強鹿 (DE) 2004 Q4 法說會逐字稿

Good afternoon and welcome to LESCO's Fourth Quarter 2004 Conference Call and 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 undue reliance on such statements.

The 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 reports, including, but not limited to, Form 10-K for the year ended December 31st 2003.

In addition, some of the information that will be discussed today may include non-GAAP measures. The presentation of the most directly comparable GAAP measure and 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 website, at www.lesco.com. The copy of the release and PowerPoint presentation related to today's call can also be obtained through the company's website.

I would now turn the conference over to Michael DiMino, President and CEO. Please go ahead, sir.

Thank you very much. We appreciate all of you being in attendance and are looking forward to taking your questions at the end of our presentation. We have a brief presentation for you. With me today is Jeff Rutherford, our Senior Vice President and Chief Financial Officer, as well as other key members of our senior management team.

We'd like to accomplish the following in this call. Number one, I'll provide an overview of our business. Number two, Jeff will give a financial review of the full year for 2004 and fourth quarter as well as issue guidance for 2005. Then, I'd like to finish after Jeff's done with some concluding comments, before we go to Q&A.

In terms of the fourth quarter and year end 2004, we are very pleased. We reported full-year revenue in line with our most recent guidance on January 6th. And excluding charges and a tax provision at a 39% rate, diluted earnings per share are $0.55, which was above the high end of our 50 to $0.53 estimated range.

Our fourth-quarter topline was helped by a number of factors, including strong sales of our combination products, which were up 34%, control products up 20%, as well as fertilizer and seed, which were up 18 and 9% respectively. Favorable weather was also a factor in driving these results as well as the calendar shift in business associated with the September hurricane. In the end, the lawn care sales channel posted a 16.7% increase in revenue during the quarter.

We are particularly pleased with the golf results, which enabled us to grow that channel by nearly 14% during the fourth quarter and 1.8% for the year. As you may recall, at the latest third quarter, we had projected golf to be flat to down 3% for the year and only recently guided golf sales rising in excess of 1%. We are hoping this positive trend will continue.

However, we caution you that as the golf -- that if the golf industry is in the early stages of a recovery, there might still be some bumps in the road. Therefore, we reserved further optimism until there is greater visibility as to whether this upsurge actually had legs. That being said, as Jeff will go over shortly, we predict golf sales to be flat at best in 2005.

Overall fourth-quarter net sales increased 14% to 124.2 million, while comparable service center sales were up 11.2%. For the full year, net sales were 561 million, up 7.2% and in the midrange of our most recent $560 million to $563 million guidance.

Our original guidance for '04 net sales was to grow between 3 and 6%. So you can see why we are so pleased as how the year turned out. On the cost side, we experienced a 50-basis-point improvement in our gross profit for the quarter and 80-basis-point improvement for the year. Our EPS excluding charges and including a tax provision at a 39% rate was a loss of 42% for the fourth quarter and, as I said earlier, an income of $0.55 for the year.

As we said on our last conference call, we are locked in a majority of our urea -- we've locked in a majority of our urea cost for 2005 at a 14% increase. While we are not ecstatic about these higher costs, it does allow us to do a better job of product pricing and making sure that our customers know what their cost increases will be for the full year.

As of December 31st 2004, our balance sheet showed dramatic improvement from a year ago. We had 7.3 million in total debt, consisting entirely of revolving bank debt. This compares to total debt of 21.4 million as of December 31st 2003.

Once again, our new service centers are performing well and are proving to be the best use of capital allowing us to leverage our cost base and grow earnings over the long term. We opened 27 new service centers in 2004, including one in the fourth quarter in Roseville, California.

For the full year, the class of 2003 service centers generated 19 million in net sales and a four-wall pre-tax operating income of 900,000, while the class of 2004 service centers contributed 13.8 million in net sales and a four-wall pre-tax operating loss of 1.3 million.

The class of 2003 is now accretive to earnings and a handful of our 2004 service centers are helping our bottom line ahead of our new service center model. It is results such as these, that give us tremendous confidence that opening new service centers provide the best return on invested capital of the long-term.

That brings me to my next point. For some time, we have felt that LESCO's future lies in the retail and wholesale channels of our business, and have been moving the company in that direction over the past two years through the expansion of our service center network.

Since opening our first new service center in 2003, we've added 48 stores to our network and ended 2004 with a total of 274 units. The track record of successful operating results has given us quantitative evidence that the best means to grow our earnings and increase shareholder value is by fully investing in the future of our service centers.

To do so, we need to harvest the working and fixed capital of our supply chain so that we can devote our resources to this end. In other words, we need to outsource those processes where we do not hold a clear and differentiated competitive advantage.

We have, therefore, been exploring strategic options for our manufacturing and distribution asset and have hired a Cleveland-based investment bank, Western Reserve Partners, to help us identify financial alternatives. We are in the midst of our discussions with potential partners. We believe our efforts are in the best interest of our shareholders and customers and look forward to keeping you informed, as we make progress in this area.

Now, with that, I'll turn it over to Jeff, and then I'll return later before questions.

Thank you, Michael. I will review the results for the full-year 2004 and fourth quarter as well as offer preliminary guidance for 2005. 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, this year being no exception.

Consequently, I will begin my remarks with a review of LESCO's results for the full year ended December 31, 2004, which we believe are more meaningful due to the seasonality of the green industry.

For the full year, net sales grew 7.2% to 561 million from 523.5 million in 2003. Lawn care gross sales increased 9.5% to 425.4 million, above our original guidance of 5 to 8% growth. Golf gross sales were 140.1 million compared to 137.6 million in 2003, up 1.8% and noticeably higher than our original expectations of flat to down 3%.

Comparable sales were 3%, in line with our most recent expectation. By product category, we had a strong showing with our fertilizers up 13% to 130.2 million and our combination products up 16.6% to 93.5 million. This offsets comparably lower sales in control products up 4.7% to 166.6 million as well as seed up 2.4% to 68.8 million.

Gross profit, which we define as current margin less distribution cost on sales, was 138.5 million, or 24.7% of net sales, up 80 basis points from 23.9% of net sales in 2003. Product margin for the full year was 184.3 million, or 32.9% of net sales, compared to 173 million, or 33% of net sales, last year, a 10-basis-point decrease. Included in 2004 results is an approximate $800,000 inventory markdown due to the contract termination of our methylene urea supplier.

However, on an adjusted basis, product margin would have actually risen 10 basis points without that charge. Distribution costs were 45.8 million, or 8.2% of net sales, compared to 47.7 million, or 9.1% of net sales, in 2003. The 90-basis-point decrease is due to our better execution of distribution products in the markets by a full truckload, especially the seasonal goods. We believe that there are additional opportunities to leverage our distribution infrastructure.

On the full-year basis, new service centers contributed 32.8 million to net sales and had a four-wall operating loss of $400,000. Selling expense was 90.5 million, or 16.1% of net sales, compared to 84.7 million, or 16.2% of net sales, last year. Pre-opening expenses were $770,000 versus 601,000 in 2003, flat on a percentage basis, as we opened 27 centers in 2004 compared to 21 in 2003.

General and administrative expenses were 28.3 million, or 5% of net sales, compared to 29.4 million, or 5.6% of net sales, in 2003, a 60-basis-point decrease. This is attributable to the cost savings recognized from tightened expense controls along with the strategic outsourcing of our customer credit functions at General Electric Business Products Services. These reductions offset the increase in expense related to Sarbanes-Oxley cost, management bonus, and rising employee insurance benefits.

For the full year, we incurred 6.9 million in headquarter relocation expense related to the move to our downtown Cleveland office and 1.2 million in hurricanes and flood expenses. The flood expenditures include damage to our bulk urea and sulfur coated urea inventory, which was being started at a third-party terminal located adjacent to the Isle River. In addition, our Florida blending facility sustained roof damage from high hurricane winds.

I also wanted to elaborate on our methylene urea fertilizer contract with a former supplier. The company has incurred 5.2 million in charges related to our dispute with this former supplier of methylene urea. These include 2.2 million related to the discontinuance of the contract, 1.3 million for forgiveness of a note receivable, 800,000 to markdown the inventory value of discontinued products and about $900,000 for miscellaneous cost.

You'll note that the 4.4 million is reflected in our vendor contract termination line item in our operating statements, while the balance is reflected in cost to product line item; that is, 800,000 is in the cost of product line item. The good news is that we found an alternative lower cost source of methylene urea fertilizer and no longer are bond by tonnage commitment. We estimate that savings will be over $2 million per year, which will be included in our product margin.

Merchant discounts provision for doubtful accounts expense was 10.8 million in 2004 compared to 3 million in 2003. At the end of 2003, we sold our trade accounts receivable portfolio to General Electric for $57 million and entered a private label business credit program with GE. In 2004, we sold an additional 5.9 million accounts receivable. The $10.8 million expense is composed of 8.5 million of normal merchant discount cost and 2.3 million of promotional discount cost.

In 2003 the company incurred charges of 2.3 million related to the early retirement of debt, as well as 4.6 million related to a loss and the sales receivable. The 2.3 million include an approximate $1 million write-off of deferred financing cost, as well as 1.3 million related to the buyout and termination of an interest rate swap agreement. We had no similar expenses in 2004.

Other expense during 2004 was 664,000 versus 1.1 million last year, as we had incurred severance expense in 2003 related to reduction in our workforce. We had another -- had other income of 508,000 in 2004, compared to 1.5 million in 2003, as we sold our interest in a joint venture in 2003.

Interest expense was $747,000, down from 4.7 million last year as the proceeds from the GE transaction were used to pay down debt. The company's pre-tax loss on a GAAP basis for 2004 was 5.3 million, compared to a pre-tax loss of 3.6 million in 2003. For the full-year 2004, the company reported on a generally accepted accounting principal basis a loss of $0.65 per diluted share versus the loss of $0.63 per diluted share in 2003.

Net loss for the 12 months period was 5.6 million compared to a net loss of 5.3 million in 2003. Excluding the corporate headquarters relocation expense, hurricane and flood related charges and costs associated with the vendor contract termination, and including a tax provision at a 39% rate, we would have reported full-year 2004 net income of $0.55 per diluted share as depicted on our reconciliation attached to today's release.

Excluding the early retirement of debt, the loss on the sale of accounts receivables and the valuation allowance for deferred tax assets, we would have reported full-year 2003 adjusted earnings of $0.23 per diluted share.

Turning now to the fourth quarter, net sales increased 14% to 124.2 million from 108.8 million in the fourth quarter of 2003. Lawn Care gross sales improved 16.7% to 86.1 million versus 73.8 million in the year-ago period, while golf gross sales grew 13.6%, 40 million compared to 35.2 million last year.

Total service center sales increased 18.5% to 81.3 million from 68.6 million with the 2003 and 2004 service centers contributing a total of 8.1 million of revenue, up from the 2.7 million that 2003 service centers generated in a year-ago period. For the quarter, comparable sales were 11.2% reflecting favorable weather that calendar shift of business delayed by the hurricanes from September and to October, and strong sales in combination control products as well as fertilizer and seed, which Michael mentioned earlier.

Gross profit on sales for the fourth quarter increased to 21.9% of net sales or $27.2 million compared to $23.3 million or 21.4% of net sales in the year-ago quarter, a 50-basis-point improvement year-over-year.

Product margin in the fourth quarter 2004 was $36.8 million or 29.7% of net sales versus 33.8 million or 31.1 of net sales in the fourth quarter of 2003. The reduction in margin was divided to the $800,000 mark down in inventory value of the discontinued methylene urea products.

Distribution costs for the quarter were 9.7 million or 7.8% of sales compared to 10.5 million or 9.7% in 2003. Selling expense was $22.1 million in the fourth quarter of 2004 versus 21.3 million last year, falling to 17.8% from 19.5% of net sales.

The increase in expense is fully attributable to the increase in new 2004 service centers. The service centers, that is service centers opened in 2003 and 2004 selling expense was 2.4 million in fourth quarter of 2004 versus $900,000 in 2003.

In the fourth quarter of 2004, there were 274 service centers operating versus 247 in the year-ago period. Excluding new service centers, selling expense was 19.8 million versus 20.3 million, a decline as a percentage of net sales by approximately 220 basis points to 17%.

General and administrative expense for the fourth quarter was 7.4 million compared to 7.5 million last year. Fourth quarter preopening expense was $107,000 in '04 as we opened our 27th and final '04 service center in October, and prepared for our '05 opening. The company incurred $180,000 of preopening expense during the fourth quarter, last year.

In November, we completed our headquarter move to downtown Cleveland for which we incurred 1.9 million of cost in the fourth quarter. Beginning this year, we will begin to realize the long-term cost savings of this move, which should be accretive to earnings on an annual pre-tax basis by approximately $1 million. Merchant discounts provision for doubtful accounts was 3.9 million compared to $600,000 in the fourth quarter of '03.

Other expense was 422,000 compared to 430,000 in the fourth quarter of '03, while other income was 150 versus 312 last year. As previously discussed interest expense was down significantly from a year-ago 151,000 versus 1.1 million, as we lowered our total debt to 7.3 million from 21.4 million, while our cash flow from operations excluding the impact of accounts receivable sales improved dramatically to 16.9 million from the use of cash of $5 million last year.

Net loss before income tax was 13 million in the fourth quarter of '04 compared to a net loss before the income tax of 14.4 million in the fourth quarter of '03. For the fourth quarter of '04 the company reported a net loss of 13 million or $1.42 per diluted share compared to a net loss of 12 million or $1.39 per diluted share last year.

Our GAAP results do not reflect the tax benefits relating to the company's fourth quarter 2004 loss because of the required accounting treatment of our deferred tax assets. Excluding charges along with the tax benefit of 39% rate, we would have reported fourth quarter 2004 loss of $0.42 per diluted share as once -- again depicted on the reconciliation attached to today's release.

Now I will provide some highlights of our balance sheet. The year-over-year variances demonstrated how our financial flexibility would strengthen as a result of last year's GE transaction and related finances. We have no long-term debt at the end of 2004 and 7.3 million outstanding balance on our credit facility versus total debt of 21.4 million last year.

Over the last few quarters, we have been working to get our inventory better in line with our need, so that we have sufficient, but not an over supply of seasonal or non-seasonal product. On a year-over-year basis, the inventory has increased close to $7 million, but the majority of this increase is attributable to our new service centers and not discontinued inventory.

In summary, our balance sheet remains quite healthy and our cash flow generation should enable us to self-fund our new service centers, which we consider the best means to achieve consistent earning growth over time.

Today, we announced preliminary guidance for 2005 of full year revenue growth between 7 and 8% including a 3% to 4% increase in same store sale. By customer sector, long term sales are expected to increase 8 to 10%, while golf is anticipated to be flat to slightly down. For the full year, the company estimates a diluted EPS range of 60 to $0.70. We anticipate opening 30 to 35 new service centers in 2005, interspersed through the year.

I will now turn the call back to Michael for some concluding thoughts.

That's a lot of work Jeff, thank you very much. Well, before we leave you to questions and answers, I wanted to tell you a little bit about our industry. Let me comment about the golf business.

Golf sales were better than expected in the fourth quarter and in 2004. And we're more confident with regard to 2005, but we do not want to get ahead of ourselves. We will continue to evaluate and test opportunities to improve our golf return on invested capital, and we think a better sales push should help that along.

While we have not spent a great deal of time discussing our Stores-On-Wheels business, which supports gulf, we intend to modify our operating model by utilizing smaller trucks to call on more potential customers in smaller geographical territory.

While we are covering up 72 Stores on wheels, all of which are tractor trailers, we foresee having closer to 110 trucks by year end as we replace the majority of the fleet with medium duty spray trucks which will cover less ground and cause substantially less to operate. These smaller trucks will not only go on golf courses, but will visit all locations with turf superintendent function including schools, universities, cemeteries, parks municipalities etcetera, you get the picture.

As far as the professional lawn and landscape industry, it is expected to grow greater than 7% annually with the consumables portion of the industry growing at approximately 4%. Our market share is currently about 15% of the 2.8 billion professional, consumable industry. And as our 2004 results demonstrate, we are capturing market share.

We believe that we have penetrated less than 50% of the market in terms of possible service centers. In other words, we think that our opportunities for over 500 service centers with 274 in a current portfolio. We planned to open new service centers at an annual rate of 10 to 15% of our store base and for 2005, we plan to open between 30 and 35 locations.

We want to open new service centers as efficiently as possible, which should result in the company opening 7 to 10 per quarter over the long-term. However, at this time we expect to only open 3 to 5 stores in the first quarter, which will significantly increase in the second quarter, giving us approximately 20 stores open by the start of the third quarter.

As I mentioned at the beginning of this call, we think the results we've achieved so far with the service centers demonstrate that we are using our capital widely and making progress towards our goal of ROIC above 10%. Based upon our calculations, ROIC was 7.2% in 2004 compared to 5.4% for 2003. While there is still much progress left to be made you can appreciate how far we come in just one year.

Our commitment to earnings growth is not limited to opening new service centers or revisiting the Store On Wheels model. We intend to leverage our expenses at the corporate level and believe that between G&A our headquarters move as our new methylene fertilizer supplier, we are taking meaningful strides to keep cost to a minimum and allocate as many resources as possible to the field.

And although we are not a traditional retailer, we do have many characteristic of a retailer and our exploration of supply chain alternatives we move much further in that direction.

We continue to be a dominant player in our category with tremendous market penetration opportunities. We believe that the LESCO brand is a leading most recognizable brand in the professional green industry, and our growth will result in the creation of long-term value for our shareholders. We are very bullish on LESCO. And with that let me turn the call back over to Jeff.

Before we go to Q&A, let me just process the Q&A by saying that since we are in a mid of our process of exploring our strategic operations for supply chain alternatives. We will not be able to comment on issues related to this process. So with that we'll turn the call operator for Q&A.

[Operator Instructions].

Your first question comes from the line of Jim Barrett of CL King & Associates. Please proceed.

Hi, Jeff; hi, Michael.

Hi, Jim. How are you doing?

Hello, Jim.

Very good, thanks.

Is it snowing there?

It is. It is.

That's bad.

Well, spring is on the way, so don't worry.

Okay.

Which would leads me to my question; you're saving 2 million from this - the termination of this contract, you're saving 1 million from the moving of headquarters. Can you tell me what are the offsets given the fact your guidance seems -- is what it is versus your actual earnings in '04?

Sure. Jim, the difference is, we are still operating under the new store operating model that we have shared with everyone, and by continuing to expand our store base and based upon the timing of those openings and so forth, that is the drag on the model, which is from the losses incurred from new stores as we open them up. There is no other bad news in our operating model at this point in time.

Jeff, I noticed that in the back you mentioned, selling expenses related to the class of '03 and '04, are those selling expenses related to the in-store personnel or is that something that -- when you say four-wall profit, I think, that you're excluding selling expense?

No. What - our four-wall P&Ls for our service center are just like any other retailer, it takes into account all the direct cost associated with those four-walls. So, selling expenses effectively for new service centers are all the operating cost of that service center, so, it's payroll, it's rent, it's whatever utilities, whatever is happening that isn't related to cost of sale within those four-walls.

Included in those four-wall P&Ls are inbound direct freight costs. So, if that store is receiving product directly from the plant, the freight cost to move the product from the plant to that store is included in those four-walls also.

Okay. Can you tell me, whether the class of '04 -- is your budget for that to be accretive like the class of '03 was a year later?

Our model -- our new store model would model them to break - to be slightly positive to breakeven.

Okay. And then finally, could you tell me whether you'll be taking any pricing to offset the higher cost of urea, I assume, your freight expense may be up as well, for example?

The new prices are already out there Jim. We have done that, and think we were successful last year in passing the prices along to our customers, and we think we've, basically, already have done that for this year now. The majority of the sales haven't occurred yet, but the prices -- the new -- the higher prices are out there.

And Michael, can you just tell me what the year-over-year increase in your fertilizer pricing is?

Well, remember that it comes down to what the urea count is or the nitrogen count is at each bag of fertilizer. But we are somewhere between 5 and 7% that we pass along.

Okay. Thank you very much.

Thanks Jim.

Your next question comes from the line of Robert Kosowsky of Sidoti & Company. Please proceed.

Good afternoon, guys.

Hi, Robert.

Good afternoon, Robert.

Hi. Do you have anything about the, I guess, the product mix that you are selling to, I guess, the Golf and market in the fourth quarter that -- because you looked a little bit more confident that the market is turning around like there's kind of a product mix to indicate cyclical upturn?

I don't think so. It seems very good across the board. There was more of the consumable sales than the equipment sales, which is a good thing, probably. But there is nothing there; there is really nothing in the mix that would lead us to believe that.

Okay. Thank you.

[Operator Instructions].

We have a follow-up question from the line of Robert. Please proceed.

Yes. One other question about the new Stores-on-Wheels, are you going to be buying these new smaller trucks, and what can we expect from, maybe, CapEx in 2005?

Robert, we're going to release -- we're going to lease those, and let me tell you what we did from modeling purposes. We're going from 72 to approximately 110, and that costs to operate are relatively flat from the expense side.

What we did for modeling purpose is take the existing sales of those individuals and adjust them based upon adding those additional stores. So we have not factored any upside into the model relative to adding those, approximately, 38 stores, nor significant benefit in operating expense.

You were saying that the outside would basically -- simply come from increased sales in addition to, I guess, better gas mileage more efficient...

The outside would be from additional sales from stopping at other types of customers. Our big trucks historically have gone to golf courses. And by going to this shorter truck and to shorten the territory of their coverage, the expectation is they are going to go anywhere where there's a stationery turf superintendent. So that's right. Michael said earlier that expands all in the universities, cemeteries, arts, municipalities and so forth.

Okay. And the total cost, I guess released the 72 trucks people actually the - that sounds like that. Well, thank you.

Okay.

We also have a follow-up question from the line of Jim Barrett. Please proceed.

Jeff, can you tell me -- considering, I assume that you have at least a rough idea of the number of new outlets you planned to open up over the next several years, at what point in the aggregate does the class of 2003 onwards become neutral or accretive to your EPS?

Yes, if you run out the model, Jim, and you would assume that we're going to continue to open, the stores we talked about 10 to 15%.

Of the base?

...of the base. The all new stores in aggregate should turn profitable in 2006.

Okay. Is that more of a sort of a modest possibility/breakeven for the year?

Yes. That's correct.

From 2003, from this point on...

He's asking in an aggregate all new stores -- if you take 2003 through 2006 and include the 2006 openings, which will continue to grow, Jim, above 35 that's when you look at approximately breakeven slightly across (ph).

Okay. And what degree of cannibalization you're building into these models, if any?

We estimate to be about 1% on comp.

Okay.

Higher basis point on comp.

And it's all built into everything we told you.

Right. Okay. Well, thank you both.

Thank you.

Gentlemen, there are no further questions.

Well, we want to thank everyone for participating. We are sorry about the snowstorm in the East. And if anyone has any questions, don't hesitate to call us. Thank you very much.

Once again we thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day.