Scott,
Got a call back from Ron Lester today. He was able to answer some of my questions - I will try to post the salient points here.
1. Cash flow being consumed by working capital. Ron acknowledged that they have always used a line of credit with the bank to finance working capital. This has been GDL's practice since Ron has been with the company in the early 1980s. Most of the dramatic increases in working capital requirements over the past year have been associated with their expansion out west and into the US. Ron stated that you can expect this to continue over the next couple years as they continue to expand. He also stated that Q1 and Q2 (particularly Q2) are the worst quarters as this is when they build up inventory for the summer months. I also asked about the extent of the credit facility. Ron stated that they still have room left even with $50M outstanding debt on their line of credit, and that this is re-negotiated with the bank every year.
2. Dividends being financed through bank line of credit. Ron stated that decisions regarding dividends were made by the board of directors of the company. He admitted that you could argue that they were borrowing money to pay dividends, however that paying dividends was a practice that the board view as a way of rewarding shareholders. I immediately followed up with a question of what percentage of shares were held by insiders. Ron stated that the Goodfellow family owns just over 50% and Stephen Jarislowsky, Chairman of the Board, owns 10.5%. The remainder of the shares are widely held.
3. Exchange rate impacts on margins. Ron stated that GDL is still a net importer, even with their expansion into the US, and therefore they are hurt by the low US dollar. They do use forward contracts to hedge the dollar, but they were caught by surprise at how low the dollar went at the end of last year.
4. Financial impacts of expansion etc. Ron was unwilling to provide specific forecasts on revenue or profit based on expansion plans. 60% of their revenue is from outside Quebec, and that number is growing. I also asked about the impact on Q2 financials of the ice storm. Ron also downplayed the impact. GDL had two weeks when they were working round the clock producing cross-arms for Quebec Hydro, but the ice storm also cost them some downtime. Ron is still reviewing the financials - he said they would be released this Friday! (Note: after getting of the call, I realized that this seems awful soon to be releasing Q2 financials, I wouldn't have expected them until April. Oh well, I'm only repeating what I heard).
5. I also asked about whether GDL actively promotes the stock to the investment community. Ron stated that they do not, and acknowledged that the stock has always been and continues to be relatively undervalued. However, the stock is thinly traded, perhaps too thin to excite the investment community, and thus Ron feels that it is unclear what return one could see from a Bay Street dog & pony show.
Well, that is all for now. Ron was very approachable and easy to talk to if anyone wants to talk to the company with any questions they may have. At this point I have been debating between buying LER.B and GDL, but am leaning towards LER.B based on similar growth but increasing margins versus flat or decreasing margins for GDL. In fact I had a bid in on LER.B last week, but got caught in the stock runup and my order never got filled. Oh well, c'est la vie. Win some, lose some.
Gord |
