艾利丹尼森 (AVY) 2003 Q3 法說會逐字稿

Good day, Ladies and gentlemen. Welcome to the Paxar 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 "*" then "0" on your touch-tone telephone. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, VP of Investor Relations Bob Powers. Mr. Powers, you may begin your Conference.

Thank you Joyce. Good morning and welcome to Paxar's third 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 third 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 the Paxar's earnings release. Arthur Hershaft will now begin our management presentation. Arthur?

Thanks Bob. Good morning, everybody, and welcome to our conference call. I'm going to ask Jack Plaxe to review the content of our press release and our third quarter numbers. Then I will give an oversight on the operations for the third quarter and our strategies going forward. So with that, Jack.

Thank you Arthur and good morning everyone. Sales for the third quarter were $171 million, as compared to $170 million in the third quarter of last year. The quarter benefited by $4.5 million of foreign exchange and $3.3 million due to the acquisition of Alkahn which became effective September 1.

Our guidance was 170 to $175 million excluding Alkahn which means we fell short by $2.6 million. As noted in the press release, our performance was impacted by the sluggish economy. Our reported gross margin was 37.9% for the third quarter which compares to 37.8% a year ago.

However there was a charge in the quarter of $600,000 that flowed through cost of sales. This pertains to a write-up of Alkahn’s finished goods inventory at the date of acquisition. The charge, which is mandated by Generally Accepted Accounting Principles, is basically intended to deny Paxar any profit on the purchased finished goods. If the gross margin were calculated without this hypothetical charge it would be 38.3%. That would be up 50 basis points from the gross margin in 2002 and up 10 basis points from the gross margin in the preceding quarter.

By the way, we will report a similar charge of $900,000 in the fourth quarter. The impact of the write up hits our income statement as the inventory is sold and since we acquired Alkahn in September not all of the purchased finished goods were sold in the third quarter. SG&A dollars were $52.6 million in the third quarter -- that's up from $48.9 a year ago but down from $54.8 in the second quarter of this year.

If we look at the $3.7 million increase in the third quarter of 2003 as compared to the third quarter of 2002, $1.6 million is attributable to foreign change, $1.1 million is attributable to the acquisition of Alkahn, $600,000 results from our expansion into new geographies and only $400,000, or less than 1%, is attributable to other spending increases.

When we look at the third quarter of this year compared to the second quarter, there's actually a reduction of $2.2 million in SG&A. Exchange had a negligible effect on the comparison. Alkahn again added $1.1 million to the third quarter and our cost reduction initiatives were in large part, but not entirely, responsible for the $3 million decline.

We took a restructuring charge of $4.1 million in the third quarter. As noted in the press release it was principally a non-cash charge to write off the remaining net book value of an ERP system no longer in use in our Ohio Bar Code and Printing Solutions business. They were upgraded to Oracle 11I, that’s an Internet enabled system, which is what we're using throughout the Americas.

Previously they had been on Oracle 10.7. While we might have made the argument that the write off was not necessary because it was an upgrade, we decided to take the more conservative path and eliminate the asset related to 10.7. Again a non-cash charge, this will have the effect of increasing pre-tax earnings by $1.3 million over each of the next three years. The balance of the third quarter charge was for severance. Restructuring and other was a charge of $10.8 million for the first nine months of this year.

And we have estimated that there will be a charge of approximately $8 million in the fourth quarter related primarily to the consolidation of manufacturing facilities in Western Europe. In addition, yesterday we announced that we will close a weaving plant in Snow Hill, North Carolina, by year's end.

Again as noted in the press release we're planning a variety of new measures to increase productivity and reduce fixed costs and these measures are focused on the consolidation of additional facilities in North America and Western Europe. Some of these measures require careful phasing, in order to avoid disrupting service to our customers, and others require further analysis to confirm their viability, but we are determined to right size our manufacturing and reduce our fixed costs.

We mentioned fixed costs in the press release. When we speak of fixed costs we are referring to all costs other than those that are directly applicable to selling, making, or delivering the product. So it includes, for example, plant supervision, depreciation and insurance as well as all elements of SG&A except the variable selling piece.

And, of course, these costs are not fixed in the sense that they cannot be down sized. A more common term for these costs might be overhead. The message is that we're planning additional measures and that it will take a couple of quarters to get them fully implemented.

Our operating income was $8 million or 4.7% of sales, including the Alkahn related charge and restructuring charge. It would have been $12.7 million or $7.4% of sales without these items. In 2002, it was $15.4 million or 9.1% of sales.

The tax rate in the third quarter was 23% as it has been in the prior quarters of 2003. It was unusually low at 17% in the third quarter of 2002 as we made a year to date adjustment in that quarter to bring the rate down to 22%. Net income was $3.9 million or 10 cents per share with the previously described charges included and $6.9 million or 18 cents per share excluding these charges.

It was $10.2 million or 25 cents per share in the third quarter of 2002. Turning to the balance sheet, many of the changes in the balance sheet in the latest quarter were as a result of the Alkahn acquisition. Alkahn added roughly $7 million to accounts receivable, $8 million to inventories, $10 million to net plant and equipment, $5 million to goodwill, $5 million to accounts payable and accrued liabilities and $15 million to our debt.

Apart from the $7 million increase in accounts receivable, added with the purchase of Alkahn, we reduced the accounts receivable by $9.5 million in the quarter. This helped drive cash flow from operations, which I'll speak to in a minute.

Our total debt increased $15 million in the quarter to $203 million or 35.8% of total capital. We began the year with a $167 million in debt and a debt-to-total capital ratio of 33%. By the way $4.2 million of debt has been repaid since September 30.

We generated $19 million of cash from operations in the third quarter, which was equal to the amount generated in the third quarter of 2002. Our CAPEX were $8 million in the quarter, $23.5 million for the first nine months. Depreciation was $8.4 million in the quarter and $22.2 million for the nine months. We're projecting that both capital expenditures and depreciation will be approximately $33 million for the full year.

We made no share repurchases during the quarter. Year-to-date, we’ve made 469,000 shares were repurchased and they were done earlier in the year at an average cost of $10.80, for a total cost of $5.1 million. If we look back cumulatively since we initiated this program in 1998, we’ve repurchased 12.3 million shares at an average cost of $9.92, for a total cost of $122 million. We have $28 million of board authorization remaining for share repurchases. Arthur, that completes my remarks.

Thanks, Jack. At our last conference call, I announced a strategy called back to basics. And that strategy was really geared to improving our profitability dramatically through leveraging our fixed costs on improved top line, which is a combination of market share gains and new product introductions. All geared to bring the company back to a double-digit operating income margin.

Let me bring you up to date on how we're going. Let's start off with, part of the back to basics is top line sales. Our intention really is to increase market share. We're going to do that through better execution as well as acquisitions. As you know, we announced the acquisition of the Alkahn Company at the beginning of September.

That's a major market share gain for us and I would like to -- I'm happy to report that acquisition is being integrated very, very well as we speak and ahead of plan and will be a significant help to our overall plan. We are also working very, very hard on executing better and that's a real focus. Today, it's speed. Speed to market is absolutely key.

And as we improve speed to market, we're going to improve our ability to execute and therefore get more business. The other aspect of improving sales is new products innovation, something that the company has been very good at over the years. And with our new focus on bar code and apparel products, we're really making good headway. I will quickly go through a variety of new things that have really happened this year. I want to start off by two (ph), because RFID is really something that has been very much in the news lately.

We have been very successful working with Marks & Spencer in the U.K. to help them with the implementation of a test store which, in fact, is underway as we speak. Paxar provided the tickets, tags and labels and incorporated the RFID technology as part of that test.

Here in the United States, we are going to introduce an RFID-capable printer at an upcoming EPC's global symposium, which will be held in conjunction with Wal-Mart. That will happen, I believe, in November. That, along with a variety of specific retail-oriented supply items that will be all geared to RFID.

So RFID is very important to us as we go forward into the world with our retailers. As they expand in that area, Paxar will expand as well. In addition, on the apparel side of our business, we have introduced a solution called SpecStar, which is really to help our brand and retail customers manage and control data that needs to be sent around the world. That's been a very, very successful program so far and continues to grow.

We introduced a printer called Lokprint 2 which has the ability to print on both sides of fabric and is particularly suited for the jeans industry and that, I'm happy to announce, is moving extremely well, and we're increasing sales every day.

We introduced on the bar code side of our business, two new printers, 9855 and 9860, which really has provided us so far this year with 20% increase in table top printer sales in terms of units. That really is absolutely terrific, plus a new line of cart products designed to provide mobility to the tabletop printers, and this is really a terrific innovation, which has gone extremely well.

In addition to that, there have been a variety of brand new products, brand new fabrics and new inks that have been introduced as we go forward. So innovation is alive and well at Paxar and we continue to work hard at it.

Let me move to the margin side of the business. We need to improve margins. Focus on productivity. That's absolutely critical. We will do that by optimizing global capacity and improving execution. If we improve the execution, we will do it for less money, lower costs, and we need to absolutely optimize global capacity.

Once we do that, margins will improve. Fixed costs, Jack talked about that earlier. We need to first of all control the costs that exist and, through global consolidations geared to reduce overall global fixed costs, we can and in fact so far this year we have announced cost reductions of somewhere between 19 and $22 million which we will see the benefit of in 2004.

So that's part of the whole leverage if we can increase the top line and we can reduce our fixed costs, we really increase the leverage and the profitability of those increased sales. And last but not least, cash is king. We're working very diligently on accounts receivable and inventory across the world.

That is a new focus. And we're making pretty good headway. I think we will see more and more benefits as we get through 2004. As we talked about the business in the third quarter, we thought business was somewhat sluggish, it's cyclically not a strong quarter for Paxar but the overall economy, at least in the retail side as far as we were concerned, we felt was soft on a global basis. We have since, in October, seen that kind of take the reversal.

So business appears to be improving, or the climate for our products appears to be improving. So we're sort of optimistic about the fourth quarter and very optimistic about 2004.With that I will open up the conference call to any questions.

Our first question comes from Bob Labick (ph) from C.J.S. Securities

Good morning. Just a quick question, can you focus a little more on the restructuring. You said there will be an $8 million charge in Q4 and it sounds like there may be additional charges going into Q1 and Q2. Could you just tell us in more detail what you're expecting to do and maybe the magnitude, not the exact dollar, but is it another $8 million next year or is it 20 or is it 5 or something along those lines, please?

I think that the downside -- that the one-time charge of $8 million, represents the majority of it. There may be some additional charges in the first quarter but we think that most of it is going to be as part of the fourth quarter.

Great. And do you think, through this charge and the actions you have already taken this year, SG&A will be flat to down next year? Is that possible?

Well, again, we're looking at, as Jack described, we're looking at total costs. Because that, to us, is where it's at, we're actually managing the business from a total cost point of view, rather than specifically SG&A versus gross profit. So overall, we just expect next year to improve our overall operating margins. And I mean, if you look at the cost reductions that we're talking about, if a good part of that is realized in 2004, and we expect it will be, we will definitely see an improvement in the operating income.

Great. And then one, kind of changing thoughts here, one of your competitors mentioned that order sizes for your kind of business have been down materially. They said to the magnitude of 30%. Are you seeing that in your order sizes as well?

Nothing new. It's order size. Twenty years ago customers used to buy large quantities and used to make it in eight to twelve weeks, and then drop ship it. Today, everything is just in time, people buy what they need, when they need it, where they need it. And so, but that's not new from our point of view, and really a lot of our products are sort of geared particularly with our in plant printing, it really is geared for just-in-time delivery. So small quantities, yes, that's part of the game, but not new.

OK. Great. I will get back in the queue. Thank you.

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

Thank you. Matthew Kempler of Sidoti and Company. Just a follow up first of all on the cost restructuring side. Of the expense savings that were already – began implemented in the first quarter of this year, have we seen the full benefit from that yet or was there still a residual benefit in the fourth quarter and then into 2004?

Yes, we indicated when we first announced the program back in April that we would not be seeing the full benefit in 2003.

OK. So about how far along the way are we at this point?

In terms of achieving our targets, we're pretty much there. But in terms of -- again, the full benefit won't be until 2004.

OK.

I'm talking about the target in phase one that we talked about in April.

That's right. I'm saying what percent of that phase one has been recognized, for example, in the September quarter?

Are you talking about how much favorability, did we have in the quarter?

Right.

I am going to have to get back to you on that, Matt.

OK. And then from a sales perspective, you mentioned that October is starting to pick up. I'm trying to get a feel for, you know, with the business down, about 4% organically in the third quarter, while retail sales overall appear to be improving, what kind of lag typically is there before retailers start to increase their volumes on the apparel side?

It's pretty close. I would tell you that if our business is beginning to show an improvement, my guess is that we're very, very close to the Christmas time frame. So we're talking probably impacting what might be a better Christmas. You know, a lot of the Christmas goods have been made and shipped. I think what people are looking for today is probably re-orders. So we see that kind of pick up or that kind of improvement on a global basis, you know, it probably, to us, says we could have a decent Christmas.

OK, and the 4% deterioration in the third quarter, you know, roughly, if you can characterize, how much of that was related to pricing versus how much of that was related to volumes?

I think it was just sort of lackluster sales. I mean, our customers were not out buying -- this is on a global basis, not just the U.S. but the U.S., Europe, Asia. The whole supply chain sort of was pretty quiet, particularly in July and August. And even, you know, a piece of September. So I can't characterize it any other way than just to say business was slow.

Then, finally, you're talking about execution as one of the keys to improving the business, speed to market, being a priority. Can you tell us what is the speed to market today for Paxar, what the new target is that you’re looking to get to, and how that compares to where the competitors are at?

I don't know where the competitors are. But I think that mostly our industry and I think all of us that compete in this industry, you know, need to meet our customers' needs and our customer is saying you got to execute faster. So execution could be 5 days, 6 days, and 10 days. It could be turning samples in 24 hours. It's just the entire fashion industry is on a high-speed mode. So you have to be able to supply this industry on a global basis, which makes it more complex in a very, very, very fast time frame. So I don't see we're perfect. But, boy, we're moving really rapidly to improve that time frame.

Is this a competitive advantage for Paxar at this point?

It's a competitive advantage. And it also, if you're not there, it could be a competitive disadvantage.

OK, thank you.

Next question comes from Tom Lewis with C.L. king.

Good morning, guys. First question, it looks like your capital spending plans for the year, year to date, are a bit higher than -- maybe a good bit higher than, it seemed, several months ago. Has that gone up? If so, can you talk about where it's going?

Yes, I think it's gone up a little bit; I don't think it's dramatic. But I think we're rapidly expanding in the Asia market. A lot of that has to do with additional manufacturing capacity as well as new infrastructure, particularly our ERP system, which is kind of a brand new initiative which is going forward, and will go online live, January 1, for the entire Asian market.

Some of the things that we didn't necessarily anticipate earlier are our transfer business, is going extremely well. And we have exceeded our expectations in terms of how long that product line is going. And we are increasing capacity as rapidly as we can. That was not necessarily something that we were -- that we knew earlier. So there are certain areas that we are, no question, increasing our capital spending.

And Jack, could you repeat the number? You were talking about earnings improvement because of that write off of the ERP?

Yes, Tom. It was $1.3 million for each of the next three years.

Of each of three years?

Yes.

OK, and are you at liberty to, you know on this RFID trial that you're doing, is this something -- you know, about how deep it goes? Are we just talking about pallet management or are we talking about getting down in the cartons or individual items?

You know, everybody is doing something different. Here Wal-Mart has at least announced that they would like to do pallets and cases. Marks & Spencer’s test actually is on an item basis. So everybody has a different look at it and everybody is testing something else. There's no question, however, that going forward, RFID will have, you know, a major role in the whole retail supply chain.

OK. And last question, two months into it, is there anything you can say now that you have got Alkahn, I have to think going in there you look for a certain amount of attrition from some accounts. How is that shaping up relative to your expectations?

I think it's great. We didn't have very much overlap. Alkahn is a terrific company that focuses on a certain high quality product. We focus on a different product line. So there wasn't much overlap. Some but not much. So far I think we're actually pleased. This is an acquisition that we worked a long time before it happened. And so it's going well. And I think it's -- these are the kinds of acquisitions that Paxar has always done extremely well and it has really benefited from and I think this is exactly that kind of acquisition.

OK, Great. Thanks a lot.

You're welcome.

Our next question comes from Rob Helf from FMI.

Good morning.

Hello Rob.

Maybe for the benefit of all of us, we have heard about the restructurings in April as well as these right now. It's not always apparent to us to see how that flows through both cost of goods as well as SG&A expenses. And I was curious maybe if you could talk about sort of where we are -- excluding Alkahn and what that added in costs, excluding that, just where we are at in terms of how much cost you think have been taken out of currently, maybe either -- you know, per quarter and where you think that is going to get to just with the restructuring that you have announced so far. Does that make sense Jack?

It's not easy, but it makes sense.

Well I can (indiscernible) back here, but I think that is an area that we're all trying to get our arms around. We obviously can't see that, especially with the inventory write downs and things like that, to see what has been associated with the restructurings and sort of where we are at in terms of getting the costs out and potentially where the leverage can be going forward.

We do have schedules set up for that. So you can -- you know, you and Jack can talk about that.

I mean, it looks like -- you said $3 million in SG&A. Is that incrementally from the second quarter, Jack?

Yes. I wasn't brash enough to take full credit for that as restructuring but I did say that it was a -- a significant part was restructuring.

There's obviously some in cost of goods as well I take it because some of that is not flowing through SG&A correct?

Sure. For example Holdrege had an impact on both lines, more on the cost of the goods line than on the SG&A line frankly. So I can give you a call and we can dissect that a little bit better.

OK, I think that's just -- we're going to be looking to see, because obviously that is part of the story here.

And I think I will just add one thing. And I said it earlier. As we look to optimize capacity in plants which is what we're attempting to do here on a global basis, by just taking two plants operating at 50% of capacity and making one running at a hundred, you automatically improve the gross profit as well at reduce fixed costs so you're doing both. And sometimes it's very, very hard to say how that is going to show up.

And again, you anticipate a fourth quarter charge that's significant but yet a first quarter potential charge that’s smaller? It sounds like, I think you were addressing a question.

I think the question was asked and I think we said that we put that in there as fourth and first because, as we work through this, there may be some additional things that will happen in the first quarter as we work on this whole planning. But we think the majority of it is in the fourth quarter.

And regionally, it sounds like U.S. was the first to be a kind of looked at and now it's more Western Europe? Is that correct?

Yes, I think western Europe has been working on some of these consolidation for a while and we just accelerated the whole, both consolidation and we think here in the United States there's more consolidation to do as well.

OK. Well thanks, guys.

Thank you Rob.

Again if you have a question please press the '1' key on your touch-tone telephone. Our next question comes from Robert Bergman (ph) with Bear Stearns.

Good morning Arthur and Jack. How are you?

Hello

Just one question reference the share buy back with the stock price down here, although it is above the averages since the beginning of the program and in the last year, I'm wondering if you or the board might recommend moving forward with continuing the buy back program since Paxar seems to be, as far as I can see, relatively inexpensive at this point?

I think Bob, that's certainly something that we're looking at all the time. Right now we just did this acquisition and we want to get that settled down. We're also increasing our capital spending as we expand around the world. But I would say we're definitely going to look at that. That's not a strategy that is forgotten believe me.

Terrific OK thanks.

You're welcome.

Our next question comes from Derrick Dueback (ph) with Ironwood Capital Management.

Thank you. Good morning. I came on a little bit late so I apologize if this has been asked already. This is more of you know, to the cost savings point. Clearly there's a lot of cost savings potential, especially if you put it on a per share basis. If you could help me better understand where these savings will be driven from. You know, provide more specifics. significant people reduction? How many facilities do you plan on closing? Where you're going to be closing them, etc.

That is -- these are things that we would rather not get into on a conference call for a variety of reasons. But we're more than happy to share some of that with you privately.

All right, I will call you later.

We have a follow-up question from Matthew Kempler

Thank you. Hey Jack, I was just wondering if you could give us the break down for international sales, North America, Asia Pacific.

Sure. Thanks for the slow pitch, Matt. The sales in the quarter in the Americas were $80.8 million. In EMEA, 45.7. And in Asia Pacific, 44.2.

OK, thank you.

You're welcome.

Again if you have questions press the '1' key on your touch-tone telephone. At this time, Mr. Powers, I'm showing no further questions.

Well, thank you very much for your interest and participation in today's conference call. And we look forward to speaking with you during our next quarter's conference call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.