強鹿 (DE) 2004 Q2 法說會逐字稿

Good afternoon and welcome to Lesco's Second Quarter Conference Call and web cast.

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 Q&A 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 the actual may differ materially from such statements.

Investors should not place undue 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 SEC report, including the (inaudible) Form 10-K for the year ended, December 31st 2003.

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

A presentation of the most directly comparable GAAP measures and the reconciliation of differences between non-GAAP and financial measures and the comparable GAAP measures are described here and are posted on the Lesco website at www.lesco.com.

A copy of the release and PowerPoint presentation are related to today's call can also be obtained through the company's website.

I will now turn the presentation over to Michael DiMino, President and CEO.

Please go ahead sir.

Thank you very much and welcome all of you for joining us today.

With me today is Jeff Rutherford, our Senior Vice President and CFO, as well as other team members of the management team.

And what we would like to do in the conference today is the following.

Number one, I will provide an update on our business.

Number two, Jeff Rutherford, CFO will give a financial review of our second quarter as well as update on our guidance for the full year.

And then three, I'll provide an update on our strategies and business outlook.

We had a really quarter and I am very proud of this team.

Our revenue growth was at the high end of our expectations and I feel demonstrated our ability to deliver impressive top line results in our critical second quarter selling season.

And even more importantly, we were able to follow through by keeping our costs in check through all of our team efforts on our income statement namely gross profit, EBIT and net income.

Our second quarter net sales increased 5.6% while comparable service centers grew 1%.

Our overall product margin improved slightly to 33.8% of net sales despite urea prices rising 25% over the last year.

As you may recall, in late 2003 we entered into a contract with our urea supplier to fix the cost of the majority of our urea needs at a price reflecting the prevailing market at the time.

While our distribution costs fell both in dollar terms and as a percentage of net sales, we also, benefited from decreased sales expense as a percent of sales and a reduction in G&A expense.

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

We received -- we reduced our revolving debt to zero, which in turn lowered our interest expense.

And seasonally we replenished our inventory taking advantage of the summer selling season.

In terms of service center development and growth, we could not be more pleased.

We opened 25 new Lesco Service centers through the end of the second quarter and are on track to open an additional two between now and the end of the year.

These service centers include fast growing existing markets as well as new ones.

Some of these new service center locations included Gibsonia, Pennsylvania, Briton, Michigan, Novi Michigan, Cary, North Carolina, Petaluma California, Pine Brook, New Jersey, Fredericksburg, Virginia, Malta, New York and Smithfield, Rhode Island.

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

The results from our class of '03 -- 2003 and our initial results from the class of 2004 demonstrate the strength of this strategy.

The 21 service centers opened last year contributed 6.3 million to our net sales as well as our four-wall pre tax operating income -- as well as four-wall pre tax operating income of 689,000.

The class of all four service centers which totaled 25 at the end of the second quarter, generated 4.3 million in net sales and four-wall operating losses of 509,000.

Together, all new service centers opened in the last two years, of which there are 46 added a penny to our diluted EPS in the second quarter.

The positive results from this experience gives us confidence that opening new service centers will provide the best return on invested capital over the long term.

With the right infrastructure in place, the company can commit its time and resources to maximizing the performance of these new stores, while positioning and educating our current locations to take full advantages of opportunities, to drive same-store sales -- to increase same-store sales.

With that comment I will turn over to Jeff, to give you some more details about the quarter in the year so far.

Thank you, Michael and good afternoon everyone.

As Michael said, I will review the results for the second quarter 2004 as well as update our guidance for the full year.

Due to the seasonality of Lesco's business, the second quarter is generally the most important period of the year and I am pleased to say that there was another sequential period for our company.

We recorded strong sales and profit while adding 16 units to our service center base.

For the second quarter, net sales increased 6% to 182.2 million from 172.6 million in second quarter 2003.

Lawn Care growth sales for the quarter increased 7% to 141.2 million versus 131.6 million in the same period a year ago, while Golf growth sales improved to 42 million from 41.7 million last year.

Total service center sales increased 7% to 126.7 million from 118.0 million.

Our same-stores service center sale rose 1%, being adversely impacted by heavier than usual rainfall and accompanied mid-centre on transition zones.

The 21 service centers opened in 2003 contributed 6.3 million in sales.

And 25 new service centers opened in 2004, contributed 4.3 million in revenue.

Product costs was 120.6 million compared to 114.6 million in the second quarter 2003, which was as a percentage of sales, 20 basis points lower than last year and resulted in a gross profit margin of 33.8% versus 33.6% versus the second quarter 2003.

Distribution costs for the quarter were 14.6 million or 8% of sales compared to 15 million or 8.7% in 2003.

This decrease is directly attributable to the year/year comparison against the (inaudible) store start-up costs from 2003, brought the focus on full truckload distribution.

Combined, our gross profit on sales was 47 million or 25.8% of net sales versus 43 million or 24.9% of net sales, a 90-basis point improvement year over year.

Selling expenses, 23 million in the second quarter 2004 versus 22.3 million last year and was reduced to 12.6% on net sales from 12.9% on net sales, a 30 basis points improvement.

One of the reasons 2004 second quarter selling expense compares favorably with second quarter 2003, is due to the significant reduction of the company's direct sales team.

The incremental cost savings in the second quarter of 2004 were $800,000.

This increase included -- the selling increase included new service center, that is service centers opened in '03 and '04, selling expense of 2.1 versus 0.8 million in '03.

In the second quarter of '04 there were 272 service centers operating versus 246 in the prior year.

Excluding new service center selling expenses was 20.9 million versus 21.5 million and improved as a percentage to net sales by approximately 50 basis points to 12.2% from 12.7%.

General and administrative expense for the quarter was 6.6 million compared to 7.2 million last years, a 60 basis points reduction, to 3.6% of net sales.

This is attributable to the cost savings recognized from tightened expense controls along with the strategic outsourcing of customer financing to GE Business Credit Cervices.

Together they have virtually offset the increase in expense, related to more stringent government guidelines as well as management bonus and insurance expenses.

Pre-opening expense was $503,000 compared to 124,000 for the same period a year ago.

During the quarter we opened 16 stores for a YTD total of 25 and we are slated to open an additional two new service centers in the second half of the year.

Last year we opened 19 through the end of second quarter and finished the year with 21 new service centers.

Other expenses were a $130,000 compared to 555,000 in second quarter of 2003, while other income was 173,000 versus 517,000 last year.

The increase in net other income for the second quarter compared to the same period in 2003 was due to the non-recurrence of severance expenses recognized in the second quarter 2003, which was partially offset with the elimination of income from our former joint venture.

Merchant discount provision for doubtful account expense was 2.6 million compared to 1.2 million in the second quarter of '03.

As you may recall, on December 30th of '03, we sold our trade accounts receivable portfolio, the GE for 57 million and entered a private label business credit program agreement with GE.

In the second quarter of this year, this arrangement has resulted in increased merchant discounts as we pay program fees and discounts to GE, of approximately 1.3% of sales.

Inversely, interest expense is down significantly from a year ago, $169,000 versus 1.3 million as we lowered out total debts to 5.9 million from 66.6 million or improving our cash flow from operation to 32.8 million and increased to 28.8 million.

During the quarter, we sold our Avon Lake, Ohio distribution facility for 1.5 million in cash, which resulted in a loss on sale of less than $100,000.

The distribution operations for customer orders previously fulfilled (ph) from the Avon Lake facility has been transferred to third party logistics supplier in Columbus, Ohio.

For the second quarter, pre tax earnings were 14.2 million compared to 10.8 million in 2003.

On a GAAP basis, net income was 14.2 million or $1.58 per diluted share in the second quarter of '04 and 6.7 million or $0.70 per diluted share in second quarter of '03.

Just to review the income tax situation we are currently experiencing.

Our GAAP results do not reflect a tax provision related to the company's second quarter '04 operating gains because of the required accounting treatment for Lesco's preferred tax asset.

Assuming a 39 percent tax rate which we used to compare year over year performance, the company would have recorded net income for the quarter of 8.7 million or $0.97 per share compared to net income of 6.7 million or 0.78 per share in 2003.

This includes the tax expense of 5.5 million this year versus 4.1 million tax in second quarter of '03.

Now I will provide some highlights of our balance sheet.

As you can see, our balance sheet was meaningfully strengthened by the GE transactions.

Accounts receivable balance dropped to 13 million compared to 84.8 million a year ago.

Our long-term debt dropped to 5.9 million from 9.5 million in June of '03 and we have no outstanding balance on our credit facility versus the 56.1 million last year.

Although we are pleased with the improvement we have made to our balance sheet, we see opportunity in streamlining our inventory and making sure we reduce our holdings of non-seasonal products.

Although our inventories were up, this is due to new service center expansion and accelerating our merchandize well ahead of our summer controlled products selling season.

We expect that improving our inventory position over the next few quarters will provide us additional opportunities and further improve our cash flow.

And turn our balance sheet, the healthiest coming (ph) years with minimal debt and a sizable cash balance.

Our cash flow should enable us to self finance (ph) our new service centers which we consider the best means to achieve consistent earnings growth over the time.

Turning to the guidance for the full year, we are raising expecting earnings per share to between $0.40 and $0.50 up from $0.30 to $0.40 due to our strong YTD results.

We also now forecast full year 2004, revenue growth between 3% to 6% including a 1% to 2% increase in the same-store sales.

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

As you know weather and other seasonal related issues affect the company's quarter results therefore we do not provide quarterly earnings guidance. .

Now I'll turn the call back to Michael for a few words in our strategic outlook.

Thanks Jeff.

Before we turn the call over to Q&A, I wanted to leave you with a few key thoughts.

We are a company bent on growth, while passionately focused on improving our ROIC.

Based upon our analysis of the lawn care, landscaping and pest control market, we believe we can open at least 250 additional service centers with an extremely high confidence of success.

Well, in the foreseeable future we plan on opening 25 to 30 new service centers annually and if the results of the ones we have opened, the service centers that we have opened over the last two years are any indication of future results, we know we are making the best use of our invested capital with a long term goal of generating return on invested capital above 10%.

In addition to opening new profitable stores, we will accomplish this by controlling our expense structure and limiting capital investments to high returning opportunities, which leads me to my next two points.

We are always looking at to further reduce our overhead costs.

We have made a lot of progress in containing G&A cost this year and believe there is still room for more.

For some time now we pursued the relocation of our corporate headquarters to more suitable locations, one that best serves our needs and keeps excess square footage capacity to a minimum.

To that end we are in the midst of a assigning our lease at the Strongsville building, our corporate headquarter and moving to a new facility in downtown Cleveland.

This will entail a one time charge of approximately 7.5 million in the second half of the year but will result in a $1 million in annual cost savings.

We feel this move is long overdue.

In terms of Golf, the challenges faced in this industry are well known to all of you.

And there is yet to emerge any catalyst to stimulate a sharp rebound in the near future.

Still the future is looking a little brighter than the immediate past as we are beginning to see favorable trend in rounds being played.

Over time, that will impact the budgets of golf course superintendent although we have not ascertained any immediate effect.

Our opportunity to secure incremental market share in the golf industry is somewhat limited since distribution of our products to the golf industry is dominated by a few national and regional distributors.

We also foresee expanding our presence in under-serviced market all the time.

The professional lawn care industry is a $7 billion market, which is supported by favorable demographics and in improving economies.

And we know we can grow our business and gain market share by reaching or exceeding its 5% projected growth rate -- that is why we are adding new service centers.

We are building and strengthening what we hope to be long term relationships.

We have a proud history of being inter-built to our customer's business, spending some 40 years and are gratified that they have learnt to depend on us for convenience, expertise and quality products.

By entering new markets and increasing our presence in markets we already serve, we are able to build relationships with new customers and those efforts are continuing to strengthen our role as the industry's premier product supplier.

So, with that and with those thoughts and a little bit of a peak about where we are going, which we have been consistent with, we open it up for questions at this time.

Operator?

Yes sir.

Do we have any questions or wait?

[Operator Instructions]

And your first question comes from Robert Kazowski (ph) of Fidelity (ph).

Please proceed sir.

Good afternoon guys.

Hey, Robert.

Hey Robert, how're you doing?

I am doing alright.

Hey, could you give us an idea of, I guess, the regional same stores sales growth and were you disappointed the same store only grew 1% to 2% versus you know the mid-single digit for the industry.

What was the first part of your question, Robert?

Well, could you give us an idea of the regional sames-stores sales growth, trend and how you said that the there was at transition in Midwest, mid-Central wasn't too good.

But could you give me any idea of how Florida and the Northeast was?

Robert, as we said the total was 1% and happened to us in the second quarter was that the Mid-Central zone, which is a large zone for us -- actually negative counts and negative counts because there are unseasonal rainfall during the second quarter.

In fact, if you just focus in on Cleveland market, I discerned it over the weekend that in a month in May, it rained 27 days in Cleveland.

And that has negatively affected our comps in the mid central zone.

And as far as the Northeast and the Southeast, which I think is what you asked, it was within our range of 3% to 5% counts -- positive counts.

OK, any particular product line really take off this quarter.

Nothing really took off.

I think the -- we didn't get as much on the site sale in the Midwest as we would like because of that rain and the lack of humidity.

That's part of the issue we are very seasonally oriented with certain products occurring at certain times ergonomically important to go down at those times.

But we don't get the opportunity to do that because of the weather, you do have those problems.

But all in all we are doing very well across all of our product lines.

One other thing, Robert, we did and are doing is -- and it is reflected in our inventory results also, is that we are essentially doing seasonal sales for product lines, much like the retailers do, relative to seasonal sales.

And one of the things that was successful for us in the quarter is, we've had a push of inventories for pre-emergent herbicides.

And we had a successful pre-emergent season.

And one of the things that we are experiencing right now in the inventory is that we also do the same for insecticides and crops and so forth.

And that's inflated our inventory a little bit but we are set for those selling seasons.

And what we are experiencing is those seasonal selling season -- that was successful in the second quarter.

That marketing effort in sales was very successful and we are pleased with the way we are doing these sets.

The customers have the inventory in the stores when they need it and it is working very well for us.

OK, so that is just better managing, when you be in shelf at a given time.

Yes.

And the 1.6% of sales for the merchant discount, is that pretty sustainable in the upcoming quarters.

You mean as far as the GE merchant discount percentage?

Yes.

Yes, we think that is sustainable.

All right, thank you.

All right, thank you.

And your next question comes from John van Heusen (ph) of Veridian Capital Manager.

Please proceed.

Hi, yes, first congratulation on a good quarter.

Thank you, John.

On the changing guidance, would I be correct in understanding this is primarily driven by better costs?

I think it is a combination...

What we guided is originally worth, we are the higher end of the sales growth within our guidance.

But we are still sticking with that 3% to 6%.

So to date we are at the higher end but really, we are -- you are absolutely right, we are doing well on distribution costs, we are doing well on G&A.

Our selling expense is down on a count basis.

So, and margins are coming in, they are relatively flat with a little bit of improvement, so you are right.

I mean the fact of the matter is we are doing a very good job in controlling this stuff.

OK.

That's hopeful.

And then when we look at the new stores both, 2003- 2004, how are they doing in sales and in gross versus planned.

They are actually, to date and we don't - you know we don't want to get ahead of ourselves and expect a change in the malls that we've shared with everybody, but they are doing very well.

Very well would be ahead of plan.

Yes.

Yes.

They are exceeding our expectations.

OK, great.

And could you help us in better understanding the economics of the headquarters move instead of in, economic terms, in cash terms.

Could I assume that the $7.5 million is not all cash out of the bank at day one and then you know what the $1 million - to say $1 million plus, I don't know exactly what that means.

What that really means in terms of cash cost going forward?

Well, the situation is as we disclosed today is that this is all subject to our landlord approval.

Right.

And we do not yet have a definitive agreement on the new lease.

OK.

So everything is estimated, this point in time.

Right.

But to answer your question relative to cash, we broke down the charge between 7.5 million and the 4.8 million is the cash payment.

OK.

Effectively.

The 2.7 million is made up of some asset write-offs but they are not significant, they are less than $0.5 million.

Right.

And the rest would be cash payments when we move, two brokers.

One we owe him the money to legal fees, when those legal fees is due.

So, it is predominantly a cash charge, other than some write off of some fixed assets.

And the cash charge that you are talking about, does that include, I think you said a 100, prospectively a $100,000 a year of ...

Yes.

...that you will be paying?

That's right.

That will be paid out over the time, over the next 11 years.

Right, and that would be reserve up front.

So the million dollar saving, would the savings prospectively be less than a $1 million in cash or is that still a good bogie for the actual cash.

On a penal basis, it is going to be approximately million, if you look at cash on, you're right, on the out (ph) years, that we are paying $100,000 that we have previously accrued for.

It is going to be approximately $900,000 on cash basis.

OK, good.

So a nice pick up.

Yes, it is a very nice pick up.

Yes.

Does that include the miscellaneous occupancy cost or are we just talking about the straight lease cost so they -- presumably there are ...

These are all end cost on the leases...

All right.

OK.

...Yes.

It is everything, the cost to live.

OK, good.

Thanks a lot.

And your next question comes from Paul Resnik of J.M. Dutton.

Please proceed sir.

Thank you.

Hello, Paul, how are you doing?

OK.

I guess you are doing OK, too.

In looking at the numbers, the 3% to 4% improvement in G&A that you predict for the year, really does play a big role in the overall improvement here and I generally, just want to get a sense of where that savings - so that's about a $1 million less in G&A expense than the previous year.

Did I read that right?

Yes, that's right.

You know Paul (ph), remember what's in there , though.

We outsource our credit group and previously the cost associated with the credit for rent was in G&A, but we produced G&A across the board.

Every reporting unit within corporate headquarters had reduced cost.

They are included in G&A.

So it is across the board and that improvement, which is going to equate to somewhere around the $1 million is net of the provision for a management bonus also.

So you are right, I mean, it is contributing to the bottom line.

And yes, I am looking at these new store figures and I suppose, it is always tricky to, you know, work it out because of the quarterly variation.

But it certainly -- those numbers do look better than any projections that I could have, you know, imagined.

They are coming up to their significant standards faster than we thought they would.

Yes.

Breakeven faster, they are coming profitability faster, they are hitting their sales number faster.

Super.

Thanks.

Thank you.

All right.

[Operator Instructions]

And your next question is from Bryan Garnik (ph) of Corporate Capital (ph).

Please proceed sir.

Hi, good afternoon.

On the distribution selling just sold, can you talk about what the annualized saving will be from that.

I believe it is about 840,000 a year.

So if I combine that with the headquarters you are talking about 1.8 million pre tax in savings.

As we move in, over time, yes.

So we say over the time, when do you expect that kind of full work effect to be seen.

Well you know that the 840,000 occurs 12 months from the time we started it.

You know full 12 months from that point.

It's a safe date.

The safe date that we should hit by down the next year.

Right, so a year from today you start to feel $840,000 in savings or - just trying to understand how that was going to ...

It is going to ramp up during that period.

As we progress into that and we start getting the benefits of it, by you know it is going to ramp up to $840,000.

Yes, approximately a 150 by the end of the year and then so forth and so on.

OK, and when does the headquarters' savings take effect.

When are you going to make...

If everything happens the way we believe it should, we will be starting our new space sometime in mid-November.

So you know that the savings then start probably really by January 1.

January 1

Great.

Thank you guys.

Bye Bryan (ph).

[Operator Instructions]

You have no questions at this time.

OK.

Well again, thank you for your participation.

We appreciate you following up.

And we are going to be in New York and Boston.

Those of us who don't know that need to find out who wants to see us and, we will do our best to see as many people as we can.

See you later.

Thanks for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.