艾利丹尼森 (AVY) 2002 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paxar second quarter earnings release 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. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bob Powers, Vice President, Investor Relations.

Mr. Powers, you may begin your conference.

Thank you.

Good morning, and welcome to Paxar's second quarter 2002 conference call. On the line from management will be 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 second quarter 2002 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 that could cause actual future results to differ materially from those contemplated by forward-looking statements. Those factors include general economic conditions and the performance in 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, Robert.

Good morning, and I want to welcome everyone to Paxar's second quarter earnings review and discussion.

Today, I'd like to focus on a couple of key development points, which have been underway for the past 18 months. I know there's certainly attention towards them, and I want to bring everyone on the call to focus the progress and the status of the initiatives begun.

I would like to turn over the call to Jack Plaxe, who will take us through the financial performance and overview. Then I'll come back and talk about the segment performance with a little bit more detail, provide an update of the initiatives underway, and talk about what was really behind the growth that we enjoyed this last quarter year over year, and talk about the balance of the year - Jack.

Thank you, Paul. And good morning, everyone.

I'd ask those of you that have our press release to please refer to page five of the press release. Here we show the second quarter of 2001 and 2002 on a comparable basis. Which is to say that the 2001 figures are restated to exclude the restructuring charge and goodwill amortization.

So addressing that schedule, sales in the second quarter of 2002 were strong at $173 million, up 10 percent from $157 million a year ago. It's noteworthy that each of our geographic segments had sales gains. North America was up six percent; Europe was up four percent; and Asia-Pacific was up 27 percent. The strengthening of the euro and the British pound added approximately $1.2 million to sales during the second quarter.

Our gross margin was 40 percent, the same as last year. Our operating margin was 11.7 percent, down from 12.6 percent last year, due to increased spending at the corporate level in support of programs to advance the re-branding of Paxar and to bring strategic alignment to each of our geographies.

Net income was $13.1 million, up from $12.7 last year. Earnings per share was 32 cents, up seven percent from 30 cents last year. We've reduced the estimated tax rate for the year to 24 percent, based upon the strong growth and earnings in Asia-Pacific, where we enjoy tax rates in the mid teens.

To digress for a moment, it's not shown in this press release, but I'd like to comment on our progress in the second quarter as compared to the first quarter. We had 120 basis point improvement in gross margins of 40 percent, and a 340 basis point improvement - 340 that is - in operating margin from 8.3 to 11.7 percent. And these, of course, drove major gains in both net income and earnings per share.

OK, returning to the second quarter actuals, and looking at the balance sheet, we strengthened the balance sheet during the second quarter, with cash rising by $9.3 million. We finished with a cash position of $44.9 million. Our debt was essentially unchanged at $176 million, and our debt to total capital ratio declined to 35 percent at June 30 from 37 percent at March 31.

While the dollars in accounts receivable and inventories rose from the March levels, AR days were essentially unchanged, and our inventory days declined slightly. Actually, these calculations would have shown more improvement if the euro and the pound had not strengthened so significantly just at the end of the quarter.

Looking at cash flow, our operating cash flow was $15 million in the quarter, compared to $22 million a year ago. Our working capital accounts were impacted this year due to the significant increase in sales in the second quarter as compared to the first. A year ago, sales were relatively flat. We were 157 in the first quarter and 159 in the second. While this year we had a 13 percent increase from $153 million to $173 million. And, of course, this drove working capital higher in the second versus the first.

For the year, we expect operating cash flow to exceed last year's $53.5 million. Capital expenditures were $6 million in the quarter; depreciation was $8 million. In the first six months, cap ex was $9.6 million and depreciation was $14.4.

I'd like to give you an update on our share repurchases. As you know, we did not buy any stock in the first six months of this year. As of yesterday, we had repurchased 200,000 shares of stock in July, for a total cost of just under $2.8 million, or an average of $13.76 per share. Of the $150 million authorized by our board for repurchases, we have $34 million remaining.

All of that completes my remarks.

Jack, thank you.

As you heard, a lot of positive points concerning the quarter-to-quarter comparisons. What I'd like to do is go in and provide a little bit deeper set of commentary around those segments and even talk about some of our product portfolio as we've seen things move.

North America, Europe, Asia-Pacific, our segments, I want to say we were pleased to see strong growth improvement in each of the geographies. North America up six percent, their operating margins up almost 110 basis points, by the way. 11.9 is where we finished, compared to a 10.8 prior year quarter. And significantly up from the first quarter of 7.3, and that, I think, is illustrative of a lot of the PPI or practical process improvement operating initiatives we have begun.

Europe, benefiting from the foreign exchange situation, slightly showed an 11.7 operating margin. A little bit off the 12 of a year ago, but overall up from nine percent in the first quarter. Again, showing progress as we continue to expand the initiatives.

In Asia, I mean that's the big story. It's a very tax efficient market for us; we were able to grow the Asian business almost 26 percent in the quarter. Certainly contributing were U.S. manufactured programs originating from the states, as well as Europe. And we actually see an increasing trend with the European retailers and manufacturers moving to Asia, as the euro strengthens to the dollar.

I mean that will bring some increased activities as we look forward. So we're pretty positive about the performance of that region as we look towards the balance of the year.

As far as ongoing initiatives, last call I spent quite a bit of time talking about our CRM initiative, our client relationship selling model, the operations initiative. I'd really like to update everyone on another initiative, which is really - or the more important initiative, which is the way the organization is aligning around our overall change process.

We've begun a pretty consistent set of messages and re-branding throughout the organization almost 18 months ago. And I can tell you, from my perspective, I'm more than pleased with the way the organization is embracing the change. The ownership is down to the line operators. We're using terms like "line of " to the customer.

People are understanding how they drive the business change. And I think that, more than anything, is the sustainable feature behind a lot of what we've begun.

I will comment early, as it is in the CRM process, that at the quarter we reported 10 of our 13 target accounts up over 10 percent. One of the accounts off significantly, primarily due to a machine sale that occurred a year ago that didn't occur this year. But, by in large, getting closer to the major accounts is making a difference, and I think fundamentally behind that sales growth pickup in the quarter.

As far as the operational initiatives going forward, we've aggressively moved those through the United States plants. We're now beginning to expand them through the Caribbean, Mexico, Asia and Europe, as we start to best practice and benchmark. That's going to be a longer-term process probably going forward over the next year to a year and a half.

But I will say on and savings, we had targeted a $5 million for the year on an annual run rate. We're at $4.5 million at six months. That's an annualized number. So as you look at that, that will be reflected in gross margin for the most part, but some SG&A improvement at the operating businesses over the balance of the year.

And, again, I think that the overall alignment of the organization is something that, you know, that I focus my attention on, as we communicate and work with our 6,400 people around the world as we continue to change and evolve, keeping pace with a very, very dynamic marketplace. So as far as where the initiatives are, I'm personally pleased. It's a little bit ahead of my expectations, candidly. We've got a lot of work to move forward with, and I think you'll see that as the year finishes off and we begin next year.

Let me remark about new products. Again, last call I talked about a new product pipeline that ranged from machines, applications, print technology. We continue to build that pipeline. In the third quarter we'll be launching initiatives that represent over $10 million in annual revenue, beginning with a new Ultra program, which is part of our bar code systems solutions. And including a initiative for many of our denim and jeans manufactures that have any characteristic to the print.

These are significant, as we continue to compete for new programs in our customers. This is not existing customers, existing business, this is all about getting new positions with our customers and not competing on price, but competing on design capabilities and innovation. So new products are alive and well, and I think you're going to continue to see that impact our top line.

As far as the growth, it's great to report a 173 number, a notch above our guidance for the year of 163 to 168. But I think it's more important to understand and appreciate we know where that growth is coming from; it wasn't a surprise.

We look at new programs in our existing customers; we look at new customers that we're bringing into the fold. And attention towards the acquisition revenue that came in since September of last year.

Basically, of that $16 million quarter-over-quarter growth, half of that was acquisition derived between the U.S. label accounts, , that small price marking business that we purchased in - I shouldn't say small, very important price marking business that we purchased in the fourth quarter of last year, as well as the integration of our print design company in Paris. And early this year the acquisition that we made in Mexico. So all of that contributed to about half of that step growth.

The other half came from a split between new customers and new programs in our customers. And I think that's very important to realize, because this is not a business that the orders repeat themselves. When I talk to the organization entering this year, I stress the importance of protecting our base business, and that's what this is about.

We can't take our base business for granted. We continually rethink how we work with our customers , and I want you to appreciate that that's certainly on our radar screen and we pay attention to it.

The last point I'd like to cover before we open the call to questions is the balance of the year. I'm not going to talk about visibility or certainty. I will say that as we entered the second quarter we talked about an improving order rate. We don't have large backlogs in our business. We're a custom, made-to-order business model.

We are continuing to see a strong order rate. Certainly the first part of the quarter indicates comfortably that we're in our range that we gave you in guidance. I'd love to tell you that we'll be to the top end or even better than that range. But, more importantly, what you're going to hear from our management team are numbers that we can deliver. We want to build confidence, and that's what we're managing ourselves against.

So the range we're comfortable with, the order rates are tracking, and it's early in the quarter. In the summer, European markets go quiet; that's a concern for us. But offsetting the European markets, we do expect to pick up in our bar code machines and business in the states.

We do expect the Asian markets to continue to support us because the orders in contract carriers are busy. We see some continued momentum in Asia. And that's very key. It's a very, very rich part of our segment performance that adds to our earnings.

So as we look at the third quarter, I find it difficult to separate the third and the fourth. I think the full year guidance that we're reaffirming is important. We've got confidence; we're going to do everything to deliver the numbers.

The world retail space continues to be bumpy. There's not a robust confidence across the marketplace. But we're continuing to see improved confidence, improved willingness to place orders ahead of lead times that we've worked with in the past. And that all in provides a sense of kind of a quiet confidence or certainty that we can finish out the year, continue the key initiatives and continue to drive against our earnings performance.

In addition to that, I really want to remark that we have not taken our focus off cash. We do have some opportunities, as sales develop, to work working capital accounts. Jack reported some positive percent of sales performance in our working capital. We look at that in absolute terms. We're going to manage that; I think we've got some room there.

We're going to continue to focus on extending that CRM initiative, continuing to get closer to customers. We're certainly not going to take our eye off the other customers in the space, too, which is something that's very important. We're not going to walk away from what I call the tier two accounts; they're very important. But we've got some pretty significant customer relationships. We're going to build on that.

And then, finally, the whole operations initiatives that we've launched in the United States we're going to begin to carefully extend. And we do expect to see some traction by the end of the year.

We're going to keep against execution. That's going to be a key driver for us. And I think the opportunity, beyond this call, for everyone to put on their calendars, I do want to remark that we are having an investor meeting on the 25th of September at the Intercontinental Hotel in New York City. We're going to construct that meeting more as a trade show, as much as an investor presentation.

We're going to have product applications and demonstrations. I think it will be a great opportunity for our investors and prospective investors to come and really, you know, see where the rubber meets the road.

You're also going to have a chance to see the rest of our management team. Paul Chu heading up our Asian-Pacific markets; James Wrigley from Europe, Matt Mannelly. Each talking about the operational initiatives as we enter the '03 market. So I think that's a key opportunity to add to this call, and really continue to let you understand what's going on. And, again, what's driving the growth that we see going forward in the business.

With that, I'd like to open the call to questions.

Thank you.

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.

Our first question comes from Tom Lewis of C. L. King & Associates.

Yeah, good morning, guys. You covered it pretty well.

Thank you, Tom.

Just a couple of little things, though. Why is the interest expense up from year ago with the balance sheet trending the way it is?

Up from a year ago, OK. Well, firstly, we have less cash. You'll notice that last year we had $75 million in cash.

OK.

But, also, in the fourth quarter of last year we reported that we took a charge to fully accrue for some supplemental retirement benefits. That charge was taken on a present value basis, and there is some unwinding of discount, approximately $800,000 a year, that gets reported as interest expense. And that's running through that account as well.

OK. OK. My other question, you know you touched on this just a little bit there, Paul. It appears you've done a really nice job of reinventing the way that you go to market with your key customers, but not all your customers are key customers. And if you add the secondary and I suppose tertiary customers together, it's important.

And I would suppose that there's an opportunity to reinvent the way you go to market , too, as well. And I was wondering if, A, is this correct, too? And, two, where are you in that process? Have you started on it? Do you get to it later this year, next year? Tell us about that.

Yes, Tom, I think it's a great question. I appreciate you asking it.

Well, for the record, for everyone's benefit, every customer we have is a key customer. When we say key customer, that's kind of a segmentation we use as we begin to focus our approach to customer facing and selling. What I referred to in the call very, very briefly is the tier two or tier three accounts and, really, I don't mean to diminish their importance by any means.

We actually have a great opportunity, probably as large an opportunity with those accounts as we do with our, you know, major, national or global accounts as we go forward. And the opportunity there is really to bring - and I'll use the term systems integration - more value in the product. Many times when you go to the major retailers and brand houses they're working with some pretty significant systems integration companies ranging from, you know, Oracle, to J.D. Edwards and others.

The second tier, or the very important, by the way, 100, 150, 300 store retailers oftentimes look to others, and elsewhere, for system applications, and that's what we're setting up without getting into some proprietary activities. But, clearly, where we're looking at, at packaging value with our products, is the way we're looking at that other important category of customers in the marketplace. That was purposely staged to follow the CRM initiative, and we'll be well underway certainly in the fourth quarter early next year.

Candidly, I'm very sensitive to the amount of change and the number of initiatives that an organization can ingest. We spent the majority of the first half of this year knitting the sales organization in North America together. Clearly, as we go forward we're going to be . I think very honestly this is going to be a key message at the investor conference that we're going to have in September where Matt and James and Paul each talk about their individual markets, because those major accounts operate differently in each of those geographies.

You know this is not one size fits all. But, absolutely, one - every customer we have is a key customer. We're going to continue to grow our customer list and carefully care and service every one of them. But we're going to bring the appropriate value to the big customers and the appropriate value to everyone else.

Does that come close to...

Yeah. Yeah. I was looking for that recognition that, you know, what you can do for that smaller customer is a different...

Well it is. It's about change. It's very important, and I think, you know, it's someplace that, again, I think there's as much opportunity from a growth factor there as there is with the top accounts. Top accounts, again, being the CRM-identified accounts.

Look, we do business with over 250,000 customers around the world. You know when we start to perfect a - the way we do it, what we're doing with the change initiatives, we do a center of excellence or a model around a small population and then we extend it. The good news is that small population is starting to respond. We're already on the course to go after the rest of the opportunity.

Great. Well I'll let somebody else jump in. Keep up the good work.

Thanks.

Our next question comes from Matthew Kempler of Sidoti & Company.

Good morning.

I had a follow-up question for you on the CRM initiative. As part of this initiative, I assume, you know, one of the big piece is to get your new dedicated sales professionals in front of the level management of your key accounts. I'm wondering so far how many of these level meetings have you had with your major accounts and what has the response been to date?

Again, another good question. And I'll go back to the mid February date, where the Olympic games wound down this year. And we - many of the folks on the call remember a comment that I had made about being very proud of the fact that we were the producers of the ribbon that was used in all the medal awards at the Olympics.

We had that put into a box, and we attached medals the commemorative stamps for the Olympics. And either I or other senior people in the company met with everyone of our targeted accounts and presented them with that plaque as a recognition of our commitment to their business.

So we started the relationship, that level relationship there. We've gone back, and as we are on this call, I'm already organizing the next round of meetings with a handful of customers with myself, and the other division presidents. And we're actually extending the other senior managers, my directs here in the headquarters office, to work with our regional and our account executives to build that.

So we've made the initial contact. We used the Olympics as the springboard. That was purposely designed. And now we're on a quarterly reconnect and calibration, as we have executive sessions, what I call, you know, breakfast roundtables, which is the form that we use to conduct the meeting. But we extend the involvement, Jack Plaxe and others in the organization, to work with the account executives to really bring as much values as we can to these conversations.

OK. And I mean it's still early, obviously, but are you seeing these meetings open doors yet into any of the previously unpenetrated product categories?

Well, yeah. I mean two things are happening, Matt, and I think, you know, first, we're using these meetings to validate our value proposition. We test a lot of what we're walking in the door to the buyers with at these meetings and validating that there's value and interest on the part of the accounts. But, as importantly, you know indicated recently by a couple of significant orders that we picked up, we're making a difference.

I mean we're getting people further up in the organization to understand where value can be created. Clearly, you know depending upon who you speak to they hear an opportunity differently. I'm trying to be a little bit loose with that without getting specific with accounts and so forth. But, yes.

OK. And then regarding the operations initiatives that you guys have going on, can you maybe give us a little more detail on what specific - you know some of the performance benchmarks that you're looking at, what specific areas you're honing in on? And maybe have you seen improvements and maybe quantify some way or give us some sort of measure of what improvements you've seen and what you're targeting?

Absolutely. Again, I mean we don't start any change initiative without very specific goals and metrics. , who is driving this change for Matt Mannelly and the United States, and as I say that, starting to network with his correspondent resources around the world. We have got - and I don't want to make this sound overly responsive to your question - we've got 11 key metrics in everyone of our facilities, ranging across the topics of cost, service, safety. And it's very important that people focus on these.

What we're seeing is - and it's literally across the board - I'm not going to say everyone of our operating plants in North America are at the same level, but I'd say they're all at a six, seven on a scale to 10. Some are nine, 10. What we're seeing and what we've got in place are 42, what we call workout teams set up. These are self-directed teams in each of our facilities that identified over 1,700 opportunities.

We're beginning to comb through those and acting on them. I mentioned in a call that we have put in our pockets, so to speak, or banked 4.5 of both gross margin initiatives and some SG&A or indirect labor initiatives that we're working on. That's an annual run rate, by the way.

I had a number. We're at the six-month milestone. This is one of diminishing return; we're not going to double. We're not going to have another in the second half. I do think we'll meet or achieve our target.

These areas relate to non-strategic purchasing initiatives, working on buying different materials from suppliers, standardizing color codes across our graphics and operations. Looking at productivity adjustments, things that we can simplify and take activity out of. Every one of our plants is going through a pretty rigorous process mapping exercise as part of our ERP rollout.

So I mean without getting into a lot of detail, yes, we're measuring them. Yes, we're seeing progress. I think in each case we're something north of a five, six, seven. Some cases we're to the top end.

This is going to take a long time to become habit, though. And the most important message is we're not doing anything other companies haven't initiated. We're not inventing process here; we're applying things that are proven. And we're pretty pleased.

I think the quarter-to-quarter sequential gross margin improvement in North America, and the operating line - you know going from a 7.3 percent to an 11.9 is an indication of some of that traction. It's going to take time, though.

OK. And last question, I think you said in the past one of the main concerns I guess that keeps you up at night is making sure that you guys establish the relationships overseas in the Asia-Pacific region as the business moves that way. Judging by the results we've seen this quarter, it seems like you're doing a good job there. Are you still concerned about that, or are you making the contacts that you think is necessary?

As soon as the business stops moving I'll be less concerned. As long as it's moving, we're concerned. That gets back, again, to really - you know we can't bank on anything. You know we've got to resell ourselves over and over again. That's part of what personally attracted me to this business.

This is a business that's hard to compete in. You have to be good to do it. And I think we're one of the players that can do it very well. And it's actually a bit of a hurdle for entry. We see that around.

I think the focus - and if you think about the Asia-Pacific markets, clearly, that's where a lot of our activity is migrating. I will say, though, in my trip to Hong Kong a few weeks ago we are opening up Vietnam, Korea, Bangladesh and Indonesia right on top of the Mainland China operation. So we're expanding that. You're going to continue to see growth in that region, if at all possible. We're going to invest in front of demand, as they say.

But other markets are huge opportunities. Turkey has demonstrated tremendously that we need to invest and grow that market. That's an equivalent to the Asian-Pacific market for the U.S. retailers. A lot of the European retailers and brand houses are moving there, as they are in North Africa, Morocco.

We opened up a joint venture in during - I reported on the last call. That's starting to pick up speed.

So it is - it's not just one market. It's being able to respond to and support our customers wherever they need it. So it will keep me awake, trust me.

OK. Thank you very much.

Our next question comes from of .

Thanks -a couple of questions.

First of all, Paul, can you just - you talked about successes in your CRM initiative I guess. And I'm just curious, would you say that your attraction with your retail customers or the brand houses, and if there's a difference, why do you think there is a difference? Is there, you know, a different amount to sell to these distinct customers or whatever? I'm curious son your thoughts there.

Good question. I think it really kind of cuts to the chase of how you execute the CRM. If you look at the one - the account that was identified, we've got a blend of manufacturers or brand houses together with the retailers.

With private brands becoming such an agenda item, if I can say it that way, for the retailers, they really become one. You know what used to be a brand manufacturer is certainly now a retailer/brand manufacturer. The successes, though, I think - and it's going to sound like a straddle.

I mean we're split right now; we're seeing, you know companies like Target perform tremendously across the board. We're seeing some of our pro branding initiatives really - which is more of a retail in-store application - getting traction with some of the major retailers where we do price marking and management. We're also beginning to see some pickup among the power brands, without going into names, where a lot of our security and brand protection initiatives are really differentiating our offerings.

We're providing things that, candidly, a lot of these folks didn't necessary call us for. So we're bringing more value in the sales call.

So it is split between both the retailer in-store, the , as well as some of the brand protection, brand differentiation. And I'd say early in - I mean if there's - I won't say a disappointment, where I don't and where I can't say 100 percent year-over-year pickup, really comes into play where we've got a lot of our machine sales, which tend to be a more cyclic transaction. And we're actually entering a quarter or second half where the machine sales and the IT spending do pick up. And I think by the end of the year we're going to have a better read on those transactions.

OK. And then, secondly, I'd like to - I guess I would - with the top line, I know you had some benefits from currency. But with the top line being what it was, I was a little surprised to see the SG&A. At least I thought there'd be a little more leverage there.

Can you quantify more of the one-time promotional things that maybe were not there last year? Maybe not going to be repeated?

I'm going to turn that one over to Jack.

OK.

No, no, I mean I'll answer it, but Jack's got the numbers, as he's, you know, flipping back. I anticipated this question. I do want to remark that the businesses are doing their share.

A lot of the year-over-year SG&A is at the corporate. And these were budgeting initiatives that we're working on as we re-brand, reshape. We've got a lot of media spend and some other costs that are isolated right here.

The business, though, as we look at the SG&A performance, are where we expect them to be. And we continue to see improvements. I want that as a preamble.

OK.

Now, Jack, I mean without putting you on the spot...

That's all right. I can give you a couple of numbers, . This year, in the second quarter, we spent about $700,000 more on media spend and consulting than we did last year. And these are all related to our re-branding and strategic alignment initiatives.

OK.

And we also - another item, just to pick two, this time last year we didn't have as large an accrual for incentive compensation. So we're up about $500,000 there year over year.

OK.

And you know we'll know at the end of the year whether or not .

It will be there or not, yeah.

But we're optimistic.

OK.

I think going forward, though, I think the answer is between $1 and $1.5 million of, I'll call it one time, but planned investment. And I describe it as investment because we've had a lot of training and going on as well that is really buried in the business units cost. And, again, I mean we're where we expected to be. I'm not as pleased on a year-over-year comparison. We need to improve it. That's one of the focal points of the second half of the year.

Right. Thanks.

Our next question comes from of .

Hi. This is for . A question - continuing on the re-branding expenses, the trends going forward, what are they likely to be?

, very quickly, what I meant to say, without being very specific, is we had planned it through the first seven-eight months of this year. We're about at the end of that process. There'll be some, what I call sustained spending. And we'll certainly have that at a much lower level.

But the bulk of it has gone up. You know things like our Web site. And I mean it ranges across the front, if anyone is familiar with embarking on some of the initiatives that we went after. A lot of it's front-ended, and by front-ended, you know, the first seven-eight months of the year.

As we sit right now, we're talking about the '03 budget, and I can tell you they're very different numbers. So not a lot going forward in the balance of the year.

OK. And then free cash flow and also the cash on the balance sheet, can you kind of highlight the priorities and usage for that?

Well I mean as far as the free cash generation, I mean as I talk to investors, you know we talk about earnings per share, cash per share, you know basically netting out. Our cap ex spend for the year is exactly where I expected it to be; we're a little bit under $10 million.

I talked about $20 for the year. That's against the depreciation line of $28. So I mean we're there. We're not under-spending, by the way.

I think the acquisition stream is out there. We're always going to be looking at three or four or five ideas. One thing, by the way, I did not comment on the call, and you're, you know, giving me an opportunity, is that we had closed on a pretty significant technology company in early July not part of the second quarter, and , that opens a door for us in the very important transfer technology business.

This is something that we've been looking at. There were a number of ways to enter this market. This was a $5 million acquisition that could open a door for many times that in revenue.

So, clearly, acquisitions will continue to be an opportunity. And these acquisitions, again, as I say to everyone, are things that I'll be able to explain, or Jack, or anyone in our company in a couple of minutes. These are going to be , either geographic or product line extensions. So they're kind of natural fits to our business.

In addition to that, we are authorized to repurchase shares. Jack commented on our activity during the last quarter. So I think we're very well positioned; we've got a solid foundation. And we can respond to the opportunity. And I can't guess what that opportunity is going to be, but we've got a range of things from new products, expansion, right down the list.

Paul, it's . I did miss some of your call, and you may have answered that. But can you comment a little bit - I know you manage the expense out of your business by managing kind of a combination of what the gross margin you can earn versus your SG&A expenditures. Can you comment on that on a go-forward basis if we have a relatively challenging retail environment?

Well, I mean I'll come back and use the recipe that and the team began before I joined the company. We'll look at a 40 percent gross target. We look at a 25 SG&A target.

At our recent board meeting, a couple of our independent directors raised the question about, you know, how close to 25 we can get. I mean we are aggressively going after that number. I think, you know, we can get certainly 27, 27.

The way I respond to the direct question about where cost is going to come from is very much dependent upon the growth of the top line. The stronger the top line, the more we're going to see gross margin improvement or leverage. As the growth patterns change, we're going to focus in on efficiency and certainly the whole selling cost side of it.

I don't know if that gets you close to the answer, but what we've talked about is a combination improvement over the coming years of between two and four percent in that margin category. And I think we're on that track.

I do think you answered it. I think what I was trying to get to, and maybe it's a question for you or Jack Plaxe. Is it fair to say that on low to mid single-digit revenue growth, given your business model mix, you ought to be able to generate 15 percent EPS .

Yeah, , if we look at our guidance for the year, we gave guidance low end 647, high end 657. That gets us, you know, between six and eight percent growth over the 611 we had last year. And on that, we've given guidance of $1 to $1.06, which implies 14 to 20 percent. So the answer is, yes, we think we can get more leverage on the bottom line than we're getting on the top line.

And there's really no reason that wouldn't continue into the next year or so?

No. I mean when I think about that, - and, again, it's a very good point. It's something we talk amongst ourselves about. We look at this whole cost and top line initiative over a three-year period.

Acquisitions are going to come and go; I can't predict them quarter to quarter. But I do think what I want to build the model around here - what we're building, more importantly - is a six, eight percent top line scenario over the three years, which may be up and down. I mean that's a smoothing number. And I think we can certainly deliver that 15 plus percent bottom line.

You've heard me, I think, even talk about if I could take a dollar of top line or a dollar of margin, I'd go for the dollar of margin right now. We do have some opportunities that we're going to continue to work on, but I'm confident, from our standpoint, as we put together our strategic plan and business plans that the model works.

I mean we don't need to be a 12, 14 percent top line to get a 15 percent bottom line. I want to, you know, set the tone that, you know high single-digits will get us a very attractive shareholder value.

My final question, and you may, again, have answered it already, it seems to me two, three, four years ago your strategy was footprint, make sure you have the global opportunity wherever your client needed or wanted you to be. Aren't you pretty well there at this point?

No. I think certainly we've stayed the course. I think by the comment, you may have heard me talk about as rapidly growing as Asia is as a market. When I went over there recently, we were talking about specific plans for markets like Bangladesh, Vietnam, Korea, along with Indonesia.

Europe, you know the challenge for James in Europe, there's a front door in every country. What's behind that front door is going to be what's appropriate for the marketplace. Markets like Romania are going to become, you know, opportunities for us. Turkey is an opportunity that we're going to continue to expand. We opened up in .

You know we're operating in over 75 countries. That will continue to be added to, five or six or seven a year. I don't see that changing.

What's going to change, though, and I think the heart of your question, is how invested we are in certain markets. Now the other important is our assets are rather portable. So we can move assets and go in and out of markets depending upon our customer requirements.

So that's - you know it's one thing to think about the light space, so to speak. It's another thing to think about, you know, the investment in that light space and how we're going to support our customers.

Again, congratulations on your quarter.

Thanks a lot.

Again, if you would like to ask a question, please press one on your touch-tone phone.

This concludes the question-and-answer session. Mr. Powers, would you like to continue with any closing remarks?

Well we thank everybody for participating and we look forward to speaking with you in the next quarter. And certainly we look forward to seeing a lot of you at our investor September 25 in New York.

Thanks very much.

Thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.