艾利丹尼森 (AVY) 2001 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Paxar Corporation quarterly earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. If anyone should disconnect, and need to rejoin, please dial 1-877-817-7175. And, as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your Host for today's conference, Ms. Vanessa Schwartz, of FRB Weber Shandwick. Ms. Schwartz, you may begin.

Thank you. Good morning everyone, and welcome to the fourth quarter conference call for Paxar Corporation. You should have all received a copy of the press release this morning. If you did not, please call Thomas , at FRB Weber Shandwick, at 212-445-8459, and we will send one out and confirm you name on either the fax or e-mail list.

Now, I'd like to introduce Mr. Bob Powers, Vice President of Investor Relations -- Bob.

Thank you Vanessa.

Good morning, and welcome to Paxar's fourth quarter and year-end 2001 conference call. On the line from management will be Arthur Hershaft, Chairman, Paul Griswold, President and Chief Executive Officer, and Jack Plaxe, Senior Vice President and Chief Financial Officer.

This morning, before the market opened, Paxar reported fourth quarter and year-end 2001 results. Management will now provide additional commentary on those results, as well as a look to the future. At the conclusion of that commentary, any questions you have may be addressed to management.

Please be advised that certain statements about the future outlook, related to Paxar Corporation, involve a number of factors affecting the Company's businesses and operations, and could cause actual future results to differ materially, from those contemplated by forward-looking statements. Those factors include general economic conditions, and the performance of the Company's operations, within its prevailing business markets around the world, as well as other factors, set forth in Paxar's Form 10-K Annual Report. For further explanation, participants are asked to refer to the final paragraph of Paxar's earnings release.

Paul Griswold will now begin our management presentation -- Paul.

Thank you, Bob.

Good morning. I'd like to start off by remarking that the quarter just completed was a very rewarding quarter for Paxar. A number of key initiatives in place, as we look forward.

What I'd like to do is ask Jack Plaxe, our CFO, to take us through the financial elements of performance. I will come back and talk about the business, in greater detail, and then open the call to questions -- Jack.

Thank you Paul, and good morning everyone.

I'd ask that you please refer to page five of the press release. This is the supplementary schedule. It shows the fourth quarters of 2000 and 2001, in the left-hand columns, presented in accordance with generally accepted accounting principles. And, in the right-hand columns, on a pro forma basis, excluding restructuring charges in both periods, and a one-time charge for post-employment benefits, in the second quarter -- fourth quarter, pardon me -- of 2001.

Now, let me discuss the adjusting items first, and get them out of the way. The restructuring charge, in the fourth quarter of 2001, came in at $4.7 million. For the full year it was $13.3 million. These amounts are higher than the two to three million dollars that we gave you for the fourth quarter, and the 11 to 12 that we previously estimated. Fortunately, the estimated full-year benefit is also higher than the $8 million that we indicated when we announced this program, back in July. The revised estimate is for full-year savings, somewhat above $9 million, and about 85 percent of that should be realized in 2002.

The fourth quarter also included a $7.3 one-time, mostly non-cash charge, within selling, general and administrative expense. This was to fully accrue for the present value of post-employment benefits for three individuals -- the Chairman, the Vice Chairman and the Chief Executive Officer. These post-employment benefits were provided for in the accounts, in accordance with agreements recently entered into with these individuals. Generally accepted accounting principles would have allowed the Company to accrue more gradually, but we decided to get the charge behind us, by taking it in the fourth quarter of 2001.

Turning now to the pro forma information, which excludes these aforementioned charges, we see that sales were $159 million in the quarter, unchanged from the fourth quarter of 2000. We exceeded our October guidance of $145 to $149 million of sales for the quarter, as several businesses far exceeded the expectations we had, at the time that guidance was given. Most notable were the following improvements, compared to the third quarter now. Asia Pacific was up 15 percent. Our U.S. bar-code business was up 16 percent sales. The U.K., in total, was up 36 percent -- France was up over 50 percent and Turkey was up over 43 percent.

These strong improvements, in these particular aspects of our business, were not contemplated back in October, hence we exceeded the guidance, and I won't be too apologetic for that.

Gross margin was 38 percent, as compared to 39.7 percent in the prior year's quarter. Margin has most definitely been impacted, as we've restructured our manufacturing facilities in the U.S. and the U.K., and more specifically we have engaged in some temporary outsourcing of products, in order to protect our customers, as we move manufacturing from one plant to another.

In 2002, we expect gross margins to improve, for a variety of factors. Firstly, the outsourcing will be discontinued, no later than the end of this quarter. Also, in 2001, we engaged in a purchasing initiative with AT support. The Foundation was put in place in '01 -- the benefits will be realized in '02. And, also, as a result of our newly formed North American Operation's Team, which will begin to drive standardization and best practices, across our North American Operations.

Moving further down the income statement, selling, general and administrative expense was lower, both in absolute dollars and as a percent of sales. Operating income was 13.3 million, or 8.3 percent of sales in the fourth quarter of 2001, compared to 14.9 million, or 9.4 percent of sales in the prior year.

Interest expense was 2.7 million, in the current period, versus 2.5 in the previous year. The tax rate was twenty-four-and-a-half percent, as compared to fourteen-and-a-half percent, in the fourth quarter of 2000, and that period included a catch-up adjustment. We were lowering the rate from 31 percent, which we had in the nine months of 2000, to a 27-percent rate for the year, and all of that benefit fell into the fourth quarter.

Finally, we get to the bottom line. Net income was $8 million in the fourth quarter of 2001, or 20 cents per share, and that compares to 10.6 million, or 25 cents per share, in the fourth quarter of 2000.

Briefly looking at cash flow, cash provided from operations was eight million, in the final quarter of 2001, and 51 million for the year. The 51 compares to 70 million, in the full year of 2000. Lower net income is a major reason for the decline in cash flow from operations, excluding the 40-million gain that we had from in 2000. Net income was 37 million in 2000, and 19 million in 2001, on a gap basis.

Amortization was six million, for all of the year 2001, and depreciation was 27 million, for all of 2001, and capital expenditures were 24 million.

During the quarter, we purchased just over three million shares of our common stock, for just over $30 million. For the year, we purchased 3.2 million shares, at a total cost of $33.1 million. Of the $150 million authorization that we received from our Board of Directors, for common stock purchases, we have $37 million remaining.

The balance sheet continues to be strong. Other than the declining cash, caused primarily by the share repurchases, and the result and decline in shareholders' equity, there was very little change in the balance sheet, from September 30 to December 31. Our debt to total capital ratio was 36.8 percent, at the end of the year 2000, slightly above the 35.5 that we had coming into the year.

Paul, that concludes my remarks.

Jack, thank you.

What I'd like to do now is take a few moments and talk about a few very important subjects. If you follow with me, the outline I'm going to track against is a discussion about the Q4 performance just completed. I want to give everyone an update on the re-sharping initiative that we began in July, and we start to -- begin to see the traction that we're expecting in the fourth quarter.

I want to talk about some new product categories, and innovation activities, that are going to be fueling us, as we look forward into '02. An update on recent acquisitions, completed in the third -- fourth quarter, this year, and just a remark about what we've got in the hopper, as we go into '02. And, finally, talk about the -- you know, the real strategy of '02, which is execution, which leads into some guidance, as we look forward into the year ahead.

Let me begin, very briefly, with a focus on Q4, because I really see this call as an opportunity to recognize a somewhat surprising -- pleasantly surprising year-end revenue line, as we continue to see a pretty difficult worldwide retail environment. But, I really think the call is about where we're going in '02, and that's the message I'd like to put on the table.

As far as the fourth quarter completed, Jack gave you some highlights of segment performance and where we saw strength. As we organized the Company, this past year, and focused on geographic entities, or segments, the North American business, fourth quarter, was off slightly, with 81.5 million in sales, versus an 84. That slight three -- three-and-a-half percent decline, though, was benefited by an improved margin performance, as we saw our technology and retail equipment business -- aka bar code -- really start to settle in, in some applications across the board, in the North American retail space, where very positive margins improved, from 8.7 percent a year ago, to over 11 percent in the quarter.

Our Asia Pacific business, historically reported in under North America, did as expected. We saw about an 11-percent revenue growth in the quarter -- 34.4 million, up from 30.9. But, more importantly, or as importantly, are our operating margins held a little bit better than 20 -- 22 percent, which is very important, as we continue to support our brand manufacturers and retailers, as they look at offshore manufacturing opportunities.

Finally, the European business -- positive performance on the top line. We saw sales up 3.5 -- 3.6 percent, to 43.5 million. A little disappointing on the margin side, as Jack remarked, as we started to rationalize our facilities. We're absolutely committed to providing the service that we need for our customers, which requires us to outsource selectively. We feel that's behind us, but if anything that was a bit of a drag on the overall margin performance, for the quarter.

I think as importantly, Jack remarked about our SG&A spending controls -- very, very key focus, as we went through the year just completed. We need to stay on top of SG&A, in an absolute sense. I don't even think about it internally, as a percent of sales. We have the SG&A spending down at a control level, by each one of our finance directors around the world, and we've managed it very carefully. And, I'm pleased to report that in fourth quarter we kept it contained, and we're going to go into '02 with the same surveillance.

So, as the year ended, as I said, pleasantly surprised with top-line performance, despite the continuing economic uncertainties of the retail space. But, as I've said in recent investor conferences, I'll remark that retail, at large, is not all that bad. Some retailers are winning. There's some positive things out there, and we're certainly focused on supporting and helping those customers perform in that space. So, I think that's the real message.

As we look into '02, the re-shaping initiative, announced in July -- I'd like to report now, for the first time, as I reference traction, we've integrated our North American organizations. Matt Mannelly has recently joined the organization, early this year, from the U.S. Olympic Committee -- Chief Marketing position -- with a retail background, with Nike, Sara Lee and other named retailers. He's settling in. He's getting his arms around the business.

But, we've got a new focus in North America, on an operation's line that Jack referenced. And, we see tremendous opportunities to enhance service primarily, but clearly focus in on working capital accounts, and operating performance across the board, as we benchmark, standardize and selectively use best practice around the world. So, there's a big opportunity there for us, as we go . And, I feel very good that Matt and his team are forming, as we enter the year. I think it's very important, going forward. It's a key growth platform for us.

As we think about other parts of the re shaping, I talked about a client-relationship marketing approach, or team-selling approach that we initiated -- at least we began the training for, and we have initiated this year, where we've taken the top clients, in our -- in our portfolio -- and we've taken and named key executives to manage those client relationships. And, what it comes down to is really having them focus, so they know more about the customer, than they know about Paxar, and providing them with a product specialist, to provide a full value.

And, the measurement is going to be wallet share. The measurements going to be earning a bigger stake of those customers spend. As we talk about it, inside the Company, from concept to checkout. So, the whole idea, from early-end design, merchandising, all the way through to the cash register, we can play in that space, and we're going to target those key accounts to build our practice, and then expand it to the rest of our customer base, over the next year.

And, finally, the whole focus on global business management. That was that third leg of the restructuring. We're putting that in place to drive product standards, and the whole innovation process, on a global basis, so that we start to look at our categories really from the customer's perspective and their spend dollars -- very, very important, as we start to build our strategy for the years ahead. So, that's in place -- planned -- the executions following. And, I feel actually a little bit more comfortable -- we're further along than I expected us to be, early in '02.

Let me talk briefly about what's fueling some of the growth, and the optimism, in the Company, and that's the whole innovation effort. I mean, we've come out with specific products, targeted where we feel our customers have some paying points. If you talk to the retail and brand houses, right now, as they've worked through this very, very challenging year, they focus on differentiating themselves, and they focus on simplifying the consumer experience. That's the front and back of it.

A key example of how we help them merchandise and differentiate is our two-sided LOKPRINT product that we've just started. We can see between three and four million dollars coming this year, out of that particular innovative development, which was an advancement of a single-side LOKPRINT that we had started two years ago. So, it's an extension of something that we've proven. We see this providing more flexibility to the brand houses, as they provide more detailed information, with their manufacturing operations around the world.

We're beginning to launch an entire new line of tabletop and portable printers, again specifically designed at the retail technology application side. Some are patented -- some are extensions of existing lines -- but, in each case, with specific value and benefit, for the retailer, with price-marking solutions and ways to simplify the retail and the consumer experience. I'm very excited about what's going there.

We've even gotten into some specific process improvement process, re-engineering efforts, with some of the major retailers, in the Miami Valley and Ohio area, where we're helping them consolidate their advertising spend, with their price marking. Without making it overly complicated, what we're doing is, as private brands are starting to appear in the retail space, more and more, sometimes you forgot what store your in. And, what we've done is we've gone back and helped the store operations people, for example, see themselves from the consumer side, and we start to help them redesign their ticket and pricing materials, so it has a face to it. So, the consumers -- we understand a store that we're in -- in addition to that powerful brand that we're buying. Again, a new idea -- very different -- an extension of a value add that we provide our customers, more than products. As I say, it's more than just a label or a tag.

Again, we're starting to see some revenue come back from this -- we're starting to move it around. So, again, traction is the word.

Let me talk about another element of growth, as we go into the year. It's about the acquisition side of our business. As we model '02, and I've talked to many people recently about, you know, what the economy word is. We're targeting between two and three percent organic growth, on top of this year's performance, but we're not satisfied with that.

In the tail end of '01, we completed specific acquisitions. We bought certain assets, from U.S. Label, in Greensboro. We bought a small merchandising price-marking business, up in Minnesota. We just completed an acquisition of the leading design house -- sales company -- in France.

Those particular add ons, as we enter this year, are going to prove to be a foundation for our growth. And, it's really not acquisition revenue, as such, because in the case of U.S. Label they were assets that we purchased, with them working to integrate that customer list, and bring the service and capabilities that we provide to those customers. The good news is, in the fourth quarter this year, we saw as much as four-and-a-half -- five million dollars of revenue. We expect that to play over into next year, and we're going to build it forward. So, that's been very, very positive, and as I've said, accretive from the beginning.

The IMS business, this small pricing-marking business, in Minnesota, that plays into our merchandising solution side, for retailers. Again, immediate benefit that's working, you know, in ways beyond our expectations. So, accretive, we're going to see probably in the area of six to eight million, this coming year, from that business -- very, very positive.

And the Europrint business, in France, is an add on. It's a sales design company that really positions us with out existing operations in France, as a full-service provider for retail and brand houses. This is not about making products, it's about designing the whole fashion side of the business, which is a very, very important part of the continent's retail focus. So, again, we're going to see anywhere from eight to ten million come in, with that acquisition, and that's going to be the foundation for our growth going forward -- very, very key.

I'll also mention that in the next number of weeks -- months -- you're going to hear more about steps that we're taking. We're constantly working on geographic, or technology steps, that give us added value and advantage in the marketplace. At any given time, we've got two -- three - four of these opportunities under consideration. And, I'll just share with you that you should expect to see some activity in that area. Each one, as I've said, very logical, very much centered on our core competence. So, you're going to see easy, understandable add ons that we build value with. So, that's very positive.

More than anything, '02 is going to be about execution. It's about taking the three or four important things, for all of us, and driving it through. We've set up our compensation plans -- our bonus programs -- all to support this. We've got organization in place. We've got people focused very, very positive, as we get into the year. Certainly in the midst of a continuing uncertain situation in the retail space, which leads me to the guidance that you -- if you had read our release this morning, we have put out, in front of ourselves, guidance that would call for approximately, at least equal to, or better than a year ago.

And, on an ex-amortization basis, what we're offering is a target of between 155 and 160 million for the first quarter, taking the year out in very, very -- you know, I won't say dangerous, but difficult to judge call, which is why we've put the gap, or the range in, of 645 to 660. As we get into the year, we're going to see closer, and feel better about tightening down that, but right now 645 to 665 is our range.

As far as earnings, again I'm targeting for us to deliver at least what we did last year. We're saying 17 to 20 cents ex-amortization. That compares to a 17 cent year-ago period, with amortization, or 20 cents without amortization. We'll know more about this as the quarter progresses.

I'll tell you, a year ago, as I got my head around this business, January -- February -- is a very difficult time to call. In our business there's the Chinese New Year, which last year occurred at the end of January. This year it's the middle of February. What does the Chinese New Year have to do with Paxar in the retail space? I reminded everyone of the significance of the Asian market, and how it depends on how we perform, and how it is supported by our retail and brand houses -- we pay attention to it.

So, something as subtle as that helps you understand how the first quarter is a -- is a judgement call here. I'll tell you, March is going to make or break the quarter. We feel very good about it, as we see our order backlogs lining up. We're coming into the year with decent momentum. You know, as I said, we were pleasantly surprised with how the year ended. We don't see anything, right now, in front of us that alters that feeling.

So, we're moving forward, with a hope and expectation that we can build, with all the soft points that I mentioned -- people and place -- execution focus. You know, we've got people zoned in on the right areas. And, as a management team, speaking for all of us, we feel very good about that.

So, with that as kind of a top line, I'd like to open the call to some questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the one key, on your touch-tone telephone. If you question has been answered, or you wish to remove yourself from the queue, please press the pound key. And, if you are using a speakerphone, please lift the handset before asking your question. Once again, if you have a question at this time, please press the one key on your touch-tone telephone.

Our first question comes from Tom Lewis, of CL King & Associates. Your question, please.

Yeah, good morning guys, and nice work.

Thank you, Tom.

Thanks, Tom.

Yeah. First question -- back at the last conference call you had a lot to say about the -- about the pricing environment -- a lot of pressure from folks just trying to stay in the game, and all that. Has that stayed pretty much the same through the fourth quarter, and into January, or has there been any sort of lessening or worsening there?

Well, Tom, if there was I wouldn't admit it. But, I'll tell you that the -- the price pressures are out there. We're getting smarter as we go, in working with our customers. And, I think and you and I had spoken about this, back a couple of months ago, where we're able to do some redesign and cost out, so that as price pressures are out there, for our customers, we're always looking to protect our margin. So, I wouldn't offer that as an excuse, necessarily, as Jack talked about the margin erosion of the fourth quarter. Not much has changed, though.

OK. And, what's you comfort level, as far as getting through the year ahead, and not having to add a line for non-recurring items?

Funny you should mention that, it's something we talked amongst ourselves about. I'm looking for the simplified one-page earnings release that has no disclaimers or qualifications. At this point, we have no planned restructuring for the year. There is one area in Europe -- you know, the focus of the restructuring, for the most part, was in North America this past year. We've got an awful lot of change underway. We feel that with no budgeted planned restructuring that we're always going to be looking for efficiencies, but nothing on the -- the front burner right now.

OK. And, just two accounting type questions. What would be a good number to use for cap ex in the year ahead, and what would be an actual, as opposed to average, share count number?

Well, I'll take the cap ex, and I'm going to look at Mr. Plaxe to help with the share count.

Cap ex -- I mean, we have a depreciation line of approximately 28 million that we work with. This past year we came in at 25, plus or minus. I've reviewed, and I'm involved -- unfortunately or fortunately -- with all the line items that come in, as we look at our spending. We're going to see about the same spend rate, coming into this year. No significant, you know, infusions major budgets, on a project basis.

Tom, we have 39 million shares outstanding, following the repurchases we did in the fourth quarter. I think 40 million would be a good average share account to use, for fully diluted purposes, although, you know, that does get impacted by share price, in terms of options for management that become and -- nevertheless, we think that going in, 40 is a good reasonable number to use.

OK, great. I'll let somebody jump in. Keep up the good work.

Thank you.

Thanks, Tom.

Thank you, Mr. Lewis.

Once again, ladies and gentlemen, if you have a question, please press the one key, on your touch-tone telephone.

Our next question comes from Arnie Ursaner, of CGS Securities. Your question, please.

Hi, this is Kevin , for Arnie Ursaner. A question on sales -- how much of the quarter was driven by acquisitions, made in the last year?

The fourth quarter -- I think I referred to the number. I'm going to say it was between five-and-a-half and six million, in Q4 ...

OK.

... primarily.

And, again, I want to qualify that. It wasn't as -- as many times you acquire a company, and bring an operating business in, and that's acquisition sales. That U.S. Label acquisition that we completed was for certain assets of U.S. Label, and there was no guarantee of business coming in. That business had to be cultivated and kind of brought in onboard. So, a bulk of that -- five -- five-and-a-half of it was U.S. Label -- approximately a million -- a million-and-a-half -- was the small project up in Minnesota. And, Europrint, clearly, we closed on the 26th of December, and it does not impact fourth quarter.

OK. And, if I understand you correctly, for next year there will be no more restructuring charges?

I said there was no -- with some cynicism -- we have nothing on our table -- it is not budgeted. I am very, very sensitive to -- even as Jack and I talked about the year-end finish, what we said -- what be delivered -- what the payback was -- so, no, at this point, no planned restructuring. And, if something comes up, and I'm not going to rule it out, the focus is going to be on the European side. We're looking at simplifying some of the activities over there, but it's certainly not nearly the significance of what we went through this year. We've got enough change and initiatives on our table.

OK, great. And, then final question -- you mentioned changed in compensation. I was wondering how many levels deep it goes in management, and kind of what's the new focus?

Well, we have two in management. We have what I call the top 20, and we have the top 160. The focus on organic sales growth, and EP performance, we put into the Company last year, for the top 20. We have extended that down to the top 160 -- what we call bonus eligible -- and we've also focused in on a long-term incentive plan that is essentially driven by share performance, versus optional .

OK, great.

Thank you, Mr. .

Once again, ladies and gentlemen, if you do have a question, please press the one key, on your touch-tone telephone.

Our next question comes from Rob , of SMI. Your question, please.

Hi, Paul. It's actually Paul .

Hello, Pat. Good morning.

Good morning. I got on a little bit late. Did you outline the 4.7 million charge in detail?

No.

Could you do that, please?

If I may, Pat, a lot of detail -- I'd prefer to call you.

OK. Generally speaking, what's it entail?

It is -- headcount reductions, related primarily to headcount reductions. In the fourth quarter no, what I've got with me doesn't have it for the quarter. I've got it for the year. But, most definitely headcount reductions, in North America and Europe -- a little bit in Asia.

This is streamlining our business. And, where downsizing and efficiencies can come into play, we're taking advantage of them. For example, as part of the North American restructuring -- this is not an answer to your question about the fourth quarter, but it's an example that leaps to mind. As we reshape North America, we've been able to move to one accounting center.

So, we have a centralized administrative services operation, out in Ohio, for HR, IT and Accounting, that's allowing us to employ standardized practices, and by the way, we can reduce the number of people devoted to these activities, by concentrating them in one location. And, this is being facilitated by our move to a common ERP system, across the business.

OK.

But, I'll get back to you with the specifics on the fourth quarter.

OK. And, I guess could you talk about the $7.3 million ...

Yeah, I talked about that Pat, and let me just recap what I said. What I said was that it relates to post-employment benefits, for three of our senior executives, and I was actually very specific. It relates to the Chairman, the Vice Chairman and our CEO. And, I pointed out that generally accepted accounting principles would have allowed us to make this accrual, over a period of several years. Conversely, it also allowed us to get it out of the way up front, and that's what we chose to do.

These post-employment benefits were given to the individuals, as a result of employment agreements that we entered into, in late 2001, and these agreements are a matter of public record. They've been filed with the SEC. I did point out, as well, that it is predominately non-cash. Actually, over the next two years we expect to pay no more than $800,000, of this 7.3 million, and then it begins, basically, as the individuals cease employment and retire, and for the most part that's not happening.

Well, are you -- are you suggesting that the compensation then is coming in the form of stock, or ...

No. No, no. These are retirement benefits that will be paid in cash.

So it is cash?

I mean, let me use Paul as an example. Paul wouldn't see any of this until he's 65, so he's go 15 years to go.

OK. A rough breakout, between -- between, you know, Paul and other two, please.

May I give you that when I call you about the fourth-quarter restructuring?

Sure. Sure.

Thanks.

Thank you.

Thank you, sir.

Gentlemen, at this time, it appears we have no further questions. Would you like to continue with any closing remarks?

No. I think it was an opportunity, again, to really talk about the look forward. I do appreciate the questions that came in. There's an awful lot going on, on our side. And, I'm speaking for both Bob and Jack, we're always available, if anyone has any follow-on questions. But, I appreciate everyone's time and attention.

Ladies and gentlemen, this concludes today's program. Thank you for your participation. You may all disconnect. Good day.