Lesco Puts Focus On Cost Cuts, Renewed Sales Push

STRONGSVILLE, Ohio – Lesco's new management has returned the turf care products company to profitability through cost reduction, and a renewed concentration on sales growth will increase earnings in coming years, said Jeffrey Rutherford, senior vice president and chief financial officer.The company is on target to reach its 2002 earnings expectations of 60 cents to 70 cents a share before charges, Rutherford told Dow Jones Newswires recently.

After tripling in the eight years ending in 2000, sales rose less than 1 percent in 2001, and Lesco incurred a loss of $2.9 million, or 34 cents a share, on sales of $504.3 million.

Lesco will report charges in 2002, including a first-quarter charge of $2 million for severance related to the management change. The company also had a first-quarter charge of $2.9 million, or 34 cents a share, arising from debt restructuring and a charge of $4.6 million, or 54 cents a share, for writedown of goodwill.

The new management will end a moratorium on new service center openings next year and begin expanding its market share again, Rutherford said. That's the key to rapid earnings growth and sharply improved return on invested capital, he said.

Michael P. DiMino, Lesco's president and chief executive since April, has a sales background, Rutherford said, and Rutherford joined Lesco in February from Office Max, an office supplies retailer. The company recently recruited additional top officers with a sales orientation, he said.

Lesco supplies fertilizer, herbicides, grass seed, pest control chemicals and turf care equipment to golf courses and lawn care professionals through a chain of 227 service centers and 77 semi-trailers equipped as "stores on wheels" for golf course managers. About 4 percent of sales come through Home Depot, Rutherford said, and even there the emphasis is on selling to lawn care professionals rather than homeowners.

The company manufactures fertilizer and produces its own grass seed. It owns 50 percent of a manufacturer of mowers, spreaders, sprayers and other equipment.

Lesco's profit problems arose because the company stopped opening new stores and didn't help existing stores reach out for new customers, Rutherford said. Also, he said the company wasn't aggressive enough about controlling costs and that it invested too much capital in manufacturing plants.

The new management launched a cost control drive that already has cut expenses by $2 million a year, he said, mainly by greatly reducing spending on consultants. He expects to cut another $2 million during the remainder of the year, with much of that in small increments of $5,000, $10,000 or $20,000. Pruning slow-moving items from the product line is another potential way to save, he said.

"We're reviewing everywhere we spend money," he said, including little things such as eliminating company-supplied cell phones for most employees and insisting that both sides of paper be used when making copies.
Aided by cost reduction, the company expects 2002 gross margins to rise to 32.4 percent of sales, from 30.9 percent last year, Rutherford said.

However, the big long-term profit gains will come from increasing sales, he said. While Lesco is the leading supplier to golf courses and the professional lawn care market, it has less than 10 percent of the $3.7 billion annual commercial lawn care market and only 13 percent of the $1 billion golf course market, he said.

Seeking Market Share From Regional Companies

Opportunity for growth lies partly in picking up market share from its main competitors - regional businesses that don't have a nationally recognized brand, Rutherford said. There's also a major opportunity in pest control products, he said, which currently make up only 4 percent of Lesco's sales.

Management is beginning to set up regional distribution hubs that can better support the service centers and stores on wheels, he said. Now they're supplied from warehouses at Lesco's manufacturing plants.

Lesco built strong market share in regions adjacent to its plants, such as Florida and the Northeast, Rutherford said. Regional hubs will permit similar market share gains in their respective areas, he said. "And we will have 100 percent of our inventory in selling locations" instead of having half of it at factory warehouses, he said.

The first regional hub is in Avon Lake, Ohio, a Cleveland suburb, where a distribution center is being retrofitted. Lesco is evaluating sites in the Southeast and Midwest for the next hub.

Management plans to change staffing at the service centers to free up people for outside sales, Rutherford said. Currently, most stores have two full-time sales people, who spend most of their time filling orders for customers who come into the store. Under the new system, each store will have one full-time person and one part-timer.

That will free up one sales person at every three service centers to work outside the stores seeking new business. Rutherford says there is opportunity to boost sales by calling on turf care specialists at schools, parks, camps, commercial properties and cemeteries, as well as lawn care professionals who don't come into the stores.

Lesco plans to expand its independent marketer program, under which nurseries and other landscaping-related businesses serve as Lesco distributors, Rutherford said, serving communities too small to justify a Lesco service center. The first marketer in the program is Wilco Farmers, an Oregon agricultural cooperative with annual sales of $95 million. "Other businesses have signed up," Rutherford said.

However, Lesco's new management pulled back from a plan to enter the consumer business through mass merchandisers. "We have no desire to take on Scotts," he said. "They are the brand for consumers. We are the brand for professional lawn care." Putting the Lesco brand into Wal-Mart Stores would damage the brand with lawn care professionals, he said.

Management plans "to make it easier for those professionals to do business with us," he said. As one illustration, he said, Lesco will simplify a " cumbersome" process for professionals to obtain credit at the service centers, or to expand existing credit lines.

Lesco wants to increase its 130,000 credit customers, he said. "It is good business; credit losses are less than six-tenths of one percent of sales," he said.
Management has several other problems to address. Lesco has difficulty charging high enough prices to some of its large national accounts to produce adequate margins, he said. Some large lawn care companies buy fertilizer and other turf care products mainly on the basis of price, and are reluctant to pay for the value-added services that Lesco provides, he said. "We have to have the discipline to say no thanks to commodity business that doesn't provide adequate margins," he said.

Lesco and a number of other turf care products companies have excess fertilizer manufacturing and blending capacity, Rutherford said, making all of them reluctant to give up even marginally profitable sales.

"We are looking at rationalizing production capacity," including possibly closing one or more facilities and buying some products that Lesco currently produces, he said.

Engineers at the jointly owned equipment manufacturing plant believe they have solved a reliability problem with riding lawnmowers, he said, but mower sales are sluggish as industry professionals evaluate the redesigned machines.
Also, sales of the plant's fertilizer spreaders and sprayers are strong, he said.

The author is with Dow Jones Newswires.