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

Executives

Kim Yost - President and Chief Executive Officer

Mike Borys - Chief Financial Officer

Paulina Hiebert - Vice President of Legal and Corporate Secretary

Ron Barbaro - Chairman

Analysts

Tom Woolly - RBC Capital Markets

Sophia Taylor - TD Newcrest

Carolyn Bennett - National Bank Financials

Kathleen Wong - CIBC World Markets

Will Bower - Moment Research Center

Brick Group Income Fund Ltd (BRK) Q4 2007 Earnings Call March 19, 2008 2:00 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Brick Group Income Fund conference call, quarter and the year end 2007 results. (Operator Instructions) For your information, this call is being recorded on Wednesday, March 19, 2008 at 2:00 pm Eastern time. A replay will be made available starting later today.

As a reminder, certain information provided this afternoon may be forward-looking and based on assumptions and anticipated results that are subject to uncertainties. Should anyone or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may differ significantly from those expected. You are advised to view the risk and uncertainties section filed in the Fund’s public filing to Securities Administrations for more details.

I will now turn the meeting over to Mr. Kim Yost, President and Chief Executive Officer. Please go ahead, Mr. Yost.

Kim Yost

Thank you operator. Thank you for joining us this afternoon. Joining me here today is Mike Borys, our Chief Financial Officer; Paulina Hiebert, Vice President of Legal and Corporate Secretary and Ron Barbaro, our Chairman.

We trust you have seen our press release issued by CNW last night and our quarterly report to unit holders which was also released last night on our website.

We are pleased to report to you the results of our fourth quarter and full year performance for 2007. 2007 was an exceptional year and I will briefly touch on some key highlights of our performance for the year and for the fourth quarter and Mike will continue our discussion with an overview of our financial results.

2007 was the strongest year ever for the Brick Group since its inception over 36 years ago. Through the entire year we focused on driving past our sales and EBITDA targets. Our record consolidated sales and operating revenue were in excess of $1.4 billion and when you combine sales at our franchise locations we had nearly $1.6 billion in total sales.

We reached an adjusted EBITDA of $89.9 million. Our payout ratio for the year was 88%. This represents an improvement of 8.7 percentage points over the last year.

Our fourth quarter consolidated sales and operating revenue of $409.1 million represented a 7.8% increase over the prior year driven by same store sales growth of 6.3% which marked the eighth consecutive quarter of positive same store sales growth. We simply continued our focus on driving sales and maximizing our customer satisfaction.

Gross margins for the quarter reflected increased margins in all our main categories which most of them offset the small year-over-year shift in mix towards lower margin electronics. Consolidated C&E for the second quarter in a row was below our prior year levels as a percentage of sales. Strong sales allowed us to leverage our fixed operating costs and take advantage of our improved supply chain management.

Surpassing the record set in third quarter, the fourth quarter EBITDA of $27.9 million was our highest ever reported. We continue to drive the benefits of our prior year key strategic initiatives while growing our store sales base of operations to the next level.

I would like now to turn the call over to Mike so that we can get an expanded overview of our financial results. Mike?

Michael Borys

Thanks Kim and good afternoon to everyone. My overview will refer to our fourth quarter 2007 press release that ND&A issued yesterday which are both available on our website.

For the fourth quarter consolidated sales and operating revenue increased by $29.4 million to $409.1 million. This represents a 7.8% increase over the same quarter a year ago. The increase was due to a retail sales increase at $26.3 million and a financial services revenue increase of $3.1 million.

Retail sales growth of 7.1% was driven by same store sales growth of 6.3%, an additional sales from new stores. As Kim mentioned this was our eighth consecutive quarter of positive same store sales growth. Same store sales growth which was strong in both Eastern and Western Canada was driven by a strong promotional calendar supported by improved supply chain management as well management strategically increased inventory levels to drive cash and carry sales of electronics which are in a high demand during the holiday sale season as well as improve delivery on our financial statement.

Our strong fourth quarter results were driven by more effectively executed against strong written sales as we continue to take advantage of our new distribution center infrastructure and optimize operational efficiencies. As we progress through 2008 we believe that we are well positioned to continue to leverage our distribution infrastructure and expanding store base.

Financially services revenue increased of $3.1 million was driven by organic growth and growth in our third party business. The amounts of warranty and insurance premiums written by the financial services segment in the fourth quarter of 2007 was $20.5 million compared to $18.9 million in the same period of 2006 reflecting an increase of 8.4%. On December 31, 2007 Trans Global Insurance’s contract with a third party client matured and was not renewed. This third party accounted for like 5% of premium written for the financial services segment in 2007. As third party insurance business delivers a lower gross margin in the Brick business, the impact of not renewing this contract will not be significant.

Consolidated gross margin increased by $14.3 million or 9.6% when compared to the same quarter in 2006. As a percentage of sales gross margin increased to 39.9% from 39.3% in the same quarter a year ago. Gross margin for the quarter was positively impacted by higher gross margins in all our main categories which more than offset a small year-over-year shipped and mix towards lower margin electronics.

The increase in our mix of appliance from electronics has been driven by strong market demand for flat screen TV’s and over the longer term has also been impacted by the re-battering of a number of united furniture stores to Brick stores. Our mix of appliances in electronics is typically highest in the fourth quarter during the holiday shopping season.

As discussed during the third quarter webcast, the strength of the Canadian dollar has not impacted margins significantly. The Brick routinely adjust its prices to offer lower more competitive prices for our customers and this includes lowering prices on those goods were our cost is impacted by the strength of the Canadian dollar.

SG&A expenses were $9.2 million higher then in the same quarter of a year ago. The increase reflects a cost of these stores which have increased our fixed occupancy cost by approximately $2 million as well as other fixed cost including compensation which have increased by approximately $2.5 million. The balance of the quarter-over-quarter increase in SG&A expense of approximately $4.5 million was driven by increased sales volume. This marks the second quarter in a row that consolidated SG&A as a percentage of sales was below prior year level and strong sales in the quarter allowed us to leverage our fixed operating cost.

For the quarter consolidated net income increased $8.0 million or 54.5% to $22.6 million compared to the same quarter last year, $6.3 million of this increase was attributable to strong sales and gross margin in the retail segment. Consolidated EBITDA increased by $5.4 million to $27.9 million from $22.5 million in the same quarter a year ago. Our record result was due to the combination of strong sales and optimization of our supply chain.

Retail segment EBITDA was $19.8 million. This is the highest that Brick has generated in one quarter since its inception. EBITDA as a percentage of retail segment sales and operating revenue increased by 0.4 percentage points and was $2.8 million or 16.6% higher than in the same quarter a year ago.

Financial segment EBITDA of $8.1 million was up $2.6 million or 46.1% from the same quarter of last year.

For the fourth quarter the Brick Group earned adjusted EBITDA of $29.7 million compared to $25.3 million in 2006.

Our distributable cash per unit of $0.47 in the fourth quarter increased $0.07 or 17.5% when compared to the same quarter in 2006. Our distributable cash payout ratio for the year was 88.0%. We had our strong performance in the second half of 2007. We improved our payout ratio by 8.7 percentage points from last year. The management is pleased with the improvement in the payout ratio which again was positively impacted by our strong third and fourth quarter results. When applying the alternative view the payout ratio for the year was 88.8%.

I would like to make a note with respect to the subordination arrangements of the Class B units. The Brick Group has exceeded the financial test required to terminate the subordination arrangements of the Class B units currently held by William Comrie. The subordination of the Class B units ended upon the approval of the Brick Group’s 2007 audited financial statements. Cash available to make distributions will now be paid monthly due to holders of Class A unit and holders of Class B units pro rata. The Class B units are exchangeable for Class A units of the Brick Group on a one-for-one basis at the option of Mr. Comrie.

During the fourth quarter of 2007 the Brick Group began providing customer retail financing on a limited basis. Qualifying customers are required to make regular schedules, monthly blended payments of interest and principal. Management believes that this program will offset potential risk of reduced credit approval rates for the Brick Carter by our third-party credit providers as well as take advantage of strong customer demand for our products and Brick Financing.

And now for an overview of our results for the full year.

We are pleased to announce that consolidated sales and operating revenue increased by $119.3 million to $1.4 billion, a 9.0% increase when compared to 2006. The increase was due to a retail sales increase of $106.7 million or 8.3% growth and a financial services revenue increase of $12.5 million representing 34.3% growth. The retail sales increase was driven by same store sales growth of 6.4% and sales from new stores.

The 2006 rebannering initiative has exceeded our expectations and same store sales increased as that the rebannered United Furniture stores have been among the highest of all Brick stores. As well, the remaining United Furniture stores are performing exceptionally well with the management function now fully integrated under the Brick management team.

There have also been significant improvements in sales at the Brick Superstores, previously HomeShow and the Brick Mattress stores, previously Sleep Better. Strategic initiatives in Quebec including new stores and more locally developed marketing have had the effect of increasing our market presence driving sales and expanding market share.

The financial services revenue increase was driven by organic growth and third-party business which accounted for approximately 17% of the increase in sales and operating revenue. Gross margin increased by $52.5 million or 9.9% when compared to 2006. As a percentage of sales, gross margin increased to 40.1% from 39.8%.

SG&A was $504.6 million compared to $462.5 million in the same period last year. SG&A as a percentage of sales was up 0.1 percentage points to 34.9% from 34.8% in 2006. As mentioned earlier, new stores and the distribution buildup have increased our fixed cost.

Consolidated EBITDA increased from $68.0 million to $80.7 million, an 18.7% increase over the same period last year. Adjusted EBITDA for the year was $89.9 million, up 13% from $79.5 million in 2006.

Maintenance capital expenditures for the year were $6.2 million and growth capital expenditures were $9.4 million net of tenant inducements.

I will take this opportunity to mention that in 2008, management will begin to formulate its tax planning strategy as it relates to the fixed tax and does not anticipate any specific action to convert from an income fund in 2008.

The Brick Group also announced today that it has secured commitments from its existing syndicate of lenders to refinance operating credit facilities of $100 million for a three year term. Closing of the refinancing is subject to the satisfaction of customary conditions and expected to occur on or about April 15, 2008.

I will now the discussion back to Kim for his closing remarks.

Kim Yost

Thanks Mike. Well, we are excited about our record fourth quarter and our year end results. By returning our focus to management basics at the start of the year we improved our results in key revenue and expense line items. As indicated earlier, we continue to focus on driving our sales and maximizing customer satisfaction. We look forward to carrying our momentum into 2008 as we continue to drive the benefits of our prior year’s strategic initiatives while growing our store and sales base of operations to the next level.

As we have stated in the past management continues to believe that geographic and economic diversification of the Brick Group will allow us to remain competitive both in the short and long term and we are well positioned to succeed against potential economic and competitive challenges in 2008.

2008 has already got off to a great start with grand openings. We have already opened two new Mattress stores, one in Richmond Hill, Ontario and one in Leduc, Alberta. As well there is another one scheduled to open right here in Edmonton, two days from now.

We have also rebannered four United Furniture locations to Brick stores; two Alberta, for Saskatchewan and Leduc; one in Pitt Meadows, British Columbia and one in North York, Ontario. And last but not least, we have expanded two of our Brick stores in Ontario, one in Bradford and the other in Hamilton.

Lastly on behalf of the Brick team, we thank everyone for their continued support of the Brick Group and I would like to publicly congratulate our entire Brick team for an outstanding and terrific 2007. Our customers have voted with their support that we are doing all the right things. Great job, team and with that being said I would like to turn it over for our ending comments to our Chairman, Mr. Ron Barbaro.

Ron Barbaro

Thank you Kim and good afternoon everyone. On behalf of the Board of Trustees I welcome the opportunity to share our enthusiasm for the results achieved by Kim and his team for 2007.

On reflection, I would like to go back to the date of our IPO when we made a commitment to our shareholders to ensure a monthly distribution of $0.10 per share and have delivered on that commitment for the last 44 months, a total of $250 million.

Plus, during that period, we have invested in our future by using $51 million of growth capital to open, coast-to-coast, 40 new stores, rebannered, relocated, renovated, franchised, a total of 79 stores while opening three new state-of-the-art distribution centers increasing our net warehouse capacity about 500,000 square feet.

On a national scale since the IPO the market place in our category has grown by 21% while the Brick has grown by 23%. Now you must agree this is a wow! management team and I applaud them. Kim, the board also congratulates our buyers who travel the home furnishing world seeking variety and value for our valued customers. We also thank our many business partners which includes our top product brands. On behalf of myself as a share holder and my fellow share holders I would also like to thank the Brick team not only for the 2007 results, but for also building a solid business base for unlimited future growth. Mr. Operator we are open for questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Tom Woolly from RBC Capital Markets. Please go ahead.

Tom Woolly - RBC Capital Markets

Hi good afternoon.

Kim Yost

Hi Tom

Tom Woolly - RBC Capital Markets

I was wondering if we can talk a bit about the inventory situation. It was up significantly over where you had it in Q3 and we are up significantly wherever we were in Q4 last year. Just talk to me a bit about the plan in terms of how you see that sort of falling down over time.

Kim Yost

Okay Mike we will give you some color on that.

Mike Borys

Now, the inventory level at the end of Q3 and we spoke about this during our webcast in our NDNA was good news for us directionally, it was also operationally at the right level for Q3, it was reasonable, it is reasonable to assume that we would have taken levels of this support our year end sales volumes for Q4, so we did crank it up somewhat and get it to the levels that we got it to at the end of the year. It was a very conscious decision to further support delivered sales, drive customer satisfaction. With the increase in our total and same store sales grow that we realized we can see that strategy worthwhile for us. So again without getting into -- so in terms where we ended the year we ended where we expected to be, we knew that we had to come in with higher inventory levels. Looking forward into Q1 2008 and again I am not going to be getting into forward-looking information, the plan was and remained always to be that we would take those inventory levels down to seasonally normal levels for the end of Q1 in a controlled fashion through reduced measured buying actions. So, again I guess the net of the answer we executed again to our plan with respective inventory levels with a view to drive sales in the fourth quarter.

Tom Woolly - RBC Capital Markets

And what were the main categories where you bulked up on.

Kim Yost

Bigger category where we would have bulked up would have been electronic and again we -- with respect to driving sales in the stores we expected to drive more cash and carry sales and we saw the benefit that realized in especially in the month of the December.

Tom Woolly - RBC Capital Markets

I just -- the only reason I ask is because its sort of the level kind of in excess of your square footage growth over the past year and I am wondering like do you really feel I -- like it’s the question of having stuff in stock in order to drive the sales, like do you sort of see yourself may be caring a bit more inventory on average going forward.

Kim Yost

Again I think what we are trying to do with Q4 and we learn every year we are trying to ensure that given the demand we see over the past number of years. We knew that we can optimize delivered sales by having the product and there is -- we are also aware of the greater demand, the greater demand for the flat panel TV’s, those kinds of electronic products, so we wanted to be sure that we had certainly that inventory on hand so people can literally buy it and walk away with it. We are also conscious of offshore and given Chinese New Year we know that there is always going to be that break in the month of February with respect to receiving product. So we again we wanted to ensure that we have the product in hand and just learned from the high demands we have seen in the previous years.

So, I don’t think it speaks to where the levels will be in Q1, Q2, Q3 but it does speak to being at a higher level certainly for the fourth quarter. So one thing I can hitch hike on to Mike’s comments is as you know we are one of the only Canadian home furnishing retailers that promotes same day delivery with that massive infrastructure that we put in place in 2006, but we’ll share with you is that whether its electronics or right through our furniture categories. The same day delivery where you buy it today and enjoy it tonight is a key strategic initiative of our marketing and merchandising programs in the inventories that Mike was referring to help support that for the fourth quarter we are all about same day delivery.

Tom Woolly - RBC Capital Markets

Okay and its fair to say your in-stock position than execute on that as significantly better than it was say a year or two years ago.

Kim Yost

Yes you could certainly say that.

Tom Woolly - RBC Capital Markets

Okay and just to touch on bringing the installment financing question. Do you have an idea how much sort of exposure you are willing to take on at this point? I know you mentioned you discussed it with the board. Can you give us a sort of an order of magnitude?

Kim Yost

Mike?

Mike Borys

Again on the installment financing, we thought -- the Company got us opportunity to drive more sales in a controlled manner. As we talked about in our NDNA we are managing the risk end of the program. We see that it turned out to be a good act and a great action of in light of potentially reduced approval rates from our lenders which we also speak about in our ND&A. Having said that, with respect to the potential for reduced approval rates, our credit sales penetration continues to improve again signaling the ongoing strength of our Brick part, so with respect to the whole program we intend and we speak to how the level of receivables are under a $100,000 at the end of the year.

Our intent is we are going to grow those receivables. I don’t necessarily want to get into what level other than its part of our risk management program. We have set a preliminary sealing, a preliminary sealing at which point we will review the program, take a look at its risk profile, take a look at its profitability and it’s that whether we move on to the next higher level. Again, given the environment and everything that everybody is reading in the papers we will continue to be reviewing this program on a regular basis. So does that answer your question?

Tom Woolly - RBC Capital Markets

Like I am trying to get a sense of is it -- are we talking in the tens of millions or we are talking in like less than $10 million that you think you would see.

Kim Yost

I think coming at it, it’s going to get competitive. I mean we are going to keep it at a level that we can manage where we are certainly not talking hundreds of millions of dollars. So we are not talking about a $100 million. I will certainly tell you that but I don’t want to get into a specific number. I think we do see that as a competitor. We see this again it’s a great opportunity, we are saving sales, so we are getting the pull through on countering those sales and we are going to be getting the administrative fees and interest costs associated with those sales, so again given the demand that we are seeing. We just see it as a great -- another avenue to bring those sales in.

Tom Woolly - RBC Capital Markets

Okay, and the -- I would assume it’s fair to say that the incremental number of transactions you would pick up as a result of offering this financing is not -- it’s not a -- it’s nothing of on the order of like 10%. It’s probably -- we would be talking a few hundred basis points in terms of the number of transactions you would pick up?

Kim Yost

It’s really not 10%. I think as we continue through 2008, we will continue to provide guidance just because of the topic, we will continue to provide guidance in terms of where we are on the program but it’s not 10%.

Tom Woolly - RBC Capital Markets

Okay, great, thank you very much.

Kim Yost

Okay.

Kim Yost

Thank you, Tom.

Operator

Your next question comes from Sophia Taylor from TD Newcrest. Please go ahead.

Sophia Taylor - TD Newcrest

Good afternoon. Just a quick follow-on question for the retail installment financing program -- just curious, have you seen a significant change in approval rates already this year?

Kim Yost

No, we haven’t, Sophia. We’ve had that indication that we might be seeing it but our credit sales penetration continues to go up. There is a strong demand for our products, strong demand for the Brick card and our financing. So again, we see it -- although part of the thinking behind it was defensive -- it really is turning into more of an offensive tool for us by introducing the program.

Sophia Taylor - TD Newcrest

Okay, great. Another follow-on, actually on the cash and carry sales. Is it reasonable to think that some of your sales may have been pulled forward from Q1 ’08?

Kim Yost

Sophia sorry, do you want to repeat that question?

Sophia Taylor - TD Newcrest

Yeah, no -- just because you actually have the inventory on hand and then are you able to record the sales in Q4 ’07 as a result of the cash and carry program and inventory build that you created. Just wondering is it reasonable to believe that your Q1 ’08 sales may have been pulled forward a quarter to some extent?

Kim Yost

I don’t think you can make that assumption. I think what you can make assumption is that from a competitive perspective, we took market share in the month of December and particularly in Q4. Without giving you any specifics as to how we are performing this year, we can tell you that there has been no impact in terms of the successive results for 2007 in Q4. We did everything that we planned to do and we said earlier, same day delivery, bulking up of electronics particularly in the flat panel TVs, was a strategic initiative which paid off for us and there isn’t really much else we can give you.

Sophia Taylor - TD Newcrest

Okay, great. And on the reserve reversal that occurred in the financial services segment. I am wondering if you can attach a number to that. Can you quantify what they were in the quarter, please?

Mike Borys

In the MD&A discussion, on the change in the claims reserve where we had indicated -- what I can't indicate is the main driver in the change in that EBITDA as a percentage of revenues was the reduction in our claims reserves. So when you look at 60% versus 54%, the biggest piece of that is the change in the claims reserve for the quarter. What I would say is that all claims reserve we capture as we could call it for the year -- if you look at the year as a whole, those amounts are roughly the same between ’06 and ’07. There was just a little bit of a -- a slight increase in Q4. Again that was driven by a couple of things. One of the items is an ongoing as we always do, ongoing review is a long-term trend in the stability of historical claims experience and then the other aspect is we do have a new business agreement amendment with one of our clients which decreases our claims exposure going forward. So our risk profile has come down and that was a key driver in allowing us to bring back some of the clients reserve.

Sophia Taylor - TD Newcrest

Okay if you had those recapture amount so in ’06 and ’07. I mean is that reasonable -- is it reasonable to assume that that continues then in ‘08 or are we at a run rate now that it’s likely going to continue.

Kim Yost

No, if the run rate is going to be -- the run rate will be impacted by a continuing review of what our risk experience will be with respect to the amendment to the agreement, yeah that would not -- that components of it wouldn’t be part of the run rate. But I don’t want to get into what specifically would the run rate be or what would the amounts be going forward into 2008, but it’s certainly an impact.

Sophia Taylor - TD Newcrest

Okay, Kim you have given us some color on where I think seven of your new stores are coming from or will be rather in 2008. Just wondering about the -- I think it’s another 12 stores in your outlook statement that our expected in ’08. Where you plan on them being opened I suppose geographically.

Kim Yost

Well, from a competitor specific we can’t give you too much information as to where and when but I can tell you this -- we have one exciting new store in BC and we are looking forward to that and it will be in the lower mainland of Vancouver. We have got a terrific new store planned Calgary which we have been waiting for a period of time and then we’ve got a serious of other filling stores in markets right across the country. So -- but there is just two locations that we are really keen for given the look and feel of that market and the potential and that’s one in the lower main land of Vancouver and in Calgary.

Sophia Taylor - TD Newcrest

Okay and then thank you.

Kim Yost

Thank you

Operator

Your next question comes from Carolyn Bennett from National Bank Financials. Please go ahead.

Carolyn Bennett - National Bank Financials

Hello

Kim Yost

Hi Carolyn

Carolyn Bennett - National Bank Financials

I just I have some follow on questions. I guess just with the installment plan I think. I am wondering if you can -- I’m coming at it a different way. I am just wondering if you can tell us or give us an indication of what percent of non-approvals you have right now. I mean with the third party providers.

Mike Borys

No, I mean I am not going to be able to get into that level of detail. If I -- we wanted to make sure that we spoke about the retail -- the financing program just to remind everybody. It’s very early into the process. It’s new, but it is something we wanted to give disclosure for. It is our intent to grow it. We do see it as a positive -- we obviously the risk and demand it will be in EBITDA driver for us and at the same time it provides an opportunity for our customers to buy product from us, but I certainly don’t want to get into specific as to what the approval rates are.

Kim Yost

I think the key thing here to be noted is that we’ve got our Brick Platinum Card well positioned for the greater percentage of our customers. The Brick line credit actually addresses a segment of our customers who require this as a service and that’s really key. I guess the best way to describe is we are adding an additional service to a segment of the customers that would like to buy from the Brick and this particular program that Mike and his team have developed services that segment and we are just going to continue to manage it through 2008 and I think Mike mentioned earlier, in a post situation where we announce our Q1 and beyond we can you some update as to its materiality.

Carolyn Bennett - National Bank Financials

Okay and next just on the retail side, you are talking about the margin, the gross margins up and then I was assuming it was due to the dollar and just is there anything else driving it because you said in your earlier comments that the dollar didn’t really have much of an impact.

Kim Yost

Well, from our perspective as you know from previous calls and everything that we produce is that it’s all about driving up our mix of furniture and mattress and expanding our specialty mattress chain etcetera. So from the perspective of selling more furniture and mattresses and from a mix perspective, that certainly has had a bearing. The challenge that we faced is offsetting that with the success that we had with our traffic, electronics and particularly flat panel TVs that unfortunately don’t carry the same margins due to competition. So I think there is really the shift of mix, we are expanding our mattress stores, the UFW stores as Mike said are doing phenomenal, but we rebannered UFW stores which are now Brick stores are doing phenomenal and they are selling a lot more furniture and mattresses. So those are all positive contributors.

Carolyn Bennett - National Bank Financials

Okay, so it was an overall increase, it wasn’t on in each category, it increased -- that’s how I read it. I think I misread it.

Kim Yost

No, that’s a good conclusion.

Carolyn Bennett - National Bank Financials

Okay, that’s it for me. Thank you very much.

Kim Yost

Thank you.

Operator

Your next question comes from Kathleen Wong with CIBC World Markets. Please go ahead.

Kathleen Wong - CIBC World Markets

Good afternoon gentlemen and congratulations for the strong quarter.

Kim Yost

Thank you.

Kathleen Wong - CIBC World Markets

Just wondering if you can comment on the competitive landscape. Did you find a lot more competitors in this past quarter and also what’s your expectation going forward this year given the current market softness?

Kim Yost

Well, when you think in terms of the fourth quarter, I don’t think it was any difference in Q4 as there was in Q3, Q2, and Q1. For years we have been facing the competitive landscape and have come out on top. Here is what I will share with you. It’s made us better. With the introduction of Best Buy and the introduction of a number of other competitors into the marketplace, Lows example, it has allowed us to understand the strategic importance of the changes in things that we have done in ’06 and now into ’07 and quite candidly it’s made us better as merchants. Our stores are looking better, our product mix is better, our marketing is far more focused in terms of our target customer and I would say that in this stage and in particular I looked at the Q4 results, we are in the top of our game. So I don’t believe the competitive landscape has changed. I believe that we have changed and I think that the team is really focused on the key drivers. As we have said in our comments earlier, in driving same store sales and taking advantage of the infrastructure buildup that we went through for the last two years.

Kathleen Wong - CIBC World Markets

And in terms of the market softness this year -- are you planning to be more promotional this year to deal with the market softness?

Kim Yost

Well, we have had many discussions regarding where the market may go. That’s still to be determined. I will share one thing with you Kathleen. If there is one brand that is so well positioned to the economic challenges and particularly geographic challenges because we have got stores from Halifax to Victoria closing the year off at 210 locations, nobody, but nobody is well positioned from a price point of view to deal with whatever comes our way economically. We are value price positioned. You just have to go to brick.com and take a look at our lineup and our price points to know we are number one when it comes to offering the very, very best value from a price point of view and history in there -- 36 years have proven that if there are economic challenges we fare very well because that we are well price positioned and that’s sort of going to be our key strategy for this year.

Kathleen Wong - CIBC World Markets

Okay, and in terms of the mattresses business can you give us a little bit more color on how you it does in Q4? Were the comps in mattresses were positive in the quarter?

Kim Yost

We haven’t been breaking out the segment of our comp store sales. We can tell you that we are very pleased with our mattress results. We have expanded our specialty chain and believe with the store opening in two days that will bring us to 35 locations for our specialty chain. We have had really good growth with our United Furniture mattresses which have actually been very surprising on a positive nature and so without getting into specifics you can only assume with that 6% plus increase both for the quarter and for the year and having to understand that mattresses are big part of our business, you can pretty much equate that we’ve had a good year from mattress sale.

Kathleen Wong - CIBC World Markets

Okay and then on your new store openings, understand that your opening five corporate Brick stores and then 10 franchise Brick stores, any reason that you are opening more of the franchise stores compared to the corporate stores?

Kim Yost

Well, it has a lot to do with availability of locations and opportunities. When you got 210 stores from coast-to-coast our real estate division will tell you that you got to be very selective in terms of where we put our fill in stores. In the franchise opportunity we’ve got far more future market opportunities and we call it super world areas than we do in our natural areas which is what we have been talking about in terms of our stores going forward, so that’s where you see the difference. What you are going to experience from the Brick going forward in terms of our growth of our new stores is that they are going to be well positioned in the markets where we know we can get the returns base on our past ROI’s and they are going to be very selective in terms of their location and when you come to realize the store that we open up in Calgary and what you see what we are going to in Vancouver, mainland you will know exactly what we are referring to.

Kathleen Wong - CIBC World Markets

And what’s your expectation of the return on investment payback period for these new stores that you are opening?

Kim Yost

But we haven’t given that information. We can tell you that we are pretty pleased with all the re-bannered monies that we’ve been spending and we can certainly can tell you that our stores, they performed in same manner, so generally speaking we prepare business cases for all our growth capital initiatives, we do post analysis with our planning team and we share that with our internal management and our trustees and we are very happy with where we are spending our money.

Kathleen Wong - CIBC World Markets

Okay and just a question on the new fields to charge on the container shipments, because I understand that beginning on January 1, the shipping companies are charging a fuel surcharge which is more than doubled, say for 40 foot container minus any cost that’s increased from above $455 to $950. So, how much here is this going to hurt your gross profit margin. Isn’t that you purchase the bill I guess once they’re office furniture from Asia.

Kim Yost

Kathleen, one of the things we have always commented about is that whether there is an increase in surcharge for container movement or whether its inland freight etcetera, we have a level playing field of all our competitors. So, we are not disadvantaged uniquely because of the situation, but we can tell you that we have looked to offset with pricing negotiations through our increased volume, with our ability to offset inland freight in our distribution network but we got our supply chain management. We have been able to offset a considerable amount of increased cost to our landed component and at this stage our customers shouldn’t expect any adverse effect on our flow through for pricing. We are going to incredibly be competitive as we said earlier in 2008 and the increase that you describe specifically, if they haven’t been offset in one component, we’ve been looking to offset them in a number of others and what we call our landed cost equation.

Kathleen Wong - CIBC World Markets

Okay and just on my last question. I understand that Wal-Mart Canada on Monday they launched a first ever product extended warranty program. Any comments on that?

Kim Yost

Well we certainly have studied it and we had examine those. You know the warranty business is a big part of our success, we service everything we sell. One thing that we did come to realize is that if you take a look at their program it’s very consumer involvement intensified that the consumer literally has to do it in a self served manner and when you take a look at the way the Brick handled it it’s far more friendly and a lot more efficient in terms of how it gets itself concluded and so we would like to think from a performance point of view we are very competitive. From a costing perspective, we have nothing to be concerned about. We are in terrific shape with the Brick warranty program as it compares to their pricing.

Kathleen Wong - CIBC World Markets

Okay. That’s great, thank you very much.

Kim Yost

Thank you.

Operator

The next question comes from Sophia Taylor from TD Newcrest. Please go ahead.

Sophia Taylor - TD Newcrest

Thanks, just a few follow-up questions with respect to I suppose the roughly 40% retained interest that is now completely unsubordinated. Just wondering if there has been any void one way or another on what is the plan with that interest.

Kim Yost

We haven’t heard -- if your question is specifically to what Mr. William Comrie may be planning to do, I can't comment on that at this stage.

Sophia Taylor - TD Newcrest

Okay, it’s perfect. Next, just in terms of -- we have got 210 stores at the end of ’07, potentially 229 by the end of ’08, market saturation potentially being an issue, what would the plans be for the Brick potentially expanding into the US ever?

Kim Yost

Well, the one key thing that we want to share with our listeners and particularly our shareholders is that when we still have single digit market share as great as the results were for 2007 and as amazing as it can be, believe that we are at $1.6 billion when you had franchise sales. We are still at just over 8% market share. We still got 90% plus market share to get within Canada and we can't give you specifics as to looking south. We obviously talk about it, we look at it. There has been -- that’s been going on for years but right now for this year and for the foreseeable years that we can see, our focus is on the Canadian market and to gain our market share through all the things that we are focusing on.

Sophia Taylor - TD Newcrest

Great, thank you and then last question is just on the commentary provided with respect to SIFT tax planning. I understand that our conversion is not likely in 2008 to corporate structure, but just wondering what type of planning activities does it entail then for you again in 2008?

Mike Borys

Mostly all that we would be doing at this point is talking to our consultant -- I probably characterize it as planning meetings. I think in 2007 what we had commented on is we were doing just a lot of listening and getting information update on what our options were. I think we have to step it up a little bit in 2008 and actually have those kinds of planning needs to begin mapping out what the different options would be. That would be about it and that’s why we are very confident and nothing would be forthcoming in terms of a conversion or a specific action in 2008, it’s still very preliminary.

Sophia Taylor - TD Newcrest

Okay, great. I do have one last question. Mike, just wondering about replacement.

Michael Borys

In what respects?

Sophia Taylor - TD Newcrest

In terms of the hunt for Mike’s replacement.

Kim Yost

Well, we can tell you that there is a keen interest and Kim and I have been kind of kibitzing back and forth over the last little bit a while that in terms of Alberta and particular Edmonton that although we had a harsh winter there is still lots of people that are keen to move to the province and move to city and Mike’s very active in supporting us in that replacement and the moment we have got an announcement to make we are certainly going to share it with everybody but we are making good progress and so far everything’s working out just as planned.

Sophia Taylor - TD Newcrest

Okay, thanks very much.

Kim Yost

Thank you.

Mike Borys

Thanks.

Operator

(Operator Instructions) Your next question comes from Will Bower from Moment Research Center. Please go ahead.

Will Bower - Moment Research Center

Hi guys. Just a very brief question for you. I have been following you for -- I don’t know the last few years, more or less, since your IPO and one think that continues to impress me about you is that you generally by and large deliver on what you say you are going to do. You have done a very good job and I think this most recent results are in line with that. The stock has not faired well in spite of that and I am wondering if you have any plans to try and tell your story perhaps a bit better to people in Toronto or elsewhere.

Kim Yost

At the end of each quarter Mike and I go on to a like a mini road show. I guess the best way to describe it where we will meet with unit holders that currently have the break and future unit holders. We are actually planned to do this next week so we will be in Toronto for two days and we will be talking and chatting on a one-to-one basis with a number of current and potential unit holders. We are perplexed to be quiet candid with you. We’ve had an outstanding year, there was nothing wrong with 2006 and as Ron Barbaro has mentioned we have issued over $250 million worth of distributions over 44 consecutive months. We have delivered on everything that we said we would in our initial take in July 2004 at the IPO and so to tell you that we are happy with where the Brick units are trading, we are not. Are we are going to continue to perform at a high level in 2008? Well management believes that we are putting every effort to do so and that the market will respond to us favorably in the weeks and months to come and that’s about as much as we can focus. We will tell you that we focus not as much on our unit value as the performance of results and, we concentrate on putting all our time, money and effort on ensuring that we do the very best for our share holders to meet our obligations and outperform the previous quarter results. So the focus is all about the business.

Will Bower - Moment Research Center

Okay thanks very much.

Kim Yost

No, thank you and appreciate your positive comments.

Operator

Your next question comes from Tom Woolly from RBC Capital Markets. Please go ahead

Tom Woolly - RBC Capital Markets

Hi, I just wanted to ask a one more quick question about the competitive landscape. Is there -- do you think Kim there any sort of weakness in the market out there that might be on the verge?

Kim Yost

Well, I think that the consolidation will continue. We’ve seen signs of it through 2007. I don’t think that that will change. The market share gainers will continue to grow and gain market share and I believe that in part that that will come through consolidation. I can’t tell you specifically that I know of any small or medium size retailer that is on the verge from a retail perspective. I will tell you that our franchise division is looking to give opportunity to the super real markets to strengthen people. So, it’s our Vice President franchising is actively chatting and talking with people that if they find themselves in a situation with their current brand but they can’t benefit from the volume behind, they don’t have the type of marketing trust and they don’t have the brand awareness, we are certainly prepared to convert into a big franchise store. So we got that vehicle for a lot of people to take a benefit of hooking onto to one of candidate’s number one brands in home furnishings.

Tom Woolly - RBC Capital Markets

Okay, that’s great thank you very much.

Kim Yost

Thank you.

Operator

There are no further questions at this time. Please continue.

Kim Yost

Okay well thank you very much listeners and thanks for the great questions from our analysts. Well once again we want to congratulate the Brick team for an outstanding year. From stock room to board room we focused on our key initiatives and we executed against it, so we want to thank our team and I will tell you we can’t thank them enough and the only last point that I want to make and I appreciate the comments that came from the analysts from a positive point of view is that the business fundamentals that make up the Brick program and the Brick groups programs are strong and our customers have proven that in the results for 2007. Thanks everyone.

Operator

Ladies and gentleman this concludes the conference call for today. Thank you for participation. Please disconnect your lines.

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: Brick Group Income Fund Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts