艾利丹尼森 (AVY) 2002 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Paxar fourth quarter and year end 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 press star and 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 of Investor relations. Mr. Powers, you may begin your conference.

Thank you. Good morning and welcome to Paxar's fourth 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 fourth quarter 2002 results. Management will provide additional commentary on the results as well as a look to the future. At the conclusion of that commentary, any questions that 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 about the business's and operations could cause future results to differ materially from those contemplated in forward looking statements. Those factors include general economic conditions and the company's performance operations within the prevailing business markets around the world as well as other factors set forth in the Paxar's 10-K annual report. For further explanation, participants are asked to refer to the final paragraph of Paxar's earnings release. Paul Griswold will begin our management presentation. Paul?

Thank you, Robert. Good morning. As we do on these calls, I will have Jack Plaxe, our CFO go through the financial summary of the business, and then I'll pick up and talk in a more detailed fashion about business developments focusing on the year 2002, and as importantly on the focus moving forward into '03. Then we'll open up the call to question and answers. Jack?

Thank you, Paul. Good morning, everyone. On the assumption that everyone has a copy of the press release, I would ask those of you that want to follow along to turn to page five, the supplementary schedule. It shows the fourth quarter of 2002 compared to the fourth quarter of 2001 shown as actual, that is in accordance with generally accepted accounting principles and then without certain charges. Just to refresh your memory, there were three charges incurred in the fourth quarter of 2001 that we eliminate in order to create comparability with 2002.

Shown on the income statement of $4.7 million restructuring charge that we took in the fourth quarter of '01. There's also $1.5 million for amortization of goodwill. As you know, we no longer amortize goodwill, following the pronouncements under GAAP. Thirdly, within SG&A there was a $7.3 million charge for post employment benefits. These have been removed from the as-adjusted columns. And I will make my comments comparing the left hand column, 2002, fourth quarter, to the as-adjusted column. Sales increased 8 percent in the fourth quarter of 2002 to $172 million. That compares to $159 million in the previous year. Without the effect of foreign exchange, sales were up six percent.

As we noted in the press release the Americas were flat. Business continues to move offshore, principally to Mexico, central America and Asia. As it moves out of the U.S., we have picked up business in the region, Mexico, Central America, and sales were, therefore, flat with the decline in the U.S. being compensated for elsewhere. Europe sales were up 10 percent in the quarter, but adjusting for foreign exchange, it was two percent, and Asia-Pacific again a very solid performance, sales up 24 percent. Again, comparing the -- to the as-adjusted column, gross margin declined from 38 percent to 37.4. This was due primarily to underutilization in manufacturing capacity in certain of our U.S. and Mexican businesses as well as deflationary pressures in most of the business.

SG&A increased 13 percent to $56.1 million. The changing foreign exchange rates added a about a million to SG&A in the quarter and new businesses in new territories added another $800,000. Generally it takes six to 12 months before a new operations generates enough gross margin to cover its SG&A type infrastructure costs. Excluding these effects, SG&A was up nine percent. For the reasons just mentioned, that is gross margin, SG&A, operating income declined from $14.8 million, to $12.6, the operating margin was 7.3 percent in the fourth quarter of '02 as compared to 9.3 percent a year earlier.

In the quarter there was a bottom line benefit as we adjusted income taxes to get to the correct year to date rate which is 19 percent. The benefit of that adjustment impacted the fourth quarter. We had 22 percent as our rate in the first nine months of this year, by the way, going forward for '03, we expect the rate to be 21 percent. Previously discussing the full year '02, while the second half was indeed difficult, we believe that we were able to wrap up '02 with a performance that was more than respectable, especially as regards the growing top line.

Sales grew 9.4 percent for the year. Approximately three percent of that was organic. Approximately six percent was derived from acquisitions either partially impacting '01, and those that were made in '02, and approximately one percent came from exchange rates. There's no doubt that in 2002, we grew our market share. Again, looking at the year, gross margin was essentially unchanged, but operating margin declined from 9.7 to 9.1. SG&A did increase disproportionately relative to sales, reducing SG&A as a percentage of sales is a major focus in 2003. We did have higher operating income dollars in 2002, and that combined with the lower tax rate and lower shares outstanding produced a seven percent increase in net income and 14 percent increase in earnings per share. Again, we don't regard this performance necessarily as the equivalent of a grand slam home run, but we do think it was equivalent at least to a triple.

As we look at cash flow, cash flow was strong in 2002. We mentioned that in the press release. Cash provided from operations was $63 million. That's up 17 percent from $54 million in 2001. We did do a good job of managing the elements of working capital during 2002. We have noted that sales were up nine percent. Accounts receivable increased five percent and inventories increased seven percent. However, essentially, all of the increase in the accounts receivable and two-thirds of the increase in inventories was related to the stronger euro and the British pound. In the fourth quarter we added $9 million to cash by reducing receivables and inventory while increasing supplier financing.

In the fourth quarter, debt was reduced $15 million. We spent $9 million on capital expenditures and we used $1 million to repurchase our common stock. For the year 2002, depreciation was $30 million and cap ex was $26 million. We also spent approximately $22 million to complete the acquisitions of the Disenois (ph), that was in Mexico, and NTP (ph) in Norway.

Let me give you an update on stock purchases. During the fourth quarter, we repurchased 85,000 shares at a cost of $1.1 million. For all of 2002, we purchased 685,000 shares with a cost of $10.2 million. Cumulatively, since the inception of the program in 1998 we have repurchased 12.7 million shares, at a cost of $129.5 million or an average cost of $10.21. Paul, that completes my remarks.

Thank you, Jack. I'd like just to briefly go over the fourth quarter performance and overview for the 2000 results remarking on the key accomplishments, and as importantly, probably more importantly as we talk in early March, direct a lot of my comments concerning the focus and issues and opportunities we see in 2003. Simple to say, the overall market remained challenging throughout the year 2002, just as it began, it finished. As we move into '03, we don't see a significant change, if anything, a little bit more volatility around the world with the current developments. But certainly, the uncertainty remains. Simply put again, the past year, we demonstrated we can grow. In the last three quarters, we were able to achieve $170 million-plus top-line and going into 2002, that was the corner cornerstone of the focus we attentioned towards and we had to demonstrate in our minds that we had a base business that could expand and build despite a flat or neutral marketplace. I think that certainly was accomplished.

As we look at '02 in each of our divisions, the Asian-Pacific business up from $125 million to $159 million, 27 percent pickup, again, benefiting from much of the migrating business, migrating manufacturing, I should say, as our retailers and brand relationships develop their markets around the world. Europe, as Jack remarked in the fourth quarter, overall for the year was up eight percent, benefiting about half of that amount due to the foreign exchange, which significantly impacted the second -- the third and fourth quarters, but Europe up 177 over 162 a year ago.

The American sales, despite the migrating manufacturing and the movement offshore, was able to achieve a three percent pickup with $332 million over a $322 million performance. Each one of those, I think, represent as very balanced performance that we expected as we achieved our targets on the top line for the year. To Jack's point earlier, the gross margins improved slightly for the year at 38.5, up from 38.4. We did not achieve the progress we expected for the year. As we continue to balance capacity, and deal with underutilized manufacturing assets in certain markets, primarily the United States and U.K., that in fact will be a key focus as we move into '03, as margins and cost containment remain the key focal points.

As Jack mentioned, I do want to draw attention to the ability and continued success in driving cash flow from operations, the $63 million generated this past year provides the flexibility and the confidence to grow our business and franchise on a worldwide basis, and I think that's a very key point to mention for the audience. As we look at accomplishments in '02, and what we're building on moving into '03, the CRM initiative, our client relationship management initiative delivered what we expected as the accounts that we identified and worked with grew over 15 percent year over year, with an uneven balance across the accounts, some growing more than other, but overall significantly simplifying the way we do business with the global brand and franchise accounts.

Our new product initiatives throughout the year, from probranding, the price management system that we offered to retailers to a new and updated series of equipments and machine lines from the Miamisburg (ph) operations, the new updated ultra, the new platform for the 9800 tabletop, the new portables on the Sierra line contributed to the top-line. Lot (ph) print two and continued advancements in the technology around permanent printing for the bottoms and the denim markets added to the growth and markets outside the United States. Security technology, something that we don't talk a great deal about, is a cornerstone to how we work with our customers in providing a concept to check out offering. And again, security is something that every one of the major brands has high on their list, and it's something that we work with as a value-added offering.

But finally, I think there's been a lot of attention to the tagless T-shirt offering that's been out for the past three or four months. We had bought NTP back in the summer of 2002, specifically to bring that technology into our mainstream offering. In the next few weeks, we'll be launching a soft-mark portfolio of products, or a suite of products that ranges from our transfer technology down through a fine Italian woven label for other applications demonstrating that comfort is about technology, and we are the technology leader in this space. So, for the record, we are a player in this transfer business. We're going to grow our position as we speak. We're launching our manufacturing capability here in the states to compliment over $5 million of business in Europe, and we see this as a long term strategy as we build out our product offerings.

We have also focused and accomplished quite a bit on expanding the global footprint. That's a cornerstone to the strategy as we play forward. It's what we announced and began to execute against over two years ago. That's something that the business has been built on over the years. In this past year, we have opened up in the Emirates in Dubai, Vietnam, Bangladesh, Morocco, Romania, the second largest to Turkey in the eastern European sector as far as textiles and Indonesia. This is going to continue to be an effort. As Jack mentioned, there is going to be a timing play between return on investment, but we are committed to the ability to generate cash to grow these businesses. We're not going to let up on that attention. We're also going to expand our technology base. I think the transfer technology is a perfect example of extending our capabilities as we continue to build value for the customers.

A key challenge as we move into '03 is going to be asset utilization, or capacity balancing here in the United States. The manufacturing moves offshore that we're experiencing are in fact increasing. That's, if anything, what's catching us a little bit behind and what we're chasing this past year as far as balancing our utilization rates in the United States. All I can tell you is we're focused on it. We're moving against it, it's a key priority. I would expect that we're going to start to see the financial performance late they're year with reasonable confidence, but simply put, as businesses - as our customers move their manufacturing to other markets, whether it's the Caribbean or the Asian-Pacific or the Emirates, or North Africa, we're going to continue to balance our assets. They are portable. We need to move them and we need to balance them against demand. Our ability to do this is going to be directly reflected in our margin performance in 2003. Over the past 18 months, with continued reposition our company around the concept to check out branding, and that in itself has incurred some one-time or non-recurring expenses on our SG&A line. We see that tapering through the fourth quarter. We see some improvements moving forward in 2003.

I'd like to discuss with a little bit more specific focus our 2003 initiatives. Clearly, expanding on our CRM model. It's working. We're going to extend it. We're also going to move it into the second tier category of customers that we have not paid attention to during the first part of '0 2 and as we go into '03, it's a key opportunity. We're going to increase the focus on the manufacturing customers in the emerging markets that the business is moving to, whether it's mainland China, North Africa, et cetera. These are key places and we need to treat the manufacturers more on a customer basis than we ever have, and I think we have got the capability and what I describe as assets and feet on the street to do that. We're uniquely positioned to build that relationship with those key customers.

We're going to continue to innovate. As I took you through a list of both supplies and machines and equipment and solutions, this is going to be a cornerstone. It's key for us to compete with products, not price. We have got a deflationary environment out there, and the more value that we can create and add to the customers is going to help offset that pressure as we go forward. I have already mentioned the capacity utilization focus. Balancing the assets with the demand. Absolutely important, and very, very focus in the U.S. markets and in the U.K. and Europe. Finally, the continued effort to expand both our markets and our technology footprint will provide that future growth. We have got the balance sheet to do it. We're committed to it, it's about executing the strategy that we have articulated a few years ago.

We are looking at another challenging year, as we move into 2003. We enter it with cautious optimism. Our focus remains on the long term, building shareholder value. That hasn't changed. I think the fourth quarter performance illustrates our ability to grow the top-line, demonstrates our commitment to building shareholder value and growing earnings. We have provided guidance that I think reflects a cautiousness about the year. The volatility remains. Again, I described it as very much as we worked through 2002. We don't see anything significantly different in front of us, and we're going to continue to execute. With that, I'd like to open the call to questions from the audience.

+++q-and-a.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. If you are using a speakerphone, please lift the handset before asking your question. One moment please for the first question. The first question comes from Tom Lewis of C.L. King and Associates. Proceed with your question.

Good morning.

Good morning, Tom.

Can we look a little deeper into this - essentially got a 13 percent increase in the SG&A year over year. Some of that is coming from 4-X, the foreign exchange conversion and all. Is most of the rest of why that's outstripping your sales growth about these initiatives to get into new markets, or are there other factors that we need to look at?

I mean, Tom, excellent question. Something that we are focused on. I think the foreign exchange piece certainly looking backwards had an impact in the fourth quarter and actually has a significant role going forward that we have to manage and pay attention to, but foreign exchange should, and I'll say it before someone else says it, should balance with top line. Basically, we're getting the benefit of the top line to the foreign exchange is impacting the SG&A as we look at margins. But I do think your point about opening -- the point about opening new markets is clearly - I refer to as a timing issue. We'll invest as much as $3 million or $4 million to open up a Bangladesh, an Indonesia, a Dubai. It's a nine to 15-month payback period to be back in the profit range. Some of that has played through in the year 2002.

That being said, our challenge is to be able to generate the returns to do that. I don't think it's an excuse as much as we're explaining where some of the SG&A pickup is. Beyond that, not a lot of issues that we get into were focused on what I refer to as one-time costs. With the step-up in the -- and the transfer of our audit partners, we're seeing one-time fee pickups and other things, but again, that's business today. So, I think the new markets being opened up, I think some of the foreign exchange, everything else is pretty much more typical and we're working on it.

Okay. My other question would be, you know, with respect to your tax rate in the fourth quarter, looking back over the years, it's a pretty consistent pattern. By far, it's your lowest rate. I have a pretty good idea how it's that way, but can you explain why that -- why it's that way so consistently?

Tom, normally we go into a year, for example, I have suggested for 2003 that 21 percent is the right rate to use. We go in with an expectation that's based very much on the mix of profitability from our various geographies, and as we get into the year, we're constantly analyzing and re-evaluating to determine whether the full year is correct. So, typically, in the first two quarters, we don't make changes. And as we get into the third and fourth quarter, where, you know, our vision is a little bit clearer as to where we're going to come out, we do make changes, and we try to make them cautiously. So, both in '01 and '02, we made a small change in the third quarter, and then in the fourth quarter, we were able to bring it down to what we actually settled in that, which is to say we don't want to overshoot in the third quarter, be overly aggressive in bringing down. But when you are making a year to date adjustment in the fourth quarter, it does have a dramatic effect. I appreciate that.

I guess -- I assume this is based on having been -- can we assume that this is based on having done better than expected in certain relatively low cost -- low tax areas, or is it something else?

It is that. It's that the proportion of profitability from the low cost areas, low tax rate area, principally Asia-Pacific came in being a greater proportion of the whole than we anticipated.

All right. I'm going to let somebody else jump in.

Thanks, Tom.

Thank you. The next question comes from Matthew Kempler of Sidoti & Company.

I want to dissect what's going on in the gross margin. The way I she is, there's four things that could be affecting gross margin. One is depressionary pricing pressure. The other, I guess would be voluntary price cuts to make market share gains. You talked about underutilization in the U.S., and then I know last quarter you mentioned a couple of manufacturing facilities that you were focusing on and that had their own issues. Can you address each of the four pieces individually and tell us what's going on there?

Sure, Matt. To begin with, I'd like to take the first one and group it together. The pricing pressures from our foreign buying offices and retail and brand houses, I -- to my knowledge, we're not voluntarily buying market share. We're not cutting prices to buy share. I think there's been a lot of pressure. We have one large competitor that after a recent merger has gotten aggressive in the market trying to build a book of business, and we're protecting our base wherever we bump into them. And I think, other than that, there's just the pressure that we all see, we're all shoppers.

We all understand the fact that we're paying less today for change that we had bought six months ago. Those two are pretty much the same, and I think that's embedded in the economy today. I don't anticipate a lot of change there. Where we are trying to offset some of that, as I remarked about solutions or value-added aspects, I mean, things that we're doing with our products to enhance or provide additional value for our customers around SKU management and such enables us to warrant a premium, even on a face-off with a competitor.

The other two elements, though, I think are the key challenges. To say challenges, I will say that these have known solutions. We don't have to figure out the solution. We do have a capacity imbalance or capacity utilization challenge here in the United States, and in parts of Europe, specifically the U.K., where the one thing that Tom Lewis's question drew attention to, I mean, we have seen a more rapid movement to our Asia-Pacific markets than we anticipated. Simply put, we didn't budget a 27 percent improvement in our Asia Pacific volumes going into the year, so we did see more performance in Asia Pacific surprisingly beneficial because of the tax efficiency. There are no tax holidays or other features that are driving that tax rate.

But that being said, the capacity utilization we have got to balance that down. We have to move assets to where the market is. When we bought the U.S. label businesses, certain assets, rather, a couple 15, 18 months ago, it was specifically to redeploy those assets to the growth markets. We have to pick that pace up. That change has been happening faster than we anticipated. We were expecting, you know, six to nine months and happening in two to three months. It's moving very rapidly, and I think that more than anything is being driven by the cycle time or the speed to market that the customers are demanding in the retail and brand houses.

The final point we had a couple of -- we still have a couple very specific hot spots that we talked about. As I talked to our board, and give them monthly updates, we talk about our graphics business, we talk about the woven business, we talk about Mexico, we talk about the U.K., these are situations that any organization goes through as they work through, you know, solving, you know, what we call operating hot spots. I would like to tell you that at this point, we're not -- we haven't turned the corner, but I would say in each one of those instances, we have made significant improvement, and I'm actually moving into '03, as or more concerned with the capacity balance and our ability to keep assets fully utilized and fixed costs fully absorbed than anything else. That's going to make the difference in the margin play.

Okay. So, it's capacity utilization and then obviously just standard pricing pressures that you've been seeing for a while now. Is one of your competitors becoming more aggressive, are you seeing price discount being more significant than you have in the past?

More significant. Again, price discount, I think pricing pressures people are looking for market share. We have had a zero to plus or minus percent economic situation in the world and everyone is going for the new program. So, I wouldn't say it's been discounting as much as aggressive market activity that we're going to be in the game with. I don't think that's really going to change. Again, the challenge here is to provide more features, and benefits, whether it's a D-2 com offering, which is our web-based ordering entry tool and other applications that we can provide greater value for customers as their manufacturing goes outside their own operations and around the world.

Okay. On the CRM initiative, I believe that you said that your CRM accounts grew about 15 percent on average in 2002?

Correct.

Where is that growth coming from? Is it deeper penetration of the existing product lines that you have with the customer, or are you actually being successful at cross-selling new products to the customers?

The majority is cross-selling. They go hand in hand. When we have a client executive working with a major retailer, offering full product lines supported by specialists, we're going to get opportunities at products that we otherwise weren't able to bid on. In addition to that, that grows the confidence and the strengthens the relationship with these customers, and enables us to get a deeper position with a woven label program, for example. So, it's hand in hand. I would probably say two-thirds, breadth of product, one-third depth.

Okay. It sounds like ...

... that's a typical situation.

So, it sounds like there would be plenty of room for improvement within the existing CRM base?

I rarely meet with investors that the question doesn't get asked. Appreciate that we have got a maximum 20, 22, 23 percent penetration. There's a lot of room in these accounts. When you talk about Wal-Mart, I mean, we're scratching the surface to be candid. This isn't a -- it's not that we're 80 percent of the account we're trying to scrap together the next two or $3 million. I think there's an awful lot out there.

In 2003, you're applying a more formalized process to the European market, is that true?

At the same time as we initiated in the U.S., we initiated on a pilot group or sample group in the European markets, we're heavily dependent on the U.K. base, we're expanding that to the continent, France, Germany and so forth. It's the same methodology extended. We're building off of some early positive situations in '02.

Okay. Thank you very much.

Okay.

Thank you. The next question comes from Steve Wilson of Rich & Tang (ph).

Good morning. I have several, Paul. First, I'm curious about the investment you made in disk Graphics and how that fits all of this.

Okay. Do you want to take it one by one.

Yes, no, that's fine.

The Disk Graphic investment we announced at the end of December. It was an opportunity for to us take a passive equity position in a privatization of a commercial printer, enabling us to experiment and develop additional high end graphic applications with key retailers and brand houses. We feel comfortable that the investment was at the proper value. We participated with an LBL firm and it gives us a chance to basically outsource some, what I would call, technical printing capability that we would never justify an investment in presses and infrastructure for here. So, it's more a valuation, and we feel that the financial return is well balanced.

So, it's really to lock in a source of printing, is that the right way to look at this?

Not lock in. We have printing capabilities throughout the company. We have got a graphics business in the states that's heavily focused on service, quick turn graphic applications. There's always been an opportunity. We have always been presented with, are you interested in bidding on this and this and this by a major retailer, which we have declined. This is an opportunity to go back in and see if there's a business value that we can provide, and appropriate returns without putting the assets on our -- in the company.

Was this something that they were already doing, or you're in essence forming?

What we are, again, I'll be as simple as I can be. We're the front end to a commercial printer, that's historically been very focused on the very demanding entertainment field. So, we're taking something called their core competence and we're introducing them to the apparel and retail space. So, they have not been in this space. We have historically occasionally outsourced different applications, different graphic plays, and this is an opportunity to do it and participate in the profit.

Okay. Second question is the need to shift production out of the states. I assume it's more difficult to contract on the woven side than the printed side, but can you just go sort of through the bits and pieces of how you shift production, scaling back here and increasing it in the markets that are growing?

Well, I mean, the first thing is to appreciate the front end, the artwork development and a lot of the quoting and sampling occurs in the states or correspondingly in Europe or the U.K. You have a customer service or front-end capability that's consistent. The ability to balance the capacity or the fixed costs is rationalizing the manufacturing capacity and being able to move those programs along with selective equipment, if it's a loom or if it's a GTO press, whatever it might be, to the receiving market. We have been doing that. We need to pick up the pace. What we have witnessed in the past year is the change is happening much more rapidly than we expected.

The right way to understand this is your sort of 10 percent over what you need here in the states and that has to shift, or is it more dramatic than that, 20 percent or 30 percent capacity?

It's different by business. We're made up of a lot of different businesses. I would say in the woven business, we may be 25 percent. Out of balance. I think in the graphics, we're probably 10 percent. In some of our other businesses, we're fine. In our systems business where we generate equipment and supplies, that's going to be more of a satellite operation. So, it's really where the fixed costs reside, and it's closer to that 20 percent, 25 percent than 10 percent.

He okay. The last question is free cash flow, '03. Jack, can you walk us through what you are looking at there?

Well, in depreciation, we wouldn't expect that to change much, Steve, although that's been impacted by exchange rates as well, you know. We would expect the same kind of a number, $30 million for the year. Cap ex - yeah, 25. So, not very much different from what we had this year. It was 30 and 26. We're talking pretty much the same range.

Then, from the standpoint of working capital, should that relationship change at all?

We were able to reduce working capital as a percent of sales from 19.7 in '01 to 18 in '02. And we're targeting 17, so, taking another percent out, roughly $7 million next year.

Offset by the revenue increase.

Yes. Yes. This is just as a percent of sales. It would be one percent lower than it otherwise would have been, but with sales in the range that we gave as guidance, seven, 720, working capital in total would be going up.

Therefore, ample funds to repurchase more stock - is that objective one, or is acquisition as higher priority going forward?

We never made share repurchase objective number one. It was always to do the things that were strategically prudent to grow the business, whether it's investing in new products, organic expansion, acquisitions, and then, you know, thirdly, if you will, the share repurchase program. But we have been fortunate in being able to do some of all of the above.

Just the acquisition opportunities out there more or less than you have seen in the past?

I think -- we're seeing we continue to see opportunities, I think, over the past six or eight months. They may have picked up a bit with all of the activity in turn in our businesses. But back to Jack's point, I think in rank order, this is about getting the operations right, new product investment, acquisitions, and share repurchase, and that's kind of the tick list that we go down as we look at where to spend the money, but I think all in all, the performance in '02 in generating free cash flow from operations, we expect flat or better next year. We don't see a significant change in that. The one point improvement in working capital, I think, is something that in the last year, we have developed the ability to execute against that. I think we're going to rather than stay quiet, we're going to continue to move on it.

Thank you, gentlemen.

Thank you, Steve. Of the

Thank you. The next question comes from Bob Labick (ph) of CJS Securities.

Good morning.

Good morning, Bob.

Hi, Bob.

... one question that I have for you, could you give color on margin business geography. You gave the sales growth by the geographies. Maybe you could talk to the margins in each area, and if they changed dramatically, why they changed.

I'm just looking for one thing here, Bob, before I respond. I think as we go down and we track this market he by market by market. Overall in the fourth quarter, compared to a year ago, you know in the Americas, we had gross margins moved down from a 38 range to a high 35 range, 35 - six. That's specific to what we have been talking about regarding capacity and not fully absorbing the courts on a couple of the key facilities. So, that really plays back into the earlier question. In the case of the European businesses, we actually saw a slight improvement as we continued to work moving the gross margin from 35, six, 35s-seven, up to the mid 37's. We expect that trend to continue as we have been able to match that capacity play a little bit better, because it's a smaller market with less migration, very honestly.

In the case of Asia, we actually looked at the Asian business as - at an operating margin side. I have explained this to a couple of the investors where we pry to look at a 40 percent gross bringing us down to a high teen, low 20 operating margin. In the fourth quarter, that's pretty much the recipe to follow. We had the gross drop from 42 down to 40 and a half, but we were able to deliver the operating margin line north of 20 percent. So, not a lot of surprises at all. In fact, Asia is where we expected it to. We're working the European piece and continue to see improvement, and the change I referred to earlier about the rapid pace of the migration in what we need to deal with is affecting the Americas, and in specific terms a handful of U.S. operations.

Great. Could you remind us where you are on your authorization for stock repurchase?

Sure. I'll ask Jack to ...

We have $32 million of additional availability.

Okay. You plan on using anything? Can you just also update us on the performance of your acquisitions this year?

The acquisitions this past year, NTP acquired I think July 1st, actually, very pleased. This is the transfer technology that enabled to us build the capability in the United States. Their book of business has grown nicely, up almost 10 percent at year end. We're budgeting this year to be up more than that in that business, and the question is now putting capacity in place to support the European side. That in fact has been the seed of technology for business in the United States that we have just entered into. We have commercial product coming off of the North Carolina facility as we speak. So, that was as successful as we could have expected. And in some cases more successful because we were able to execute the technology transfer ahead of what we expected to be able to. So, I mean, the NTP piece is exactly what we wanted. I touched on the disk investment which was a different kind of investment, we feel very conservative, properly valued, and that's going to expand the graphics capability.

And then the early acquisition this year, the Disernos (ph) business, which was an asset purchase in Mexico, a very, very slow start. I have to be candid in saying disappointing in the first six months. I will say in the last 90 days, I just had a business review with them. We're now starting to see what we expected to see. We're six months behind the curve as they say, as far as the investment return, but I expect fully that we'll be war we targeted, because once the business has now started to build down there, the book of business is expanding, and we feel pretty good about that.

Okay.

Those are the three touch points this past year.

That's great. Thanks very much.

Thank you. The next question comes from Randy Gourdsman (ph) of Baron Capital.

Hi. Guys. How are you doing?

Good morning, Randy.

The stock repurchase, just to follow up quickly. You have under 50 million on the balance sheet. You said you have 32 availability. Is there any possibility that you guys would increase the authorization particularly given where the stock price is trading?

I tell you, our board has never not supported recommendations to review this. Again, it's not a priority of ours, use of cash, but that's certainly under consideration.

Next question is dealing with the utilization issue, obviously you guys need to move things a little quicker to Asia from the U.S. than it's been happening. I guess that's reflected on your margin -- implied sort of, margin guidance for the first quarter. Are you guys going to close some plants in the U.S., and you can walk through the costs and how that might work?

Well, I think we could do that offline. I think as we look at plants in the United States, again, I'll stress that the front end part of the business is dependent on what we do in this country. We're evaluating that. That's something that we are certainly picking up, and putting more attention on. And I think that in the next three months, at our next call, we'll have more specifics to talk about, but it's under evaluation.

Okay. Just kind of following that line looking at the guidance for the full year, assuming kind of in a normalized tax rate, and, you know, fairly normal SG&A margins it kind of looks like the overall operating margin would be higher by the end of the year than what's implied by the first quarter guidance is that due to the estimation that you're going to get the utilization improvements and pricing.

Excellent question. Something that we have talked about amongst ourselves as we look at the business in the past number of weeks. First, you know, we're in a pretty unstable economic environment right now. We have made a practice of delivering what we have put in front of the investors as far as guidance. There's one, the focus on doing what we say we're going to do, so there's a conservatism or cautiousness about that given the uncertainty, the other part, and it's been indigenous in our business for as long as we have looked at the numbers, is the first part of the year, January and February, tends to be a slow startup. March tends to be an overwhelming influence on the first quarter performance. We are sitting in the first week of March. We're looking at the numbers. We feel pretty good about the top line.

Now, as far as the margins go, historically, as we ramp up, first quarter volume to second quarter volume, we have a much larger second quarter volume seasonally. I'm saying what you could see. For yourself. The corresponding margin improvement picks up, and that's historically what we have experienced. So, I think the combination of the uncertainty that we're dealing with, the fact that we're going to deliver what we tell people, and I think the fact that seasonally, the business picks up in the second and fourth quarters. That being said, layer on top of that the initiatives that we're going to be taking as far as balancing our capacity. I think it all adds together to give us a sense that the guidance. I like to focus zero under your guidance of $1.08 to $1.16 is a deliverable range given the fact that we finished at a dollar this past year. We're saying, you know, we can grow the earnings on a double-digit basis. And the sales guidance indicates a solid six, seven percent range, so that's pretty consistent with the path that we're plotting over time.

Is it correct to assume that, you know, the operating margins would be in the, sort of, nine percent to 10 percent range, consistent with '02?

I believe by the end of the year that the target is to get the operating margins to double digits.

Okay. Just last kind line of questioning, Paul, can you elaborate a little bit more on the competition with -- now that Avery has merged with RVL (ph). What segments of the market have they targeted, and where do you guys excel. What are they doing to grab market share.

Avery historically has been very strong. The part of Avery that we are dealing with in the graphics side. so they have been players on the service bureau (ph) and graphics piece. RVL has been a sales company focused extensively on woven and printed products. The combination is really where one tries to leverage their position on the graphics side. So, I think they're building off of the Avery, you know, product base. Nothing proprietary here. That's what we're seeing, no surprise. That's what we expected.

Correspondingly, the way we come back to it is, we provide and we're more attention to protecting our graphics business. Growing our service. We do over $90 million of graphics around the world. A lot of it is developed and designed here in this country. I think we're fully capable of competing. I think on the woven side, even after the merger, they don't have manufacturing assets. We are able to do quicker turns and sample proofing. That's where we we're going to compete with them on the printed and woven piece. In a top line way.

Just quickly, so in terms of the price, they're trying to buy market share in any of the areas. You haven't seen that?

No, I haven't seen that. That was an earlier question about discounting versus voluntary pricing discount. We're just seeing aggressive behavior. Anyone after, you know, merging is going to go after opportunities, and you know, we see them where we used to see two people, we're seeing one person. But they're certainly looking at building a book of business. I think our top line performance in the fourth quarter certainly indicated that we're growing share.

Thanks very much, guys.

You're welcome.

Thank you the next question comes from Chad Killmer (ph) of Gabelli Woodland Partners.

Good morning.

Hey, Chad.

Wondering if you are confident that you can hit the 13 percent EBIT margin that you laid out by 2005.

We laid it out as a target. We're not retreating from that at this point. I think with a we have to demonstrate, I'll say, it you know, for the -- everyone listening, we have to demonstrate that we can get the operating margin first back to double digits and grow it piece by piece. But I think it's achievable and it's where we're heading.

Okay. My other question is, you said, I think Jack said, SG&A is a focus for '03. I'm wondering exactly what the focus will be on, and where that number is going to end up being for this year?

We're looking at every element of SG&A, Chad. As a percent of sales, we know we have to drive it down. We finished the year at a full 30 percent. That is too high for our business model. The long term goal is 25. That's three to five years out. This year, we just want to get back to sort of where '01 was on the adjusted basis. You look the at schedule we gave you. It's roughly 29 percent of -- below 29 percent.

Okay.

We think that will be a good goal for this year.

All right. Thank you.

Yes.

Thank you. The next question comes from Robert Bregman of Bear Stearns.

Hello, Paul. Hello, Jack. How are you doing?

Good morning.

Since no one else has said, I'm going to say, I think you are doing very incredible --incredible and good job in an extremely challenging market environment. The way I read things, you did report 24 cents in earnings for the fourth quarter. You are predicting an increase in net of eight percent to 15 percent for next year, and yet we're looking at a stock that's down 20 percent. So, I guess I want to pin you down and do you to you feel --don't you think we should be really considering stepping up to the plate fairly shortly and reinitiating our buy-back plan in a fairly sizable way to take in stock that people seem to be selling for what I consider no reason? Why don't you speak to that issue?

Well, let me try to be diplomatic in response to this. Clearly, I mean, we're watching the same thing that you are watching. We feel pretty good about -- not pretty good -- we feel very good about this past year's performance.

Good.

I didn't want anyone to not understand that. I don't think we purposely want to strut or advertise overconfidence in this, but I think a lot of good things -- I think we have performed, as you put it, incredibly in this past, very challenging year. That being said, I think the focus continues to be on growing our business, expanding our footprint. We certainly have the cash wherewithal through operations to look at a very specific plan going forward. That's where we are going to be. The board supports the concept. I mean, it's not something that we're not inclined to look at among the range of alternatives.

Okay. Thank you.

Thank you. The next question comes from Greg McDoesco (ph) of Lord Abbott.

You talked, and you have talked quite a bit about the capacity utilization and how it's shifted quickly. Just from the nature of the retail business, does this imply that perhaps a different strategy is needed? I don't think there's any question that we will continue to see very quick changes that are ---to different locations around the world. Does this mean that in effect you have to ramp up in every location and such that you can put the capacity up back and forth. Talk about it a little bit, because it seems as if -- you know, because this fast-moving world is here. How can you deal with it on an ongoing basis going forward?

Excellent point to bring out. I think the change we knew about the pace of change has quickened with all of the uncertainty. You could hear that directly from the Kelwoods (ph) and anyone else that you may want to talk to seeing the change in the brand-building markets. I don't pick that particular name client out for any reason. I think the key, though, is that it's not that it's moving back and forth. This is a case of two markets that have been very traditionally manufacturing markets that are now not manufacturing markets. That's the United States in some categories and it's the U.K. market where people are simply have migrated off. What we need to do, I don't want to oversimplify is step up and pick up the pace of moving those fixed cost assets to where the market has migrated. I don't think it's a volatile, unplanned or chaotic move, but it's been a case where we need to be less responding to the move and more anticipating it, given the fact that we can do this plug and play or move around in three to six months.

This is not moving a paper mill, this is moving a set of looms or a set of presses. We just need to be able to respond, and we need to step up and move from traditional manufacturing markets to the new emerging markets. Those are very, very specific in the location. We're talking about mainland China. We're talking about the Caribbean basin. We're talking about eastern Europe, the emirates, North Africa and the Subcontinent. It's not that we don't know where it's going, it's about getting redeployed assets up and operating.

Are we talking more about semi-fixed costs of personnel and other things as opposed to fixed asset, or is it property, plant and equipment.

It's not so much property-plant. It's the hard assets of looms, and presses. There's not a lot of bricks and mortar involved here. There is a component of what I call human technology or the skill set that we're able to grow and move into these markets quickly.

Those when you say looms, et cetera, are those -- do you physically move those assets from one location to another?

Yeah. We put them on a palette, crate them, move 'em. There is portability to that extent. The vintage or the age of our assets allow us to feel comfortable we're not moving dated equipment.

Then with regard to the. Tagless T-shirt, you mentioned that. Would you just -- maybe I didn't hear it, but how is that going and what are your expectations there?

That goes back on our side almost two years when we looked at acquiring a business of business -- piece of business that would develop into this technology. As it turned out during 2002, we had a plan of working with the Norwegian company NTP. We acquired it. They had a book of business at the time of over $4.5 million in the business using transfers in Europe. We then within months placed an order for equipment. We're now in the business in the United States. We have gotten very good relationships with the network people that are using this product. In fact, two weeks ago, I was down an one of the sewing locations in the Caribbean watching our transfers applied. We feel like we have got a very, very good product. The category in our business at this transfer today represents is a $15 million kind of market. I think we can be a formidable player in the market quickly.

Thank you.

I think I further mentioned that we'll be launching a complete campaign against not the transfers, but this whole notion of comfort and the fact that technology is what creates comfort. We have got signed tenured woven (ph) labels that perform as comfortably as the tagless and some cases more durable. We're going to offer is a full range of transfers down to the woven category for our customers to choose from, rather than selling a transfer. By the way, we believe a transfer, by the way, is a label. It's a carrier of information. So, it's not label-less, it's just how the information is transferred.

Thank you.

Thank you. We have a follow-up question from Bob Labick of CJS Securities.

A quick question. Will there be any incremental SG&A expenses related to the change in auditors, pending management in Q1. Is that already in the guidance or how should we look at that?

It's already in the guidance. I think every public company has experienced an increase in audit fees with the additional work required by Sarbanes-Oxley. We are experiencing the same thing, but it's in the guidance.

What would the guidance have been without it?

You know, we're talking about fractions of a penny. We're not talking about whole penny necessary.

Not a meaningful ...

... a share, of course.

Got. Thanks.

You're welcome.

Thank you. At this time, we're showing no further questions. I'd like to turn the program back you to, Mr. Griswold.

Thank you very much. Robert, would you like to tie it this up?

We would certainly like to thank you for your interest and participation in today's conference call, and certainly look forward to speaking with you during the next quarter's conference call. Thanks very much.

Ladies and Gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Good day.