艾利丹尼森 (AVY) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to Paxar Corporation's second quarter 2003 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 requires assistance during the program please press '*' then zero on you're your touch-tone telephone. As a reminder, ladies and gentlemen, this conference call is being recorded. I would like to introduce your host for today's conference call Mr.Bob Powers, Vice President of Investor Relations. Please go ahead, Sir.

Thank you, Jonathan. Good morning. Welcome to Paxar's second quarter 2003 conference call. On the line from management will be Arthur Hershaft, Chairman and Chief Executive Officer and Jack Plaxe, Senior Vice President and Chief Financial Officer. This morning before the market opened Paxar reported second quarter 2003 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, the performance of the Company's operations within its prevailing business markets around the world as well as other factors set forth in Paxar's form 10K annual report. For further explanation, participants are asked to refer to the final paragraph of Paxar's earnings release. Arthur Hershaft will now begin our management presentation. Arthur?

Thanks, Bob, and good morning and welcome to our second quarter conference call. I'm going to ask Jack Plaxe to review the quarter from a financial point of view, and then I will comment on the quarter and the future as I see it going forward. So with that, Jack.

Thank you, Arthur. Good morning, everyone. On April 29th, we provided second quarter guidance. We gave sales of 168 million to 173 million. And we indicated EPS in the range of 18 to 22 cents per share fully diluted. As you know, we have exceeded the guidance. Sales were $184 million, up 6% from 173 million reported in the second quarter of 2002. And earnings per share was 25 cents, that is before a restructuring charge and a charge related to Paul Griswold's severance arrangement which I'll get into later. EPS was 32 cents a year ago. Including the restructuring charge and the charge for Paul, E.P.S. was 18 cents.

As noted in the press release, business improved as we moved through the quarter. Asia Pacific has sales of $50 million, 16% over the prior year, and our Europe, Middle East, and Africa business unit had sales of $52.5 millions, 18% over the prior year. This was due almost entirely to the strength of the euro and the British pound. The average value of the euro was up 25% in the second quarter of 2003, compared to the second quarter of 2002. The pound was up 11%. Overall sales in the Americas declined 6% in the quarter. They were $81 million. In the prior year they were $86 million.

Sales in the Caribbean, Central America, and Mexico combined increased 26% while sales in the U.S. and Canada fell 10%, reflecting the continuing migration of apparel manufacturing as well as economic softness in the U.S. Our gross margin which had been at 37.4% in each of the two preceding quarters improved 80 basis points to 38.2%. It was 40% in the second quarter of 2002. SG&A was 29.8% of sales. That's down from 32.6 in the first quarter of 2003, but up from 28.5 a year ago. In absolute dollars, SG&A was $54.8 million in the second quarter that is up from $53.2 in the preceding quarter.

Approximately $1 million of the quarter over quarter increase is attributable to increased selling costs on the additional $20 million of sales and approximately $1 million is attributable to foreign exchange. Therefore, by deduction, all other costs fell by approximately $400,000. Before restructuring costs of $2.3 million and $1.3 million charge related to Paul Griswold's separation from Paxar, operating income was $15.3 million or 8.3 % of sales. That is down from $19.9 million or 11.5% of sales last year but up from $7.8 million or 4.8% of sales in the first quarter. Obviously we're pleased that our operating margin has turned upward following three quarters of decline.

As mentioned previously, our goal is to get back to a double-digit operating margin over the next several quarters. The $2.3 million in restructuring charges incurred in the quarter related primarily to positions eliminated in the U.S. sales organization as well as downsizing at several locations in the U.K. In addition, as I mentioned, we had a charge of $1.25 million related to Paul's departure. This represents a payment of $2 million and accrued expense of approximately quarter million dollars related to temporary continuation of medical coverage and early vesting of stock options. All of this is net of a million dollars that we previously accrued for his supplemental retirement benefit.

The supplemental retirement benefit was eliminated as part of a final settlement deal. As noted in the press release, it's estimated that the actions taken to date will reduce SG&A by approximately $7 million next year. And we intend to implement additional actions in 2003 to reach our goal of $9 to $10 million in total savings. The tax rate was 23% in both the second quarter of 2003 and the second quarter of 2002. Net income on a GAAP basis, which is to say including the restructuring and the charge for Paul, was $7 million. It would have been $9.8 million without these charges. It was $13.1 million in 2002. We've now provided guidance for the third quarter and updated our guidance for the year.

As the third quarter is usually impacted by seasonal slowness in Europe and in the U.S. to a lesser degree, we're estimating that sales will be in the range of $170 million to $175 million and that earnings per share will be in the range of 18 to 22 cents. Again, this is before possible additional restructuring charges. We did $170 million and 25 cents per share in the third quarter 2002. For the year, we've added 5 cents to the bottom our EPS range and we've added 2 cents to the top of the range, previously we gave guidance of 70 to 80 cents. We're now at 75 to 82 cents, and we've increased the sales guidance for the year to $690 to $700 million.

As you know, we did $668 million in sales in 2002 and we had $1 per share EPS. Looking at the balance sheet, the major changes, and here I'm going to compare June 30th to March 31st, accounts receivable increased $17 million reflecting the increase in sales, especially in the final weeks of June. We had an increase in goodwill of $5 million and that's driven entirely by exchange rates. We also had an increase of $12 million to accounts payable and accrued liabilities, which again reflects the increased in business activity. And shareholders equity increased $17 million.

The company's debt to total capital ratio fell slightly to 34.4% at June 30th. It was 35.2% at March 31st. Year-to-date cash flow from operations, which, of course, includes the restructuring charges, was $8 million in 2003, that's down from $18 million last year. There were a number of puts and takes but the $12 million decline in net income represents the principal difference. Capital expenditures were $16 million in the first six months of 2003. And depreciation and amortization was approximately $14 million. Comparable figures for 2002 were $10 million CAPEX, $14 million depreciation and amortization.

For all of 2003 we're projecting CAPEX of approximately $34 million and depreciation and amortization of $28 million. There were no shares repurchased in the second quarter. On a year-to-date basis we have repurchased 285,000 shares at a total cost of $5.1 million. That's an average price of $10.80 per share. Recapping since inception, which was in 1998, we've repurchased 12.3 million shares at a total cost of $122 million. That's an average price per share of 9.92 cents. We have $28 million of additional authorization remaining against the total of $150 million approved by our Board of Directors. Arthur, that completes my report.

Thanks, Jack. I'd like to just comment basically on three things. Earlier this year, we started a program called Back to Basics. And Back to Basics in my mind had basically three phases. One was current actions. The actions that we have taken that Jack spoke about and that is improve the gross margins, reduce the SG&A costs. And I'm happy to say that we're well on plan to achieving what we had estimated and that is a $9 to $10 million SG&A reduction as we move into '04. And continued improvement in the gross profit margin. So that was the immediate action.

The second aspect was the strategy of the business. And the strategy of the business is what I call product focus. And so we have changed the way we look at the business and we're now looking at product by product. And now product focus does a lot of things. First of all, it drives innovation, which is really important, because innovation drives new products and new products drives sales increases. So that really is a real focus. Now, that's the strategic business unit approach that we talked about earlier. That started in the earlier part of the year, but really got going, I would say, the beginning of the second quarter and is now completely in place as we move into the third quarter and the balance of the year and obviously next year and beyond. So product focus is critical. That will also drive better margin management and people focusing much more closely on the cost of goods and the cost of manufacturing. It will also drive what I call fixed cost control. And that is we don't spend any more money than we anticipated spending and we're constantly looking to reduce our costs.

The third and last thing is to really focus on cash. So cash is going to be king. We have to think about cash, not only as it relates to profits but to working capital especially. So we're going to go back to those, I guess, four different things, product focus, which is going to drive innovation and sales, margin management, fixed cost control, and an emphasis on the cash side of the business. The third phase of Back to Basics is really to sort of look at our market as we've always looked at the market and that is we have a tremendous franchise. We were the first people to put together the whole one-stop shopping concept for apparel and retail. We have grown that business, and we'll continue to grow it on a global basis so we can make our products available to our customers wherever they are. We will continue to broaden that product line as we can identify more and more products that fit into our, what we call, "product suite". We will also do that through acquisitions. We have always been acquisitive. We have bought many, many companies through the years. And any acquisition we do would have to be accretive in the first full year of acquisition.

So, we're going to go back to exactly what we have done in the past, focus on our market, acquire businesses, broaden our product suite, and grow our business in the way we know how. So in general, I'm really pleased. I've been back on the job for 60 days. You know, the momentum that was developed here is ongoing. I'm pleased with the progress that our management team has made in making these changes. And we're really excited about the opportunity and the potential for growing the business and continuing to make Paxar the leader in its field. With that, I'd like to open up the conference call to any questions.

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 and you wish to remove yourself from the queue, please press the pound key. And if you're on a speakerphone, please lift the handset before asking your question. One moment before our first question. Our first question comes from Tom Lewis from C.L. King & Associates.

Good morning.

Good morning.

Hi, Tom.

My only question is, Jack, you were talking about receivables being as high as they were. Did you say that that was all because of or mostly because of the timing of sales picking up in June?

Yes. We had a very strong second half of June, Tom, and all of those sales obviously are sitting in receivables.

Okay. And was that strength seen across your various regions, or was it -- or is there any -- yeah, just leave it at that. Was it -

Yes, yes, it was pretty general across our business.

Okay. Thank you.

You're welcome.

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

Good morning.

Good morning, Matt.

My first question is really, I think on the expense side. You've made mention of the SG&A savings. Can you talk a little bit about what you're seeing on the gross margin side and how you're progressing versus goals there?

Well, I think we can talk in general. I think that a lot of the things -- first of all we talked about consolidations. We are doing consolidations here in the United States, have done, and continue to do them in Europe. All of that improves the SG&A part of the business -- the gross profit part of the business. And, as we go and focus more on the second phase, which is product focus, we expect to really drive very, very hard at our cost of sales. And so, you know, I think we get improvements both ways, by doing the one, two, three. The real basics. Product by product, you know, machine by machine, plant by plant. And so I kind of think that we will see improvement, gradual improvement over time.

Okay.

Excuse me. Just to add a little bit to that. As we mentioned, in the first quarter, the savings were skewed toward cost of sales. We talked about approximately $3.5 million of annualized savings in the cost of sales area and about $2.5, talking about the first quarter now, of savings in the SG&A area.

In the second quarter, we're looking at savings resulting from what we did in the range of $5 to $6 million and that is skewed heavily towards SG&A. It's about 80% SG&A. So, we're not behind what we were programming for the manufacturing area, but in the second quarter, the focus was very much in the SG&A area.

Okay. And how far along are we in the target, it got about 350 positions?

We are -- Robert, you have that handy?

120 in the first quarter, as you know, and in the second quarter, 208.

208 additional.

That's right.

Okay. All right. From the sales side excluding the foreign exchange and acquisitions, the growth is basically flat year over year. We talked about the product focus here. Can you maybe give us some specifics on how you expect to jump-start growth going forward?

I think that -- I think what is happening to our business is that it is -- it's a relatively slow market growth, estimated at somewhere in the maybe 2 to 3%. Hard to measure it because there's some deflation on the sales of apparel. But as we look at units, we see somewhere in the area about 3% increase, at least in the U.S. market, and a comparable amount in the European market. We think we can jump-start growth by product focus and innovation.

I don't think it's ever really stopped. I think that we -- you know, we sort of plateaued a little bit. But our -- but the consolidation, I think, of our customer base and the dispersion of where the goods need to be manufactured, I think is a positive thing, because we're the best positioned company in the marketplace on a global basis to provide these products.

So I think if we get back to the market focus, the product focus, and we get back to innovation, those are the things that are going to allow us to kind of look at every single specific product and every single market to sell that product. I don't have anything more specific than that, but I can tell you that, that's the way we've done it in the past, and I think we can do it again in the future.

Okay. But just maybe if you look at your five product segments, I don't know if it's premature, but if you can talk about each of those specific segments and which ones you think can grow low single digits, mid single digits and which ones you expect just to hold steady?

I think it's a little too much to try to do on this conference call.

Okay.

I don't really have that in front of me. But I'm happy to go through that with you offline.

Okay. Thank you.

Thank you. Our next question comes from Bob Labick from CJS Securities.

Good morning. First question, Avery Dennison said on their conference call that they're seeing decline in their business Asia Pacific. You guys obviously had a strong quarter there. So, are you winning contracts from them or are they coming up in competition? How do you explain that?

I can't explain it. I don't know what's happening in their business. I do know that our Asian business has been strong for quite a while and continues to be strong. We have a very broad-based Asian business. It's, I think, quite a bit different than theirs in a lot of respects, but, you know, we see our Asian business growing forward, and that's an area of expansion for us. And a lot of emphasis. I don't understand what it is that they're doing so I can't comment on it.

Okay. I mean, have you seen on yourself taking contracts from them in that region?

You know, I don't think we see ourselves necessarily taking contracts. I think we compete every day. Obviously, as our business grows, most -- most of that -- there's probably some market share growth. Hard to know exactly who we're getting it from. But the market is growing, and it's as the business migrates more and more to low-wage areas -- the Asian market that is getting the lion's share of that growth. So we would expect to grow in that market because of more market growth than market-share growth.

Okay. To follow up from the last question on gross margin, you know, those gross margins were down 180 basis points year over year versus 140 basis points in the first quarter. So, you know, it appears they're still declining. What are the major causes of that and how soon do you think you can get that decline to flatten and then improve?

If you make a comparison against our strongest quarter ever, second quarter last year, I mean, not that we hadn't had 40% previously, we did 40% in the year before, but we think that it's more appropriate to be looking at what we're doing sequentially rather than to go back to the previous year's quarter.

So, for example, I mean, as we all know, the company in -- had three quarters of declines. After that 40% in the second quarter last year, we had 37.8 in the third. As I mentioned in my remarks it was 37.4 in the fourth and 37.4 in the first. So we regard it as very definite progress that we move from 37.4 up 80 basis points to 38.2. Now, sure, that's down 180 from the year before, but the year before was an exceptionally strong quarter and we see it as improvement, just the fact that we've turned around instead of decline, decline, it's an uptick. And it's not where we want to be eventually, but in a matter of fairly short time we managed to get what seemed to be a very steep downward trend turned around, and we're pleased with that.

I don't think that we can explain, you know, it in terms of being worse. We'd like to talk about in terms of being better.

Okay. Just one last quick question. Cap Ex of $34 million is higher than, I guess, prior guidance of $31 million or $30 million or so. What's the incremental Cap Ex that's going to be spent on?

Well, it's a variety of things, but it's very definitely related to some I.T. spending in the Far East where we're going to be upgrading the E.R.P. system there as we have for the most part done in the Americas.

Super. Thanks very much.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the "1" key on your touchtone telephone.

We have a follow-up from Bob Labick from CJS Securities.

I was just trying to get off this but I feel, I'll ask another. You mentioned acquisitions as a vehicle for growth, you know, tuck-ins and the like. Could you discuss, what you might be looking at. Would it be geographic or product focus and just give us an update in general on where you stand in that process?

Well, I think it's something that we've been pretty good at over the years. And so we're always looking at opportunities. And there's always two or three or four that we're looking at, and they are primarily geographical, but sometimes market share and sometimes product broadening of the product line. So, these are the four, sort of, categories. And we don't have anything in particular to report, but we see that as an important part of our overall strategy is, to broaden our overall market position through acquisitions. And that doesn't mean we do them all the time, but we will continue to look at that and be probably a bit more aggressive in the future than we have been in the last, you know, year or two.

Great. Look forward to seeing you at our conference in August. Thanks very much.

Thanks, Bob.

Thank you. Our next question comes from Rob Helf from Fiduciary Management.

Good morning. Couple of questions. First can you first discuss the litigation with Zebra and sort of -- as much as you can describe the products that you feel that were infringed upon? And just remind us again of what kind of capacity -- what types of products you are, I guess, shuttering capacity maybe in the higher cost countries and moving to sort of the lower cost capacity nations that you have. Thanks.

I think it's hard to comment. It's probably not possible for us to comment beyond the press release in terms of the patent infringement suit. This was a suit that was filed back in April and is -- I guess -- there's ongoing conversations between the attorneys on our side and their side. So that's about all I could really comment on that. I would say on the second question, the -- almost all of our products are being impacted on a geographic basis by offshore manufacturing. That's a process that takes some time because not every place our customers want to be, is it possible for us to provide a full-range of products.

So we're more than likely going to be expanding pretty rapidly with our ticketing business, which is the easiest business, although one of the more complex businesses, to go global with. Printed labels clearly is the second one. And woven labels is the third one. Our Systems business and Barcode business is probably the fourth one. That's the one that is more than likely going to be pretty well fixed here in the United States because we can make product here and ship it elsewhere. It's more of a standard type of product.

But most of the custom products over time will migrate to where the customer wants to make his goods. I don't know if that helps you, Rob. But that's kind of the way it goes?

It does. I'm just trying to get into the mindset that you guys have and how much capacity and what sort of products you want to be, I guess, positioned with geographically. It doesn't sound like you can have everything in each country but at least be reasonably close to where your customers are needing to go?

And I think that's what we've done. We're very much -- if we look at it, not country by country, but region by region, certainly, the C-Cam region is one that's growing well for us, and we will expand and continue to expand the whole range of products in that area. And eastern Europe, northern Africa, southern Europe, those are all the areas that we are growing pretty rapidly and continue to open up new marketing areas. And, of course, Asia is very fast growing as we spoke before, and we continue to expand our position in Asia pretty rapidly.

So -- and there's abroad range of products there. So I think in general, the only two places that we are not expanding and - if anything, we're probably contracting is going to be right here in the United States and in western Europe. And so, as the business migrates we'll see a contraction in one place and expansion in other places.

Caller: thanks, Arthur.

Thank you our next question is a follow-up from Matthew Kempler from Sidoti & Company.

Thank you. I was wondering if we can talk a little bit about the CRM program and how that fits into your sales strategy, and if it's still a big part of it, what's the progress you're seeing these days?

I think CRM is a great -- kind of a great program We're not talking much about it, but basically we have people assigned to national accounts, and we call those folks CRM's. We don't look at that as anything much today that is different than we've had in the past. We now have a split sales force. We have our BCS sales people calling more specifically on accounts and apparel people calling on accounts. So we have the different - but basically we do -- we still have CRM's on accounts and the two sales forces work together. So it's a little bit different than it was, but clearly, something that's important for us to continue to manage the national account, particularly as they consolidate.

Will you still report data points on how those top CRM accounts are performing?

No.

Okay. All right. And then otherwise, from a new product perspective, I don't know if there's any update on what's coming in the pipeline or some of the newer products that were released recently like the Lokprint, the tagless, Ultra Gold, how they've been impacting the top line.

I don't really have that information. There hasn't been a focus in terms of trying to pull that together and giving you that right now. But the whole transfer business is doing very, very well. We've been up and running now for the last 90 days. And we are producing more and more of these transfers. So that is going well. Lockprint is going well. All of the new products are going well. But most importantly, we are going to be coming out with a whole variety of new products as we go forward over the next six months. And that's going to be the focus.

The focus is going to be new products that can bring value add to our customers, because that's how you win business. And, so we want to develop lots of products that our customers perceive, bring them value. Value perception is really important. And I think we'll focus on that. And in our next conference call, I'll be happy to spend a bit more time on that area, Matt.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press the "1" key on your touchtone telephone.

Mr. Powers, there no more questions in the queue at this time. I would like to turn the program back to you.

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

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.