

We will accomplish this by investing in new stores, patrolling our expense structure and limiting capital investment to high returning opportunities.

We are very encouraged by the success of the new Service Centers.

They have exceeded our initial expectations.

We have the infrastructure, the team and the technology to improve operational efficiency, expand our margins and increase profitability.

While this will not happen tomorrow, it is happening.

It is an evolutionary process, and will resolve in increased shareholder value over time.

With that, we'd like to open it up for questions.

Ladies and gentlemen, if you wish to ask a question, (Operator Instructions).

And your first question comes from Robert Kuarvsky (ph).

Please proceed.

Good afternoon, guys.

Hey, how you doing Bob?

I'm doing all right.

This is a quick question on the merchant discounts line-item, does that reflect any kind of start-up costs, like we see this 1.6 million trend down, and is it fair to assume that we will have 1.6 million each quarter going forth throughout the year, or is it a reflect of some of the seasonality of your business?

Well, those fees, Robert are based on two things.

Number one, the underlying programs we pay a merchant discount to GE as we would to Visa or Mastercard.

And then there's a second portion that's really related to any type of promotional programs that we're running, and we would, for example extension of terms.

And we'll break that out in the 10-Q.

But that will be seasonal based upon sale, so if you, generally speaking, if you take debt merchant discount as a percentage of sales and our, and run that through, (inaudible) it will be seasonal, so it's going to increase in the second and third quarter, and it's going to drop down again in the fourth (ph) quarter.

But it will remain the same percentage of sales.

And we'll break out all the components of that line-item in the Q, which we will be filing hopefully very soon, and than you can break it out even better.

And it will break it out between what's multi-merchant discount, which would be the Visa and Mastercard.

That's about 306,000 of that number, and then the product label, which is GE, is about 1.26 million, but we'll break it out, sort of, between what's normal recurring and what's promotional.

Thanks, that helps out a lot.

And just kind of curious in terms of the pricing, can you guys give us an area of where your pricing level is now versus maybe what it was last year, and comment on how some of the price increases are going for you guys so far this year, and maybe also comments on some of your competitors?

For us, the prices are higher than they were last year.

The good news for us is that we gave customers an increase at the beginning of this year, which is what they wanted.

Last year we gave them three increases.

It was tough for us because they don't like that.

They want to know what their price is going to be prior to the season, so they go to the homeowner and tell them what the increases are going to be.

We have heard very little negative feedback about our price increases this year.

We have seen our competitors raise prices because they have not received the same kind of fixed income on the fixed contract that we have on the urea situation.

Do they keep pace with urea price increases, do you think?

Generally speaking, but we are always higher, Robert.

Our delivery system demands that, convenience, the number of SKU's, that type of thing.

We did pass along three to three and a half percent price increase, and we are seeing success with that price increase.

All right.

Thanks a lot, and also just kind of curious, you guys always said you were going to open 500 stores, or at least that's what I remember you guys saying, now it's down to 250, why the decrease?

I guess we'd just be more specific, we can open as many as 500, but we know for a fact, we believe, that our demograph-our studies indicate to us, that the 250 that we have selected will generate the 1.3 million at maturity at a very high level of probability, very, the statistical model is very high there.

There are many other stores to open, as many as 500, but the 250 give us the 1.3 million per store.

All right?

OK then.

: And Robert, even, to add on to that, we have opened stores this year that wouldn't be in that 250 account model, and it's really opportunistic.

And so, it's going to be, it can expand outside of that, but those that, Michael's right, those 250 are very specific.

We think those are the homeruns, Robert, but we're not backing off the 500.

We're just saying that 250 is, it's the conservative range of very successful numbers.

OK, so it's kind of like a little, little bit of a class system right there. (inaudible)

Yes.

Thank you very much.

OK.

And your next question comes from Paul Resnick (ph).

Please proceed.

Very nice quarter, and using the tax adjusted numbers, you were improved 14 cents over, admittedly this is a tough, this is the loss quarter, but that 14 cents, tack it on to 23 cents last year, brings you to 37 cents are you're still providing guidance of 30 to 40 cents.

What are some of the issues that you see as the year progresses?

Paul, I, the only issue that we have is the potential of weather going the wrong direction for us as we enter our biggest quarter.

We're in good shape, other than that, so that's it.

We don't have any other skeletons in the closet that we know of.

: We're, at this point, we're not adjusting our full-year guidance.

If, as we get through the second quarter, and as we get to the end of the second quarter, if we feel it necessary to revise guidance, we will do that when it occurs.

See, we just are not prepared today to adjust guidance.

OK, and secondly, a year ago, Golf had a really tough winter, but the Golf numbers really didn't show any improvement.

Is that because the market is so bad, or have you cut back somewhat in that area, of a couple fewer Stores-on-Wheels?

I mean, a lot goes into that negative comparison.

Go ahead, Steve.

Paul, it's Steve Cochran.

How are you?

Fine.

We are seeing, as you mentioned last year, it was a tough market for the Golf industry.

The rounds are starting to trend upwards, however due to the fact that superintendent and golf course managers had such a tough year last year, there's cautious optimism there.

So, there are waiting to see how their revenue stream comes in and as a result, the weather is better, the rounds are better, and we have cautious optimism with Golf, but we're going to continue to project a little less from a revenue standpoint than last year.

OK.

Thank you very much.

Thanks, Paul.

And your next question comes from Rob Wilson from Tiburon Research.

Please proceed.

Yes, thank you.

Can you talk about your accounts receivable, and the recourse portfolio and maybe what the amount of the recourse portfolio is, Jeff?

: Yes, sure.

What that is, effectively, is our accounts that GE did not purchase from us.

They did form them.

They are managing those accounts for us, but we have liability should there be a default on those accounts.

And what we're going to spend time doing this year is, and really, the reason they didn't buy them initially is, they didn't have time to do full due diligence on them.

So, we are continuing to work with GE through those accounts.

And the accounts that qualify will be sold to GE.

In fact, in the first quarter we sold, I think without of our owned accounts, but we sold another $3 million of accounts to GE.

That balance, as of the quarter-end, is just under $6 million, so it's comparable to what it was at the end of '03.

And the reserve for any potential loss in those accounts is included in our allowance for dealflow (ph) accounts.

And what is the allowance?

: It's 4.9 million.

Got it.

Do you guys have any facility closure plans for later this year?

: No, we don't.

All of our Service Centers, effectively are positive cash flow and positive returns.

No distribution facilities?

: Well, what we've done, we've moved a couple distribution facilities, and we're moving away from a fixed warehouse cost to a variable 3PL (ph) model.

Right.

: Where opportunities arise, we will do that, but nothing that we're prepared to talk about today.

Got it.

And could you provide some more color on the product margin guidance for the rest of this year?

I understand you're hedged in your urea contracts, but what should we expect going for for the next three quarters?

: Our guidance on product margin is, remains at 33-33.5%.

Got it, unchanged.

: Unchanged.

OK, thank you.

: Sure.

As a reminder, ladies and gentlemen, (OPERATOR INSTRUCTIONS).

And your next question (inaudible) Devon Lander (ph) from Morgan Joseph.

Please proceed.

Hi, looking at the product margins that you were just talking about, can you just give us an idea of what is going on with urea prices and do you see them, are they increasing, are they going down, are you still happy with where you're locked in?

Hello, Devon.

The urea, as far as, we could probably buy small amounts of urea right now at, little bit less than what our contract is, but we're real happy with where we're at, relative to the whole situation.

It's turned out to be very favorable for us.

OK, and in the press release, you talked about you were encouraged that your pre-emergent sales were up 20% over the prior year.

Is that just an April-over-April comparison?

You were talking---

That's Q1 versus Q1.

Right.

Oh, that's Q1.

Right, yes, January, February, March.

OK, sorry.

And I think that was it.

Thank you.

Your welcome.

And your next question comes from George Marshall.

Please proceed.

Would you consider selling Golf and adding something to Lawn Care?

There's no place to sell Golf at this time, or any, there's no strategic vision of that right now.

The, when we open Service Centers, we are more or less, adding to the Lawn Care side.

That's what happens every time we do that.

We are finding that a lot of Golf customers are finding these new, more convenient Service Centers, and they are going there to purchase their products.

So, that's a good thing for us, as we continue to expand our regional presence.

Yes.

George, you know, we're always examining opportunities strategically, but one thing we need to say is that our assets in Golf, including our Stores-on-Wheels and our direct salespeople, I have a very good return on capital.

And therefore, it makes sense for us to be in that business, regardless of where the sales are going, the returns are very good in that business.

Thank you very much

Sure.

Again, ladies and gentlemen, (OPERATOR INSTRUCTIONS).

And your next question comes from Rob Wilson (ph) (inaudible).

Please proceed.

Hello?

Mr. Wilson, do you have a-

Oh yes, I'm sorry.

Could, let's see, your 5% comp store sales or comp Service Center sales, is that relative to a 3.7 last year?

No, I don't, no it wasn't, it was five, wasn't it?

Right at five?

You mean for the entire year, or for the first quarter?

For the first quarter.

What was that five up against last year?

It was up against a pretty good comp, in fact, last year first quarter, I think we comped just under 10%.

Just under 10?

OK, and is it fair to say that your Q1 performance was better than you had planned going into the quarter?

That's probably fair to say, yes.

OK, thank you.

Again, ladies and gentlemen, (OPERATOR INSTRUCTIONS).

And there are no further questions at this time.

We also would like to thank you for your time.

Have a wonderful evening.

Everybody travel safe.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect and good day.