強鹿 (DE) 2005 Q2 法說會逐字稿

Good afternoon and welcome to Lesco's second quarter 2005 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 questions and answers following the presentation.

Questions 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 announce historical information as forward looking statements.

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

Investors should not place undo reliance on such statements.

Factors that may include actual results to differ materially from those projected or implied in the forward looking statements as set forth in the company's Securities and Exchange Commission Report including but not limited to form 10K for the year ended December 31, 2004.

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 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.

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

I will now turn the conference over to Michael Dimino, President and CEO.

Please go ahead, sir.

Good afternoon and welcome to Lesco's second quarter 2005 conference call and web cast.

I want to thank you all for joining us today and I'll let you know as usual Jeff Rutherford, our Senior Vice President and Chief Financial Officer as well as other key members of our Senior Management team are here today and we'd like to accomplish the following - I will discuss the long expected news and our strategic initiatives and our refined operating model;

Jeff will give a financial overview of our second quarter as well as update our guidance for 2005 in view of today's announcement; and then I'd like to offer some concluding comments before we proceed to Q and A.

In conjunction with our earning's release today we also announced an agreement to sell our supply chain assets to an affiliate, Platinum Equity Turf Care Supply Corp and upon consummation of the transaction we'll enter into a long term outsourcing supply agreement.

The deal was approved by our board of directors and we expect to close it by the end of October in this year.

The transaction is subject to the satisfaction of customary closing conditions to sell substantially all of our supply chain assets along with its consumable inventory product storage belt locations which includes fertilizers, seed, control products, combination products, pest control and other products.

The supply chain assets to be sold are composed of all four of Lesco's blending facilities and the majority of the company's warehouse and distribution centers.

Specific transaction terms are confidential with the exception of certain information that may be recorded in the company's regulatory filings.

Turf Care Supply Corp will pay the company a cash purchase price equal to the value of the inventory at closing.

The company expects to harvest approximately 25 million in cash after selling all requirements associated with the transaction including the outstanding accounts payable due to vendors for the inventory.

The company anticipates the proceeds to be returned to the shareholders in the form of a stock repurchase plan, tender offer, or a special one time dividend to be determined by the Lesco board of directors.

The transaction is expected to close by the end of October 2005 and the company anticipates a pretax charge related to the proposed transaction of 27 million to 30 million.

The charge includes the loss on the sale of fixed assets, the mark down of inventory not purchased by Turf Care Supply Corporation and the expenses associated with the transaction.

In the larger scheme this venture allows us to devote more of our resources towards expanding our service center and Store-on-Wheels models, the two most profitable areas of our business, where we know we hold the distinct competitive advantage.

The industry as a whole clearly holds excess lending capacity in turf fertilizer and we maintain that by exiting the manufacturing sector we can better manage our inventory levels without the risk that we may have to sell product and reduce margins when the market is at imbalanced supply levels.

The sell to the Platinum affiliate and our concentration on service centers and Stores-on-Wheels also transitions the company forward away from the non store model.

To that end having had success after disbanding our lawn care sales rep program two years ago, we have now disbanded our golf sales rep model as well.

They have been reassigned to regional manager positions, Stores-on-Wheels, or service centers, although some have left voluntarily as well.

We are confident that our Stores-on-Wheels will operate at significantly higher margins in the long run even if it costs us golf revenue at the onset.

As partially reflected in our first half results that we see there and we will more than likely continue in the foreseeable future.

However the revenue that is lost did not contribute meaningfully to our bottom line.

The higher margins are due primarily to product mix.

Stores-on-Wheels go directly to the customer with a defined merchandise serving based upon the season, unlike our competitors who utilize a sales rep model and tend to put themselves into a bid situation with the lowest price winning.

That was a game that could not be won.

Let me explain our new model in more detail.

We originally had a sales rep and a Store- on-Wheels both assigned to the same territory.

To reduce our reliance on sales reps and better serve our customers we split the market into two Stores-on-Wheels territories and reassigned the sales reps to a second truck.

As we discussed on our first quarter call, we also started to employ smaller trucks to call on potential customers in smaller geographical territories.

Our only testing of this modified go to market approach in terms of both the financial results and customer feedback were extremely positive and gave us confidence that we could replicate this early success on a national basis.

The smaller vehicle support all of our customer's product needs and the savings associated with this new vehicle should enable us to increase the number of them by 50% with no incremental operating costs.

Unfortunately the accelerated transition has not been smooth and we expect to see a drop off in golf sales for the balance of the year, hence our reduced guidance.

But we know that if we stick to our long term growth initiatives the short term pain is worth the price.

Our majority of Store-on-Wheels cover less ground and cost less to operate which is particularly important with fuel prices as high as they are.

The smaller Stores-on-Wheels will not only call on golf courses, but will visit all locations with stationary turf superintendent functions including schools, universities, cemeteries, parks, municipalities, etc.

And now to the specifics of the quarter.

The spring sowing season began in earnest in late March and excluding the falloff in golf sales, which I expanded upon a few moments ago, we recovered nicely from the slow start due to the prolonged winter.

Net sales were up 4.4%, lawn care gross sales grew 9.7%, and same store service center sales grew 8.3%, and we are up--and the stores are up--and are up 3.9% year to date.

We opened ten service centers this quarter in addition to the one earlier in the year.

Geographically they were spread out as we added our store base in the South, Southeast, and Northeast.

As stated last quarter it is our intention to open eight to ten stores per quarter for the foreseeable future.

Both the class of 2003 and 2004 are generating strong top line growth with the class of 2003 delivering a 21% revenue gain for the second quarter and the class of 2004 generating a 98% increase in sales versus a year ago.

Although a large part of the later success is attributable to service center openings in the back half of 2004 which are not reflected in the second quarter's results.

On an apples to apples basis sales were up 88% for the class of 2004 stores that generated sales in both years.

Our gross profit margin increased by 100 basis points while our EBIT margin improved by 40 basis points despite a nearly $500,000 impact from cost related to our vendor contract termination settlement in the second quarter.

We hope to continue gaining some product margin leverage and think our strategic pricing program will help ensure that we do so by protecting our gross margins and rewarding our best customers.

This pilot program is being operated in two regions and more than 6% of our stores with results so far encouraging and we will roll it out to the entire company by the end of the year.

Some of the other efforts we are working on include our direct marketing initiative which features a series of data driven campaigns focused on targeting the right customers with the right promotions at the right time.

Although this program is in its infancy we are pleased with what we are seeing from this endeavor.

Standard stocking assortment, so that a customer can walk into any store wherever they are expect to see some consistency in our offerings, is an elementary retail concept but something we are only beginning to practice at Lesco.

Excluding some variations due to geography we are filling our service centers in a uniform fashion.

As basic as this sounds, we think this approach goes a long way in building customer loyalty because they know they can find what they are looking for in all of our stores.

We are also enhancing the Lesco shopping experience through the use of visual merchandising including clear signage and defined Plano grams.

These changes will help maximize our investment in our service centers and our Stores-on-Wheels by generating incremental revenue and gross profit opportunity.

With that I will turn the call over to Jeff Rutherford.

Thank you Michael.

As Michael said I will review the results for the second quarter of 2005 and update you on our guidance for the full year.

Due to the seasonality of Lesco's business, the second quarter is historically the largest revenue generating period of the year representing 33% of our annual sales.

However this year due to the catch up people played because of the cold weather in March the seasonal shift had an ever more pronounced effect on our results.

For the second quarter of 2005 net sales grew 4.4% to 190.2 million.

Service center sales improved 12.1% to 142 million including comparable service center sales being up 8.3%.

The sales at other selling locations that are locations other than service centers were 50.2 million versus 56.5 million in the same period last year.

The entire decline is attributed to the disbanded sales rep model.

Lawn care growth sales grew 9.7% to 154.9 million while golf growth sells fell 11.2% to 37.3 million.

All product category sales were up year over year on higher gross margins and we experienced particular strength in combination products and seed which were both up nearly 12%.

Our other key revenue drivers were fertilizer up 5%, with pest control products up 6.5%, although control products were down slightly.

We add new service centers to the comp base in their second full calendar year of operation.

Thus the 2003 service centers are included in our same store sales figures while our 2004 new service centers are excluded but will be included in our 2006 same store sales calculations.

Gross profit on sales which we define as product margin plus distribution costs was 50.9 million or 26.8% of net sales, up 100 basis points from 25.8% of net sales from the second quarter of last year.

Product margin was 68 million or 35.8% of net sales compared to 62.3 million or 34.2% of net sales in the same period last year a 160 basis point increase.

Distribution costs were 17.1 million or 9% of net sales compared to 15.3 million or 8.3% of net sales in the second quarter of '04.

The 60 basis point increase is due primarily to fuel surcharge costs.

As we said last quarter we locked in a majority of our urea, phosphorus and potassium costs this year, the three major fertilizer components with the cost of urea rising 14%.

In addition to higher raw material costs, limited availability of certain product components and elevated freight charges due to the increase in energy prices contributed to the overall increase in cost.

However, we experienced better gross profit margin in the quarter due to higher pricing.

Selling expense was 22.9 million or 12.8% of net sales compared to 22.9 million or 12.6% of net sales in the same period last year.

Approximately 8.8 million is attributable to incremental offering costs for service center openings in 2003 through 2005 for this year.

Five million is related to new direct marketing initiatives and service costs.

That number for this year was $24.3 million in selling expense.

Preopening expenses were 491,000 versus 597,000 in 2004 as we opened ten service centers this quarter compared to 16 in the second quarter of '04 but also incurred costs in the second quarter for stores that will be open in the third quarter.

General and administrative expenses were 6.3 million or 3.3% of net sales compared to 6.6 million or 3.6% of net sales in the second quarter of last year, a 30 basis point decrease.

We incurred nearly $500,000 in costs related to our vendor contract termination, that is the KPAC Agreement, which you may recall was announced late last year.

Merchant discount provisions for delta accounts expense was 3.8 million compared to 2.5 million last year, a 60 basis point increase.

We incurred approximately $500,000 for fees for promotional discounts and extended payment terms for certain customer accounts compared to no costs of this nature last year.

Interest expense was down slightly to $124,000 from $136,000.

Earnings report income taxes increased 10.8% to 15.8 million in the second quarter of 2005 from 14.2 million in the second quarter of 2004, an improvement of 50 basis points to 8.3% of net sales.

For the quarter the company reported on a GAAP basis a net gain of $1.71 per diluted share versus a net gain of $1.58 per diluted share for the same period in 2004.

Including a tax benefit at a 39% rate we would have recorded second quarter 2005 adjusted net gain of $1.04 per diluted share.

Similarly for the second quarter 2004 we would have reported an adjusted gain of .90 per diluted share.

I will provide some comments on our balance sheet.

As of June 30, 2005 we had 3.8 million in total debt consisting of 3 million of revolving bank debt and .8 million of an interest free forgivable loan from the city of Cleveland.

This compares to total debt of 5.9 million in the second quarter of last year.

Cash and cash equivalence were 8.5 million versus 26.9 million at the same time last year.

Over the last few quarters we have been working to get our inventory better in line with our needs so that we have sufficient but not an oversupply of seasonal and non seasonal product.

On a year over year basis inventory has increased close to $15 million but the majority of this increase is attributable to the decline in sales resulting in certain supply chain inefficiencies.

In summary our balance sheet remains quite healthy and the additional cash we should receive from the sale of the supply chain asset we will be better positioned to enhance shareholder value by expanding our service center footprint, reducing our debt, and repurchasing outstanding shares.

The company's adjusted guidance for 2005 full year revenue growth should range from 1 to 2.5% with an 8% to 9% increase in service center sales.

The sales of other selling locations are expected to decline approximately 22 to $25 million related to the accelerations of the company's strategy to reduce its sales rep model and to concentrate on the higher profit service center and stores on wheels model.

For the full year the company estimates a diluted EPS in the range of .45 to .50 which includes an .03 effect from the settlement of our dispute with KPAC and before the 27 to $30 million expected charge associated with the supply chain transaction.

We anticipate opening 30 to 35 new service centers in 2005 with 11 already open in the first two quarters of the year and the remaining start opening in the third and fourth quarters.

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

Thanks Jeff.

Good job.

There's a lot of information there.

This is an exciting time in the history of our company.

This transaction makes us stronger and more flexible in charting a growth expansion strategy for our high operating margin business segment.

We have had a long term target of 10% EBIT margins and while we realize we have a long way to go to that goal the disposition of our manufacturing and distribution assets move us even closer.

Our strategic model demonstrates that we will intermittently increase our EBIT percentage through the continued profitable expansion of our service center network while controlling levels of cost such as warehousing and G&A.

In addition our merchandising strategy, revised Store-on-Wheels models, direct marketing and pricing piloting initiatives will help us expand our operating leverage beyond the inherit ant growth from expansion.

As I have stated many times before we are a growing presence in the consumables portion of professional lawn and landscape industry and we are exceeding the average growth rate of 4%.

We consider the same nesting activities that are driving growth in home improvement retailers helping us as well as people are willing to spend more to improve their most valuable asset-one of their most valuable assets their lawn and their home.

We intend to open new service centers at an annual rate of 10% to 15% of our store base or between 30 and 35 locations this year alone.

We think the traction we have gained with our newer stores illustrates the opportunities available to us across the country as we fill out the 50% of the market that we have not yet penetrated.

The Lesco name stands for quality products and economic expertise.

With more than 150,000 lawn care landscape, golf course, and pest control professionals relying on us to service their needs.

We think we are now at even better position to help their businesses grow while at the same time reward our shareholders by creating even more value for them.

And with that I'd like to turn the call back over to the Operator, and we'll handle questions at this time.

(OPERATOR INSTRUCTIONS)

We have a question from the line of Bryan Garnett with Wholesale Capitol.

Please go ahead.

Hi, good afternoon.

Good afternoon, Bryan.

I guess my first question is on the stock buyback, how are you going to affect that and what's the time limit on that?

The stock buyback would be subject to the closing of the transaction so it obviously can't occur until we actually close this transaction.

And then post closing our board of directors will decide what the next step is relative to returning excess cash to share holders.

So it's not clear if it would be just buying back in the open market or doing a Dutch tender or if it ends do you have any sense of where it might go?

At this point I think it's too early for us to commit that all of those things are being plausible, are being considered Bryan.

So I'm also trying to understand now what effectively is reduced guidance for the year and if the lost sale is the primary factor in that reduced guidance and if those are low margin sales and not very profitable why is there such a reduction in guidance?

What has occurred as a--by the way we did not expect to lose that significant amount of sales and what has happened to us in the first half of this year is that we were not able to react as quickly as we would hope now in reducing the cost behind those sales.

And a big part of that is the warehouse and manufacturing and distribution costs associated with that sales rep program.

That sales rep program was generally shipping direct from warehouses to customers.

The biggest move we did quite frankly in assisting us in removing those fixed costs behind that model will be the sale of our supply chain asset.

The warehouse cost associated with that and inventory will be part of the sales plaque (ph).

So if there's a lower-if you've got like $25 million of sales, is essentially the decline in sales you were not expecting?

No, we did not expect to lose as much as we did in this conversion from the sales rep to the Stores-on-Wheels.

OK Can you quantify that?

I'm just trying to understand-

Yeah, I can tell you it's-the actual sales and sales rep program are approximately 40 million last year before the total disbanding of the program we did somewhere between 6 and $7 million dollars in sales.

Those sales will then have to convert over to the stores on wheels.

The Stores-on-Wheels are running approximately 6 to 7% ahead of what they did last year but that's not enough to make up for the approximately $34 million drop in sales rep program.

So maybe it's-so again it's like a $25 million drop sort of lost revenues?

That's right.

But we're talking about a .10 reduction or higher in net income, right?

So as I translate that back, let's say 12 1/2 cents on nine million shares and divide it by taxes right, it's like $2 million dollars.

Is my math right here, $2 million on 34 million of sales?

The historical contribution, we don't break that out in segment reporting, but the historical contribution on the fore wall basis for these entities was approximately--it was in the lower single digits.

But there are the fixed costs behind it are still in existence.

Our problem and the reason you're right on your mathematics, the problem we have from an earnings per share in the short term is that we've lost those sales but we still have a majority of the cost that were associated-- other than the cost to get sold we have the majority of the costs supported that whole sale are still in existence and we need to further refine our model and right size our cost structure associated with losing those sales.

We didn't do that in the first half.

So can you quantify what the fixed costs are associated with these sales that theoretically will go away, and I presume they're going away with the sale of the transaction.

Is that right?

Yeah.

Bryan you're getting ahead of us a little bit there and that's what we say in our release that we're going to right size the cost model.

So we have to be careful we don't give any guidance already for next year.

Right, right.

So, but there's a significant offside opportunity for us to increase earnings per share for next year based on this transaction.

Absolutely.

Yeah, I guess what I'm just trying to understand is that if we accept that there's sort of a non recurring expense structure here if you will, that you'll penalized by this year.

I'm just trying to understand what it would look like if you weren't operating with that burden.

Is there any way you can kind of point us to that?

You know I think when we close the transaction we're going to have the ability to give some further forward looking guidance.

I don't know if I'm definitely committing to 2006 guidance but we're going to help everyone when we close this, Bryan.

It's near the numbers you're talking about though in infrastructure and fixed warehousing costs and inbound freight and so forth.

And obviously we were holding inventory associated with these sales and we need to work through those costs also.

So it's obviously in the range that you're referring to.

OK so I guess that will sort of get me into my next question which I think on the last call we talked about Michael which you said once this deal was done we could talk about furthers how you get to that 10% Ebit margin level.

And that will be clearer once we get through the deal?

Yeah, I think its clearer when you start to talk a little bit more about stores and the Stores-on-Wheels with less of this other fixed expense that becomes our path to that answer to where we're going.

You know I think Bryan when we get past this transaction and looking at the model long term it obviously very much simplifies our model.

We become much closer from a structure, maybe not from a selling perspective, but from a structure tool to a retail model.

We'll have Stores-on-Wheels, we'll have the service centers, and we're going to retain a certain amount of direct business that is either profitable-has their own own achieved profitability level and contribution and/or contributes through having direct sales and then sales through service centers and stores on wheels.

All costs will be in the four walls and then outside of the four walls of those three operating segments, and I use that segment term loosely, not necessarily from a GAAP perspective will be our corporate cost.

So our model post transaction is going to be much easier to understand and much easier to model quite frankly.

And that will clean it up and it will be easier to understand how we will be able to continue to generate increasing operating margins.

OK so net this deal, other than getting capital back to shareholders, you also anticipate there will be cost savings that you will benefit from as well?

There could be--by the way we need to say that we've partnered with a very strong partner here in Platinum Equity, and when we do our modeling associated with this transaction we aren't necessarily modeling for any upside level for any of the things that they can do for us which could be extraordinary.

But modeling it from just a financial perspective and within the four walls that we can control the actual cost to purchase our product will be slightly higher than it has historically been but the opportunity for us is really about all the other things we can do like changing our model from a sales rep model or changing some other parts of our model to capture higher opportunity and operating margin.

So in all end, yes we do anticipate that these transactions in concert are going to contribute to higher operating margins in the future.

And Michael when you refer to right sizing that's sort of in addition to the transaction with Platinum?

Yea its part of it Bryan.

We have opportunities in existing structures that maybe we don't need anymore and then we have opportunities in these strategic-with our partner, with Platinum to benefit long term to the EBIT.

OK.

Thanks guys.

Thanks Bryan.

The next question comes from the line of Paul Westbrook (ph) with Jay (ph).

Go ahead.

Well, it's been a long time coming, congratulations.

Michael Dimino and Jeff Rutherford: Thank you Paul.

Just with regard to the structure of this deal, in the past there have been-that you've done a transaction with a commitment to take product, and over time that didn't age well, the environment changed.

What sort of level of confidence do you have on this transaction not running into that sort of problem where you've got product at a given price that is not acceptable given the current industry environment, that sort of issue?

Well I would say-I know you're referring to the KPAC transaction...

Paul Westbrook Yeah.

The problem with that transaction was not necessarily-we can say this now since it's settled but the problem wasn't necessarily with our partner, it was the fact that we were committed to a level of tons that we couldn't sell.

And once that happened to us we had to significantly discount product in order to work through the working capital.

This is completely different.

By level of scope that was an 8,000 ton agreement and we couldn't sell-that was the mescaline fertilizer and it's very specialized for golf.

We're talking 350,000 tons of Lawn fertilizer in this transaction and if someone came back to me and said we're really only going to need 175,000 tons that may change my mind but that's not going to happen.

We're growing this business significantly in lawn fertilizer.

The deal which we're going to be somewhat circumspect until we close and relation to our partner as an ongoing business here is structured so that we feel very comfortable that we're going to continue to be able to source high quality, enjoy comparable cost, and have a reliable source of fertilizer while our partner can do other things while still enjoying an acceptable level of profitability in their relationship with us.

So it's a totally different type of arrangement.

We don't have a tarnish commitment, there are some commitments embedded in the agreement relative to their margin and so forth but it's a completely different type of partner, a very sophisticated partner who has done these types of transactions before.

The staff is going to be the staff that works for us and so forth and so on.

We feel very very confident that we have the right partner, the right agreement and the right protections and going forward we're going to have a reliable source of high quality reasonably priced product.

And those details however won't be available until the deal closes?

That's right.

OK

The next question comes from the line of Robert Cadastre (ph) who is a private investor.

Please go ahead.

Hello and good afternoon.

Michael Dimino and Jeff Rutherford: Hey Robert.

I was just curious, is the total drop in revenue that we should be expecting on an annual basis just at 40 million?

The drop in revenue we've broken out in the guidance and we talk about what the service center sales are going to be this year relative to their increase and then we talk about what's going to happen in the other location.

If you go into the release, we continue to break out our sales in a matrix format.

Meaning we break out service centers and other selling locations and then on a matrix level show lawn care and golf.

Now one of the things that has happened to us this year is we're getting a slight mix change in our service centers and we're getting a higher growth in golf actually at the service centers.

But, are you asking Robert if the 40 million is the total that we expect to lose in this round?

Yeah, I'm just asking-maybe I'm just looking at some 2006 guidance the full impact of the elimination of the sales reps--

I mean you can't guarantee anything but I think we're pretty satisfied.

We've done as much damage as we possibly can do.

OK and with that you annualize 40 million or so?

The decline's going to be in that $34 million area.

But there are other parts of that, other selling locations that are going to increase and the total decline is going to be 22 to 25 from last year.

You can pick up that other selling location number in the 10K and we're anticipating that number will be down 22 to 25 million.

OK, are you guys retaining any liquid warehouse or distribution centers assets at all or is it all gone?

There are a couple small, minor distribution centers that we'll retain for global market purposes.

OK and of the 25 million you expect to harvest from the sale, how much do you plan on keeping internal for the increased store on wheels campaign for your new service centers versus how much is going to be totally distributed to shareholders ?

We continue to believe and have experienced that we can grow what we had planned on growing through operating cash flow.

And you've got to remember we're going to generate a little bit of tax lost out of this transaction also so that'll help pay for expanded service centers and stores on wheels.

OK so primarily the growth is going to be internally generated?

That's right.

OK thank you very much.

Thank you Robert.

We have a follow up question from the line of Bryan Garnett with Wholesale Capitol.

Please go ahead.

Hi Jeff, you touched on the tax loss which is $30 million is that going to be able to shelter ordinary income?

Yes it will.

I hate to use the word shelter.

If you offset-

yeah, that'll be an ordinary loss.

OK so at a 40% tax rate that's worth 12 million bucks.

Yeah, that's not in the 25 million.

OK that's a buck a share of values theoretically.

Right, that's correct.

OK great thanks for clarifying that.

sure.

Sir we have no more questions from the cue, would you like me to prompt for more questions?

Well, if there aren't any more questions I think we might as well wrap it up.

No additional questions.

OK I'd like to thank all of you for your time and attention and we're available to come and visit with you if you need to talk to us.

Thank you.

Ladies and gentlemen this includes today's presentation you may now disconnect.

Good Day.