Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Rick Zimmerman - CEO

Ed Puisis - CFO

Analysts

Brett Levy - Jefferies & Company

Peter Lisnic - Robert W Baird

Chris Manuel - KeyBanc Capital Markets

Christopher Glynn - Oppenheimer & Company

Ryan Watson - Stone Cover Capital

Andrew Cray - Phoenix Investments

Alan Weber - Robotti & Company

Walter Branson - Regiment Capital

Michael Rosenberg - Malad Partners

Dayton Superior Corporation (DSUP) Q4 2007 Earnings Call February 15, 2008 11:00 PM ET

Operator

Before proceeding further, let me read the company's Safe Harbor statement. Certain statements made herein concerning anticipated future performance are forward-looking statements. These forward-looking statements are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements, as a result of a number of important factors.

Representative examples of these factors include without limitation, depressed or fluctuating market conditions for our products and services, operating restrictions imposed by our existing debt, increased raw material cost and operating expenses, our ability to increase manufacturing efficiency, leverage our purchasing power and broaden our distribution network, the competitive nature of our industry in general, as well as our specific market areas, change in prevailing interest rates and availability of and terms of financing to fund the anticipated growth of our business, satisfaction of the conditions of completion of our refinance.

The list of factors is not intended to be exhaustive and additional information concerning the relative risk factors can be found in Dayton Superior's Annual Report on from 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission.

Let me remind you that under the SEC's regulated FD, the company cannot provide any of you with further earnings guidance individually, so they urge you to take any questions which will help you build your financial models in this public forum.

Good morning. My name is Mathew and I'll be your conference operator today. At this time, I'd like to welcome you to the fourth quarter 2007 investor conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I'd now like to introduce Rick Zimmerman, CEO and turn the call over to him at this time. Thank you. Mr. Zimmerman. You may begin your conference.

Rick Zimmerman

Thank you, Mathew. Good morning from Dayton Ohio and thank you for joining us this morning. This is Rick Zimmerman speaking. Before I turn the financial portion of today's call over to Ed Puisis, our CFO, I'd like to take just a couple of minutes to talk about our 2007 end markets. I think many of you have heard or seen our recent presentations but for those that have not, our end markets are really put into out into four categories; first being Residential Construction, that's very light construction work as far as we are concerned comprises about 5% of our business. Commercial Construction which is made up of retail space, office, space, distribution and manufacturing facilities, recreational parks and facilities, Commercial construction makes up 40% of our business.

Then there is the Institutional Construction, which is the schools, hospitals, government buildings that's 25% of our business. And then finally there is Infrastructure Construction, which is highways, bridges, airports, power plants etcetera and that makes up about 30% of our business.

According to F.W. Dodge for the full year 2007 as compared to 2006 work contracted in the non-residential building construction market was down about 5% in square footage and up 3% based upon value. With the number of projects for the year flat '07 compared to '06. A snapshot for the fourth quarter and only the fourth quarter data shows a slightly weaker market, as compared to the full year trends. Reviewing the regions on an annual square footage contracted basis, there is some major differences within the region most being dumped and some of them very significantly and too the nine regions showing some growth.

In the non-building or infrastructure area, this is projects like streets, bridges, dams, sewers, waters, waterworks, airports. These are only reported in value and they were up 2% compared to last year again with significant regional differences. In combination that's the non-residential building and the non-building, contract value across the nation was up about 3% for the year. At Dayton Superior, we achieved record fourth quarter and full year income from operations on revenues of $116 million and $483 million respectively. Total revenue for the quarter was flat, while up 1% for the year. I'll add that our fourth quarter results were achieved while relocating two key facilities, distribution center in California and our primary forming manufacturing location in Illinois.

For the quarter, Product sales segment performed very well with gross margins improving 390 basis points on sales that were up 1%. For the year, the segment improvement 290 basis points. All product lines improved with our accessory chemical and forming businesses showing the strongest improvement. Our gross margin expansion is the direct result of the Dayton Superior team's intention to continuing operational improvements, continuing cost controls, product line rationalizations and much better marketing discipline.

Our rental revenue maintain the trends, we experienced in the third quarter with revenue down 16% over fourth quarter of '06. Used equipment sales however were strong up 12% for the quarter. I have some specific rental comments after Ed reviews the fourth quarter. So, I'd like to turn the call over to Ed now to talk a little bit in more detail about our fourth quarter operating results. Ed?

Ed Puisis

Thank you Rick and good morning. Our discussion this morning, we'll be referring to the press release figures that were published yesterday. Our fourth quarter sales came in at $115.6 million virtually flat with the same period of last year. For the year, sales up $483 million or 0.8% higher than last year roughly 1%. Product sales were $88.7 million in the fourth quarter of 2007, an increase of $1.1 million or 1.3% from the $87.6 million in the fourth quarter of 2006 due to improved sales prices. For the year, Product sales were $398.4 million, a 2.7% increase from $388.1 million last year due to favorable pricing, as unit volume declined.

Rental revenue was down 15.7% to $15.5 million for the fourth quarter and also down for the year at $59.7 million. Used rental equipment sales increased to $11.4 million from $10.2 million in the fourth quarter of last year, a decrease to $24.9 million from $28.4 million last year.

On to gross margins. Our programs to drive cost down and improve customer service continued to reap results in the fourth quarter with improvements in gross margins. Gross profit improved 20.5% in the product sales segment contributing $21.9 million or 24.7% of product sales up from gross profit of $18.2 million or 20.8% of product sales in the fourth quarter of 2006 despite higher material cost and other cost increases due to inflation. Accounting for the increased margins are higher selling prices as well as operating efficiencies. For the year, product gross profit was $105.5 million or 26.5% of product sales, an increase of 14.9% from $91.7 million or 23.6% of product sales for the same reasons, we discussed for the quarter. We increased product gross profit 290 basis points in 2007 versus 2006.

On the rental side of the business, gross profit was $7.3 million for the quarter and $26.4 million for the year versus $7.8 million and $25.9 million last year. The decrease in rental gross profit for the quarter was mainly due to the lower revenues discussed above. The increase in rental gross profit for the year was due to lower depreciation expense. The used rental equipment segment realized gross profits of $9.7 million and $19.9 million for the quarter and full year versus $7.9 million and $20.7 million in the same periods of 2006.

SG&A for the quarter decreased $27 million versus $30.8 million in the same period last year due to lower consulting fees and stock compensation expense. For the full year, SG&A stayed virtually flat at $106 million and actually decreased, as a percentage of sales to 22.1%.

Net interest expense for the quarter and the full year was $11.8 million and $46.5 million down from $12.6 million and $50.1 million last year. The decline was primarily due to the repayment on the revolving credit facility from the proceeds of our IPO. We incurred $2 million of other expense in the fourth quarter related to merger discussions that were subsequently terminated.

In 2007, we continued the practice of reserving for the tax benefit of our domestic losses. Our income tax expense is a result of foreign earnings. As a result, our future earnings will not be burning over the next few years by the income tax expense reported or cash, as we would realize the benefit of the net operating loss carryforwards.

We have determined that we overstated deferred income taxes in 2004 by approximately $11 million and as a result had reflected higher liabilities and higher shareholders deficit in periods from 2004 and subsequent by that amount. The overstatement resulted from failing to reduce the tax valuation allowance for accelerated depreciation that will reserve within the net operating loss carryforward periods.

As a result Dayton Superior restated financial statement subsequent to December 31, 2004 to reflect lower total liabilities and lower shareholders deficit by approximately $11 million. This restatement has been reflected in the summary balance sheet attached to the press release. The restatement does not affect Dayton Superior's consolidated income statement for any period subsequent to 2004 and is a non-cash adjustment.

Our NOL currently stands at approximately $134 million. This brings us to our Q4 net loss of $3.3 million or $0.18 per diluted share based on 18.3 million shares versus a net loss of $10.1 million or $0.91 per share based on fewer pre-IPO shares of 11.1 million in the quarter of 2006.

The net loss for the full year was $6.7 million or $0.37 per share based on 18.3 million shares versus $18 million or $1.76 per share based on the pre-IPO 10.2 million shares in 2006. Note that in periods with the loss, the impact of unvested restricted stock, stock options and warrants are not included in the number of shares, as they would be anti-dilutive.

Now, I'll discuss the balance sheet and cash flow. Accounts receivable at $68.6 million or lower than the $71.5 million at December 2006 due to improved DSO. Inventory at $66.7 million was up from December 2006 of $58.4 million due to a buildup of inventory for our forming factory relocation in Illinois, which will be completed in the first quarter of 2008 and due to its inflation. Accounts payable at $39.2 million were down slightly from $40.9 million at December 2006. Traditional CapEx additions were at $19.9 million for the year, as compared to $13.3 million in 2006, as we continue to invest in our manufacturing facilities in information technology to improve product costs and customer service. We can now invest in a more traditional level, as we move forward.

Net rental CapEx was $1.5 million with $25.2 million of additions and $23.7 million of proceeds from used sales. We are no longer recording proceeds from sales on rental equipment, which is on statement of cash flows equal to the used rental equipment sales that is on the income statement. Proceeds now are equal to the cash received in the fiscal period from used sales. We have restated 2006 cash flows in the press release. This change solely affects the consolidated statements of cash flows specifically the [10 K] action proceeds from sales of rental equipment is adjusted and offset by an adjustment to the 10-K captions change in accounts receivable and changes in prepaid expenses and other assets.

As far as the fleet in general, we are comfortable with the size and mix of the rental fleet. It does not require the same level of investment in '08, as it did in '07 and '06. We are proceeding with the previously reported refinancing of the revolving credit facility and 10-3/4% senior second secured notes and expect to close this refinancing in the first quarter of 2008.

I'll now turn the call back over to Rick for some closing comments.

Rick Zimmerman

Thanks, Ed. During the course of 2007, while our markets weren't, as robust as we originally planned and we did experience some regionally specific market challenges including our ---some second half uncertainty within the credit market. Our products, our businesses, the product lines, various operations we have the manufacturing or distribution and our customer service execution, all continued to improve. Our order accuracies and fill rates are up and our customer service improved steadily throughout the year.

Our use of technology to improve service, communication and business efficiency is growing and will be a key enabler for some of the exciting 2008 improvements that we have planned. Our capital investments are demonstrating the promised returns with many just now coming online. Across most of the product lines pricing is improving. Our costs are under control. Our freight expense is being well managed and our new product pipeline is taking shape.

Collectively, the annual and quarterly improvement trends that we have seen in our gross margins validate our strategy and our direction. Gross margin, less SG&A showed a 40% improvement year-over-year. In short, 2007 was a very solid operating year for Dayton Superior.

So, let's close the book now on 2007 and talk a little about 2008. During our last conference call, I commented on significant regional differences in our rental operations, mainly that our year-over-year decline was concentrated in Florida and Baltimore -- in the Baltimore, Washington D.C area .And that Florida appeared to be bottoming, but the Northeast would remain a challenge. Well, let's update that a little bit.

Florida appears to have bottomed in the fourth quarter and through last week our Florida business is now up compared to the same period in '07 as some large jobs that had been delayed are finally shipping. The Baltimore and DC area will remain depressed. I think through the major portion of 2008. And we really don't expect the comps to turn positive here until late third quarter. And this is a combination of market and a large overhang of idle contractor owned equipment and some European competitive fleets that have moved into the area.

Our New York City initiatives are beginning to payoff and the overall New York City Northeast equipment on rent is up nicely so far compared to 2007. Other areas are pretty much as reported last quarter. Midwest is stable and in spite of the severe weather patterns we have seen there in the first to six weeks of the year. Southwest business driven primarily by strong infrastructure investments was up double digits in the fourth quarter that trend continue so far this year. Our Western businesses declined. A combination of the housing weakness impacting some commercial sectors, project delays, they were down double digits in the fourth quarter and we are seeing that same trend continuing thus far this year.

On last call, I also commented on specific strength in power plant, parking structures, ethanol development, some new products in our international business. Fortunately all these are holding up well as this all of our heavy steel forming products and market. We have a record backlog in parking structures. We are bidding more power plants than we have in many years. Our international business continues to grow and our new high rise products have been well received in the marketplace.

Nationally, our expectation is that our rental revenue comps will turn positive in the second quarter. We are midway through this first quarter, looking into this year's construction season and clearly there are some uncertainties in the market. But from my perspective, Dayton Superior is well positioned to manage through these uncertainties. We have some very specific goals for 2008 that will become part of our 2008 conference call agendas. We expect our revenues to be up slightly driven by new product efforts. Our product sales, gross margins will continue to improve at a 100 to 150 basis points in 2008. We expect that it will reduce our debt by $15 million to $25 million. Our PP&E CapEx is planned at $10 million. This is a $10 million reduction over last year.

Our fleet investment is planned at $13 million. This is a $12 million over last year. And we are very comfortable with both of these levels of investment for 2008 given the size of the investment that we made in both of these categories in 2006 and 2007. Our working capital is expected -- we expect the day payable, the inventory days and the receivable days to show incremental improvement in 2008, but clearly a key focal point for us in 2008 is debt reduction.

In closing earlier today, I mentioned primary market segments in which we participate and while there is some question about commercial construction, we believe that national infrastructure spending and institutional investments will remain sound. These markets in combination with our new products revenue growth, sales and customer service regionalization, continued operational improvements and our pending refinancing actions give us confidence that 2008 will be another record year for Dayton Superior.

That's all for our planned comments. So, we'll be happy now that we'll open the lines up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brett Levy with Jefferies & Company.

Brett Levy - Jefferies & Company

Hey, guys.

Ed Puisis

Hey, Brett.

Rick Zimmerman

Hey Brett.

Brett Levy - Jefferies & Company

Could you start with the steel costs clearly there has been a pretty pronounced increase in all steel costs are you guys in the first quarter going to feel some pressure or you've been able to kind of get out of ahead of those in terms of raising your own product prices?

Ed Puisis

To answer your specific question in the first quarter I think we'll be okay. But generally to answer your question, steel prices look like by the end of the first quarter that's over the fourth quarter they'll be up about 20% to 25%. We announced already and have implemented a price increase in January between 4% and 8% on most of the steel products and are about to announce another price increase of 10% that will be taking effect also in the first quarter. So, we think we are well positioned with our price increase to offset the inflation that we're experiencing.

Brett Levy - Jefferies & Company

But there will be some lag in the first quarter, it sounds like?

Ed Puisis

Yeah, there will be some but the fact of the matter is as I'm also pretty good on material in the first quarter January and February we had a fair amount steel already purchased so while that market prices are going up we positioned ourselves fairly well that we had a fair amount of steel on the ground. So, I don't expect to see any margin compression from steel specifically in the first quarter. I think we're going to be fine?

Brett Levy - Jefferies & Company

All right. And then you guys had a kind of beginning of last year cost cutting program that seems like you've accomplished a decent chunk of that this year. Do you have 102 to 150 basis point improvement in margin how much of that is the continuation of the cost cutting program and basically just how much of that program has been realized and how much in dollar terms is left to go?

Rick Zimmerman

Well, we've said all long that we'd expect that our product sales gross margins will expand 100 to 150 basis points annually until we get to the mid 30 a good, strong, solid industrial companies run in that space and there is no reason why this business can't get there.

Brett Levy - Jefferies & Company

All right. And then this is just kind of, I might be dating myself a little bit there. But several years back one of your competitors, I mean I'll just name them Meadowbrook was sort of try and expand into a lot of your spaces and you guys fought back by putting more sales force on the street. Is the competitive dynamic kind of continuing to be very aggressive right now or market share is basically settling in kind of -- at a more stable level.

Ed Puisis

Yeah, I'd say that we do not have an aggressive market share grab going on in the marketplace either from our perspective or competitors perspective. I mean, there is always a little bit some truffles that go that happened in regional marketplaces here and there. But I think it's fairly the [clarity] of orders pretty well settled at this point.

Brett Levy - Jefferies & Company

All right. And then you guys referenced some conversation about a merger were those discussions limited to the fourth quarter?

Rick Zimmerman

Yes, pretty much.

Brett Levy - Jefferies & Company

Got it. And were someone to merge with you, would it be possible to take the NOL with you? And was that obviously a critical part of the discussion?

Rick Zimmerman

Well, I can't comment on any portions of the discussion. But clearly the NOL is an attractive asset for us.

Brett Levy - Jefferies & Company

Got it. All right, I’ll get back in the queue.

Rick Zimmerman

Okay.

Operator

Your next question comes from the line of Peter Lisnic with Robert W Baird.

Peter Lisnic - Robert W Baird

Good Morning guys.

Rick Zimmerman

Hey, Pete.

Ed Puisis

Hi, Pete.

Peter Lisnic - Robert W Baird

I guess, if we first start talking about the margin expectations for '08 in products, it sounds like you're pretty comfortable getting that 100 to 150 basis points. What I'm wondering is, is that dependent on you sort of covering steel costs, or what you've embedded in terms of price increases to get to that 100 to 150 basis points?

Ed Puisis

You are correct, it does assume that through our price increases we do cover our steel inflation costs, which like I said earlier, at this point of time we feel very comfortable we'll be able to do.

Peter Lisnic - Robert W Baird

Okay. And then if I, I guess if I do some back of the envelop math, based on the commentary, and thanks for all the details on the '08 outlook, but if I do the math on, rental kind of being down for at least the first half of the year and then pretty good price realization in the products business, it sounds like volume in the products business will be down for '08, is that a reasonable assumption?

Ed Puisis

I think, our thought is that, its unit volume very well could be slightly down. In terms of revenue though, we believe it will be up because of the variables you mentioned, plus the fact that we are getting more momentum in new products.

Peter Lisnic - Robert W Baird

Yeah, and I was just going to ask…

Ed Puisis

Yeah, the new product, it will be interesting to see how much momentum we get in new products, and could that be kind of a diamond in a rock in terms of offsetting some of our unit issues, if the market is soft? Yes, it could be, because we think we have got a lot of momentum in new products and we Rick and I built that world of concrete where most of about the shows we displayed was concentrating on what new products are coming out and they seem to be well received by the market.

Peter Lisnic - Robert W Baird

Okay. And then, I guess if you got new products what I was also wondering about what's international, because you probably have some currency advantage relative to others in Europe. Did you see that help your sales growth in international in the fourth quarter and what sort of your outlook for international in '08. I know it’s a small part of the business, if the margin is probably going to help I would guess?

Rick Zimmerman

Yes, the international business that we do is primarily with the forming business, the forming side of our business. And the large portion of the international business goes into Latin America. And as a result of that, we don’t get so much of a currency translation advantage that we might do going somewhere else.

Peter Lisnic - Robert W Baird

But is that something that you could potentially exploit in '08?

Rick Zimmerman

We are working hard in expanding our distribution network and our capabilities into Latin America.

Peter Lisnic - Robert W Baird

Okay, alright. And then I guess my last question is just on the – I know you can't talk about merger, but everyone can see your balance sheet and I would have guessed that, kind of the priorities for cash would be debt pay down, debt pay down and debt pay down. So, from a strategical standpoint, can you maybe give us a sense as to what strategic rational was behind.

Ed Puisis

I can't reiterate what we said every time we talked about acquisitions that the acquisitions will be accretive. The acquisitions will improve our debt to EBITDA rations. So, clearly that will always be determining factor in whether we move forward.

Peter Lisnic - Robert W Baird

And can I ask, whether or not this merger was in a space that’s comparable to what you are in now, because that’s fair game or no?

Rick Zimmerman

It is in the construction industry.

Peter Lisnic - Robert W Baird

Okay. All right, thanks guys.

Operator

Your next question comes from line of Chris Manuel with KeyBanc Capital Markets.

Ed Puisis

Hi, Chris.

Chris Manuel - KeyBanc Capital Markets

Good morning gentlemen and congratulations on a terrific quarter.

Ed Puisis

Thank you man.

Chris Manuel - KeyBanc Capital Markets

A couple of questions for you, first, you ran through a couple of the numbers pretty quick and I was hoping you could give a me again, what your expectation were for CapEx next year and as well.

Ed Puisis

Truly CapEx, PP&E will be $10 million.

Chris Manuel - KeyBanc Capital Markets

Okay.

Ed Puisis

Fleet investment will be $13 million.

Chris Manuel - KeyBanc Capital Markets

Okay.

Ed Puisis

Product sales gross margins will improve 100 to 150 basis points.

Chris Manuel - KeyBanc Capital Markets

Okay. And then did you have D&A number you gave us as well?

Ed Puisis

No, but what I did, no I do not.

Chris Manuel - KeyBanc Capital Markets

Okay, do you have any you can give us?

Rick Zimmerman

That won't be so much different than what was for 2007.

Chris Manuel - KeyBanc Capital Markets

I don’t know if that is a appreciable move?

Rick Zimmerman

Yeah, that's a appreciable move.

Chris Manuel - KeyBanc Capital Markets

Lets talk about debt reduction coming down bit next year, but it sounds like with capital spending being down pretty sharply and it sounds like a little working capital coming out that you built up here, as you removing some plans around, as well as some potential interest savings it will pump free cash flow it sounds like, is there are any reason to believe that $10 million to $15 million you guys mentioned for debt reduction can be pretty down conservative?

Rick Zimmerman

Actually said 15 to 25.

Chris Manuel - KeyBanc Capital Markets

15 to [20] maybe that’s what I missed.

Ed Puisis

Yeah, $15 million to $25 million of debt reduction.

Chris Manuel - KeyBanc Capital Markets

Okay, that’s helpful. Another question...

Ed Puisis

I mean, we'd also like to think that that's conservative

Chris Manuel - KeyBanc Capital Markets

Okay. Thank you.

Rick Zimmerman

But we will see.

Chris Manuel - KeyBanc Capital Markets

In terms of the refinance, in a press release that you put out a few months ago, when it extended, I think both the last date indicated February 29 and in your prepared comments today and in your press release you said the end of the first quarter. Would there be any need to extend the timing again or is it, if you think you can have it done before the end of GE commitment ending?

Rick Zimmerman

Yeah. We the reason that it was extended before really scheduling in all the meetings we met with the banking community and gave our presentation both in a public form and in a private form. So, that is now complete. So, I think after now we've had our earnings release in I'd expect that in the next week to two weeks, where GE will be closing this transaction.

Chris Manuel - KeyBanc Capital Markets

Okay, that helps. I just wanted to make sure that there wasn't and if does in someway as you pointed out two more weeks till that date expires and I just wanted to make sure there wasn't a mismatch between the two dates?

Rick Zimmerman

No, I don't believe there is and as you know, I believe when we called the bonds, the bondholders to have up to 30 days to relinquish them.

Chris Manuel - KeyBanc Capital Markets

Okay, that's helpful. And then the last piece that you are looking to refinance the 13% notes. Is that something that becomes the next focus or?

Ed Puisis

Absolutely once this is complete, we'll be working with GE and looking at what our opportunities are on the 13%.

Chris Manuel - KeyBanc Capital Markets

Okay, very, very helpful. And last question I have before I'll turn it over is as you look at outlook for some of your end markets with -- have you seen any deferrals or push backs of projects. I know you talked through some of the regions and some of the pieces. But related to potential state funding issues with budgets being pretty weak is there -- do you think there is much risk on your public work side to some of the projects on the board?

Rick Zimmerman

Yeah at this point, no. Where we're seeing a little bit of procrastination takes place is in the commercial sector and primarily driven by some of the credit market tightness.

Chris Manuel - KeyBanc Capital Markets

Okay. Are there any particular regions that are?

Rick Zimmerman

No, no just it's kind of, it was risks sporadic.

Chris Manuel - KeyBanc Capital Markets

That's very helpful Rick. And thank you both very much and good luck on the quarter.

Rick Zimmerman

Okay, great.

Ed Puisis

Thanks, Chris.

Operator

Your next question comes from the line of Robert (inaudible) with RBS

Unidentified Analyst

Yeah hi, good morning.

Rick Zimmerman

Hello.

Unidentified Analyst

Given your '08 guidance for revenues and rental spend what you'll spend on the fleet. I was wondering if you could help us understand your expectations for rental equipment sales in '08 will that be consistent with '07 or should we expect that to come down?

Ed Puisis

I'm assuming your referring to used sales.

Unidentified Analyst

Correct.

Ed Puisis

And I think our expectation is, it might be slightly lower but as I've said before, it's just very volatile. It's very sporadic; it often has to do with tax situations of specific general contractors as well their owned fleet conditions. And so, anytime we --- even when we, back a couple of years ago when we tried to get it down we weren't very successful for very long. So, that's a hard number for me to say. I'd expect it to be down some, but that's not a promise.

Unidentified Analyst

Okay fair enough. And then on the -- that your comments regarding the accounting change. What percentage of the historical rental equipment sales were made will you guys providing some financing terms to the buyers versus a cash-on-delivery sale?

Ed Puisis

The used sales typically have, I want to say we probably in our history as they have had some terms that may have been a couple of years. But typically it's less than 12 months and closer to 60 days than anything else. But the timing of those sales at a yearend like in another word especially because often these sales are driven because of tax consequences for the general contractors. They could have, we could have spikes at yearend that differ from one year to the other year thus causing cash to be received in the following more cash to be received in the following year versus the current year. That's more the issue; it's more of a timing issue. The terms typically are between 30 and 60 days generally.

Unidentified Analyst

Right. And I guess, I'm curious as going forward as you look out to '08 is that timing differential getting bigger and was that the catalyst for revisiting the way you guys would record it or was it just somebody kind of caught on and said we should look at this a little differently?

Ed Puisis

Yeah that was more of. It was just brought up to say, hey should we just -- the same way we look at capital investment. Should we treat this a little bit closer and so we decided to look at it's meaningfully not a lot different although in some period it can be. And so obviously we've the discussions and decided you know what it's probably, it is a cash flow statement. So to be more accurate on that specific cash item, as you know the balance just ends up in working capital.

Unidentified Analyst

Understood, okay. Great, thank you very much.

Ed Puisis

Sure.

Operator

Your next question comes from the line of Christopher Glynn with Oppenheimer & Company.

Christopher Glynn - Oppenheimer & Company

Thank you. So I think in the past you’ve talked about longer term opportunity from shifting the costs of freight to customers, just wondering what your seeing on the progress with that and then prospects for that to materialize is a incremental gross margin driver?

Rick Zimmerman

Good question. We've had some really good success in managing our freight costs, I think as we mentioned in our discussion. We haven’t had such good success in offering the practice these defective practices in my opinion of our industry and this is something that we keep talking about and keep trying and, but we can only do as much as the competitive landscape allows us to do in that regard.

Christopher Glynn - Oppenheimer & Company

Okay. And then earlier in the call you referred to the competitive situation being pretty well stable, correct me if I’m wrong, I took that to me in that I look on the pricing discipline has improved, but is that maybe framework to think about the prospects for shifting the freight costs?

Rick Zimmerman

I would like to think that that would be possible, again because I think this is a practice in our industry that is defective and I would like for the industry not to have defective practices. But to the extent that our competitors choose to give away the freight then there is not much we knew about it. We kind of have to follow suite.

Christopher Glynn - Oppenheimer & Company

Okay. But my interpretation the comments on the competitive outlook is apply to the kind of pricing discipline you are seeing right now?

Rick Zimmerman

I think the pricing discipline was much better in 2007 than it was in prior years.

Christopher Glynn - Oppenheimer & Company

Okay. And what percent of the product is steel based?

Rick Zimmerman

I think across our business somewhere 21%, 22% is steel based of our COGS.

Christopher Glynn - Oppenheimer & Company

Okay. And on those we’d be looking at an 8% plus or 10% price increase? So just in price 18% growth on that portion of sales or might not really.

Ed Puisis

Well, let me, the initial price increase we gave a 4% to 8% was across all product lines, so different product lines move different percentages. So, but I would say adding, I guess you could say, if you are saying that, hey at least 20% of the sales moved 8% and then an additional 10% that’s probably reasonable, but you just need to understand that not everything moved to same percentage.

Christopher Glynn - Oppenheimer & Company

Right, but in terms of the weighted average portion?

Ed Puisis

You are probably not terribly far off.

Christopher Glynn - Oppenheimer & Company

Okay. Then just on the SG&A cost, may you could talk a little bit more in [raw] terms instead of a percent of sales target, is $26 million to $27 million a quarter a pretty good run rate to think about?

Ed Puisis

Well, we've always talked about 21% to 22% of sales. We have shown that we have a variable SG&A in this business. So that’s kind of how we talk about it rather than talking about in terms of SG&A dollars.

Christopher Glynn - Oppenheimer & Company

Okay. But it certainly become a less variable this year, it looks like.

Ed Puisis

As sales were a lot less variable compared with prior year as well.

Christopher Glynn - Oppenheimer & Company

Okay. Got you. Thanks a bunch.

Operator

Your next question comes from the line of [Ryan Watson] with [Stone Cover Capital].

Ryan Watson - Stone Cover Capital

Yeah. Most of my questions were answered, but as far as the merger talks, are those still progressing now or are those a fourth quarter event?

Rick Zimmerman

It was the fourth event that died in the fourth quarter.

Ryan Watson - Stone Cover Capital

Okay. And then, as far as refinancing, you mentioned one to two weeks, but are there performance based clauses in the closing of that that you have to meet, and if the deal is not fully syndicated, is it correct that GE would take whatever is not syndicated out to the market?

Ed Puisis

I'll answer both questions. One is, there are no open thresholds that have to be met by the company, under the agreement with GE, meaning like, do we have to attain, do you have to attain something in addition to what we've currently attained for them to be held by the agreement? No, there is nothing additional. In terms of its committed financing, so, they have -- at the end of the days, in their determination what they would like to put on their own balance sheet versus what they would like to syndicate, that's really up to them and they'll make their decision, but GE is committed to the financing that we have and so it will be put in place, it will be their determination on what they're syndicate and what they don't.

Ryan Watson - Stone Cover Capital

Okay. And to the extent

Ed Puisis

So, if they can't do something, that I guess -- your implication is that, if they couldn't they would put it on their own balance sheet given that would be their only choice to do it, but that's up to them how they do it. But they've committed to the financing.

Ryan Watson - Stone Cover Capital

Okay. But its not best efforts.

Ed Puisis

Correct, it is not a best efforts financing.

Ryan Watson - Stone Cover Capital

Okay.

Ed Puisis

It is committed.

Ryan Watson - Stone Cover Capital

It is committed. Okay. Okay, thank you.

Operator

Your next question comes from the line of Andrew Cray with Phoenix Investments.

Andrew Cray - Phoenix Investments

Hi guys, congratulation on the quarter.

Ed Puisis

Thank you, Andrew.

Rick Zimmerman

Sure.

Andrew Cray - Phoenix Investment

I just wanted to ask one quick question, does the new GE revolver allow you to buyback the 13% note obviously they are trading now in those low to mid 80s which is a tremendous yield?

Ed Puisis

That's clearly -- clearly the plan is to have some ability to buy some amount of the 13, if we so elected to.

Andrew Cray - Phoenix Investment

Okay, good. Thank you.

Operator

Your next question comes from the line of Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

And just back with a couple of barriers. Ed, does that $15 million to $25 million in debt paid on assume that the GE, if I guess it's done?

Ed Puisis

Yes.

Peter Lisnic - Robert W. Baird

Okay, all right. And then just on the, I guess the restructuring and severance cost that you incurred in the quarter. I assume lot of that was due to the movement of the forming operation here in Illinois. Can you give us a sense as to what the numbers might look like for '08, I'd imagine they will down from '07?

Ed Puisis

Are you talking about the restructuring numbers….

Peter Lisnic - Robert W. Baird

Yes.

Ed Puisis

I think we're not planning for significant number there. I don't think there is. It's…

Rick Zimmerman

$1 million and $1.5million

Peter Lisnic - Robert W. Baird

Okay.

Rick Zimmerman

Kind of without say

Peter Lisnic - Robert W. Baird

All right. And then well, my final question is there anything right now that's in sort of the acquisition pipeline or no?

Rick Zimmerman

Well, there is a number of opportunities there in the marketplace today. As you could imagine…

Peter Lisnic - Robert W. Baird

Yeah. How far you realized that

Rick Zimmerman

(inaudible)

Peter Lisnic - Robert W. Baird

I guess it would be my question.

Ed Puisis

Sorry, Pete.

Peter Lisnic - Robert W. Baird

I'm just wondering how close you might be to taking one of those to completion, I guess?

Rick Zimmerman

Well, actually, we are not close to doing at this point because we need to get this financing done.

Peter Lisnic - Robert W. Baird

Okay.

Rick Zimmerman

Once we get the financing behind us and we understand exactly, what kind of lays ahead of us from a debt and cash availability standpoint then I think we can have some logical perhaps meaningful discussions with some small players.

Peter Lisnic - Robert W. Baird

Okay, thanks again. Thanks on the good quarter.

Rick Zimmerman

Okay, great, thanks Pete.

Operator

Your next question comes from the line of Alan Weber with Robotti & Company.

Alan Weber - Robotti & Company

Good morning. Quick question, when you talk about the improved gross margins over the next two year how much of that or what are your views in terms of the volumes that are needed to meet those expectations or projections?

Ed Puisis

Currently, as we're looking at -- to meet those gross margins percentage increases. We do not believe we need volume to do it. Not to say we don't think or anticipating we'll get volume overtime. But that 100 to 150 basis points should occur regardless of -- I think where you are leading is there operating --do you need operating leverage to attain those and the answer is no.

Alan Weber with Robotti & Company

Thanks. Can you just probably talk about how you get to those levels then?

Ed Puisis

We've kind of have gone through over presentations a number of issues whether that that would be value engineering, where we take a product and reengineer it and example we've given is a plastics product, where we recently redesigned our plastic products, a number of our barsupport plastic products and took 25% of the material out, while improving [formsitten] function and actually so the next stage in the essence we don't change the pricing but did you got a new product we're running now is a lower cost product and 25% of material are plastic products almost falls through because it takes very little labor.

Now for 2008, in 2007 we made a significant -- a number of PP&E investments and those investments most of them in terms of production ready came online late in the year. And so those would be areas now we'll be running and get the benefits of all of 2008, as we're running much more efficient. Into the effect that, I talked about we've been outsourcing some product lines in China and that landscape is changing relative to bad taxes and other support.

Other governmentally subsidized elements that are disappearing with some of the areas, we've improved from a manufacturing capability those products now are even more profitable by producing them in-house. So, a number of our capital investments will also drive that. And then we've the other area, we talk about is lean manufacturing, where we've teams going through our facility and have targeted now probably about 3 to 5 more facilities that they hope to get through this year that will have significant projects, we believe in it that will continue to reduce our cost. So, those are the types of areas, where we think we'll continue to improvements from actually that we're very confident we're going to see improvements to our gross margins.

Alan Weber with Robotti & Company

Okay, great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Walter Branson with Regiment Capital.

Walter Branson - Regiment Capital

Thanks. I wonder if you could expand a little bit on the potential refinancing of the 13 in terms of potential timing for that, what sort of things you might be considering. And I guess you mentioned basically you're going to talk to GE about it, I guess my question would be GE is likely to be the source there and why that wasn't rolled into the current?

Ed Puisis

Hi Walter, a couple of questions. Generally speaking once we complete this transaction that will probably be one of my primary focus is on what are we getting, how are we going to refinance the 13, we are looking at everything and GE is one of the participants in terms of one of the advisors that we speak with. Nothing is being determined in terms of who will actually help us with that type of transaction, so, but we're looking at everything.

It's safe for you to assume that the company is open to all ideas that you could imagine in terms of taking out the 13% notes. And, why the 13 weren’t rolled into this overall offering that we're doing right now is really a result of where the markets are and success factors based on pricing targets we had in terms of what we could achieve. And I think we've, upon completion of this, we will, as we've said we'll significantly improve our interest expense, which will help the business and the issues of 13 in my mind is not an issue of can we get it done, but more of an issue at what the price is. And so, we're looking at lot of different alternatives and what the most effective pricing mechanism or way to re finance that debt.

Walter Branson - Regiment Capital

And you have a strong confidence that it's a '08 event or could it potentially put in to early '09?

Rick Zimmerman

My expectations right now, it's an '08 event. We'll be looking at it. We are not going to chase down the last 25 basis point and wait. If we see something that makes sense, April 1 or April 10 we'll execute it. We're not in gain to take any risks here. When we see something that makes sense we're going to get it done. And I'm its more likely for that transaction to get done in '08, I think at this point than '09 I'd say more likely second half than first half.

Operator

Your next question comes from the line of [Michael Rosenberg] with Malad Partners.

Michael Rosenberg - Malad Partners

Hi guys, congrats on the quarter. Based on the current portion of debt of the balance sheet it looks like roughly half of the revolver would be drawn on day one, is that right?

Ed Puisis

Draw on (inaudible)

Rick Zimmerman

On the refi

Ed Puisis

On the refi

Michael Rosenberg - Malad Partners

Correct.

Ed Puisis

Yes.

Michael Rosenberg - Malad Partners

Okay. So, it's a 150 million total revolver, I guess I'm trying to get a sense of the cyclicality of your business, seasonality of your business excuse me. How much do you think really would be an excess amount that you could use to repurchase 13s in the market and is there a minimum availability threshold in that credit agreement?

Ed Puisis

I think we also said that, how would I answer that. On the following states in terms of availability that for the year, I expect it to fluctuate between a $142 million or $143 million or greater. So, for the preponderance of the year especially in our -- where our working capital is more cyclical it will all be available.

Michael Rosenberg - Malad Partners

And, there is no threshold that you need to have certain availability?

Ed Puisis

Well, it's based on the yes, there has to be a certain amount of borrowing base -- our borrowing base calculation is done based on receivables inventory etcetera that we go through. And I'm just telling you based on our forecast right now for the most part it will all be available and it will all be available during the peak season, when our working capital needs elevate and that's kind of what's your point to tell you that you're going to have you need more working capital in the second and third quarter then you obviously need at yearend or in the first quarter.

Michael Rosenberg - Malad Partners

I guess, you are comparing the second and third peak borrowing to what we've talked about roughly $75 million transA1?

Ed Puisis

Right

Michael Rosenberg - Malad Partners

So that how much more -- can you tell how much more do you are going to?

Ed Puisis

Right to answer that question our revolver can fluctuate or our working capital needs can fluctuate between $20 million and $40 million and that's kind of the range in what we need. And I'd say it less likely to be above 30 than more likely. So, but I gave you $20 million to $40 million historically it's probably more like $20 million to $30 million.

Michael Rosenberg - Malad Partners

Okay. And is there a minimum availability threshold so could you theoretic, if you're borrowing base for 142 could you take down all 142 or is there threshold that you can't scrap?

Ed Puisis

No I can't tell -- the numbers I'm giving you I can take all of it.

Michael Rosenberg - Malad Partners

Okay.

Ed Puisis

Or any thresholds are built into the borrowing base calculation.

Michael Rosenberg - Malad Partners

Okay. Okay, great, thank you guys.

Operator

Your next question comes from the line of Peter (inaudible).

Unidentified Analyst

Hi, quick question, while I understand mergers and acquisitions expenses can be very high $2 million is in my experience, extraordinarily high in the giving the probable size of the transaction. Could you give us some greater detail as to the components of the charge?

Ed Puisis

The $2 million charge was for extensive diligence driven by the transaction proposed transaction that never reached a point through that due diligence we reached a point where basically conversations ceased and persist. That's all I'm prepared to the [bottles] I guess on those calls.

Unidentified Analyst

Okay. Thank you.

Operator

Mr. Zimmerman, you have now no further questions.

Rick Zimmerman

Okay. Well, we thank everybody for joining us today. We look forward to talking to you again in another quarter. Thank you.

Operator

This concludes today's the Dayton Superior conference all. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Dayton Superior Corporation Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts