艾利丹尼森 (AVY) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference please press star then zero on your touch-tone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's call, Mr. Bob Powers, Vice President of Investors Relations. Mr. Powers, you may begin your call, please.

Thank you. Good morning and welcome to Paxar's fourth 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 fourth quarter 2003 results. Management will now provide additional commentary on those results as well as a look for 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 welcome and good morning. We're going to -- our program for this morning will be for Jack Plaxe, our Chief Financial Officer, to review our P & L and balance sheet, give some comments on the performance of the outcome of the fourth quarter. And after Jack's comments are completed I will review the business and the business operations. So with that I'll turn it over to Jack.

Thank you, Arthur, and good morning, everyone. Sales reached $195 million in the fourth quarter. That was up 13% from $172 million in 2002. And it was in fact significantly higher than the 178 to 183 that we gave as guidance. As noted in the press release, we had 3% organic growth in the quarter, 6% came from the Alcon acquisition and another 4% was attributable to foreign exchange.

Our Asia Pacific region continued to achieve strong growth with an increase of nearly 20% exclusive of the sales added by the Alcon acquisition. Our gross margin was 36.6%. That compares to 37.4% in the previous year. The most significant contributors to the lower gross margin were underutilization of certain manufacturing facilities in the U.S., especially woven label facilities, and inefficiencies associated with the discontinuance of manufacturing at two facilities in the U.K. These causes will not impact future quarters because we've discontinued manufacturing at the former Alcon woven label plant in South Carolina. That was done in January. And we've completed the transfer of manufacturing from two facilities in the U.K. SG&A in the quarter was 28% sales. That compares to $51.7 million, or 30% of sales a year ago. Of the absolute increase in SG&A dollars, that is, $2.9 million, going from 51.7 to 54.6, Alcon accounted for 3 million and Exchange accounted for another 2 million, which means the base level of spending actually fell by $2 million in 2003 versus 2002.

In the quarter we had $9.6 million of restructuring and other charges, of which $7 million related to the closure of manufacturing facilities in the U.K., 1 million related to consolidation of offices in Germany and France-r and 2 million related to the closure of a manufacturing plant in North Carolina and certain other downsizing actions that were taken in the U.S. As noted in the release, we do not expect to be reporting any restructuring charges in 2004. Operating income was $7.1 million, or 3.6% of sales, as compared to 12.6 million or 7.3% of sales a year ago. Exclusive of the restructuring charge, operating income was $16.7 million, or 8.6% of sales. This is shown on page 5 of the release, where for the first time we've provide aid reconciliation of the GAAP and non-GAAP measures. Net income was $2.3 million, or 6 cents per share on a GAAP basis. And it was $10.9 million, or 28 cents per share on a pro forma basis. It was $9.5 million, that is, net income was $9.5 million and earnings per share were 24 cents in the fourth quarter of 2002. We did exceed our per share guidance for the quarter, which was 22 to 25 cents per share. Using the 28 cents of non-GAAP EPS for 2003, we had an increase of 17% in EPS as compared to a 13% increase in sales. The tax rate in the fourth quarter was a very high 45%, and that's because the U.K. portion of the restructuring charge provided no tax benefits. It was a low 6.9% in the fourth quarter of 2002, and that reflected a catch-up adjustment in the quarter to bring up the rates for the year down to 18.8%. For all of 2003 the rate was 27.8%, once again driven by the non-deductible U.K. restructuring costs. On a pro forma basis, which is to say without restructuring, the 2003 rate would have been 25%.

For 2004 we believe we'll have a 26% effective tax rate. Turning to the balance sheet, we finished the year with $64 million in cash and cash equivalents. Accounts receivable was 127 million. That's up from 107 million at the end of 2002. The increase is due in large part to the greater sales in the fourth quarter in 2003, but also to slightly higher sales outstanding. Inventory was $94 million at the end of the year as compared to $84 million at the beginning of the year. But the inventory days were essentially unchanged. Our total debt was $194 million, or 34% of total capital at December 31st, 2003. That's up from $167 million, or 33% of total capital at the beginning of the year.

In the first six weeks of this year we've reduced our borrowing by $11 1/2 million. Looking at the balance sheet, you'll note that at year end the common stock subject to redemption has been fully restored to shareholders equity which effects termination of the stock repurchase agreement that we had with Arthur. Our operating cash flow was $17 million in the quarter and $46 million for the year. In 2002 we had $26 million in the fourth quarter and $63 million for the year. Basically, again, with reference to the information on page 5, the decline of $17 million for the year reflects two things, a fall in pro forma net income, an increase in accounts receivable related to strong fourth quarter sales.

Our capital expenditures were $33 million in 2003, $26 million in 2002. The increase in '03 reflects expansions in China, Bangladesh, and turkey. For 2004 we're project -- for 2004 we're projecting capital expenditures of $37 million. Whereas approximately one third of our cap ex in 2003 was in Asia Pacific, almost 50% of the capex in 2004 will be in Asia Pacific. The spending in Asia Pacific is aimed at two things. Firstly, providing manufacturing capacity for products that were previously outsourced. And secondly, preparing for the accelerated growth expected starting in 2005 with the elimination of quotas under WTO. Depreciation was $30 million in both 2003 and 2002. We expect depreciation to be $34 million in 2004. Finally, some comments on our share repurchase program.

There were no Paxar common stock

purchases in the fourth quarter of 2003. For the year we purchased 469,000 shares at an average cost of $10.80 and title cost of $5.1 million. Cumulatively since 1998 we've repurchased 12.3 million shares at an average cost of $9.92, title cost of $122 million. We continue to have $28 million of remaining board authorization for stock repurchases. Arthur, that completes my remarks.

Thanks, Jack. I'd like to just comment on the overall business. First of all, as I said in the release, we're very pleased with the progress we're making. That progress started about six months ago when I assumed the role of CEO. And I had really a four-point program, and I'd just like to go through and kind of review that with you.

But the first part of this program was something I call back to basics. And that was refocusing the business back on its sales and its products. As well as growing the top line and reducing costs, not only improving margins but also reducing our total SG&A. And so we're making headway in that area and continue to do that. Part and parcel of that was a restructuring program that we started at the early part of '03 and that restructuring program was to make sure that our assets were aligned with where our customers want our products manufactured. And that meant ultimately that we would close five plants, which we have done, and taken the appropriate restructuring costs.

I'm pleased to report that as far as we can see right now that restructuring has been completed and we do not expect any further restructuring in '04. Acquisitions were something that we've always been part of our strategy, and we would continue with that process as we acquired the Alcon woven label company the beginning of September. That integration continues to go extremely well, way ahead of plan.

And I would tell you that it was -- that acquisition was accretive for the very first quarter, full quarter after the sale, which was way ahead of what we had anticipated. So we're really pleased with that acquisition. And the fourth thing was innovation and new products. And we need to reemphasize that aspect of our business. RFID became something that Happened due to some of our Customers wanting to move in that Direction early in '03, and we have jumped in that arena and been now very aggressively involved in providing a printer and a set of supplies and integration process for those customers that will utilize RFID. We've developed a 9855 RFID printer which reads and writes and verifies.

As a matter of fact, at the NRF show, which took place the middle of January, we introduced that printer and in fact had the only live demonstration of how RFID really works in the entire show even though there were other competitors of ours with other printers but were not functioning.

So we were really pleased, and we're happy to begin to develop partnerships that we've announced with a variety of different people to try to work and develop that technology. So that is moving along. Our tagless T product which we've talked about in the past, we've actually this week doubled our capacity in North Carolina and we expect to fill that capacity pretty quickly. That program is going very, very well. And it's new technology. We kind of like it. Where we've expanded that in China as well as in Turkey and obviously we're in Norway with it.

So we've got a lot of new products in the pipeline, and we're really sort of happy about the sort of new focus on innovation. Just to comment about the overall sales, and these sales numbers are, as compared to a year ago in our three geographies, they are inclusive of foreign exchange as well as the acquisition, but just interesting, in the Americas we had a 6% increase, in Europe a 14% increase, and in Asia 27% increase. So some of that obviously has to do with foreign currency. Some of it with the acquisition. But in general there has been a real pickup in sales, and I think that is something that we're really happy about.

That pretty much concludes my comments, and at this point I'd like to open it up for questions.

Thank you, sir. At this time if you should have a question, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Bob Hlavac of CJS Securities. Your question, sir?

Good morning, gentlemen. This is actually Will Seddon for Bob. Your gross margin was a little bit lower than Bob had in his model. Can you just comment on that and what you see for gross margins going out into 2004?

Well, I won't comment on Bob's model, but you know, we explained in the basic terms why it was 36.6, we gave the principal causes. You know, I'm going to stand by what we said. It was inefficiencies in the U.S. And we've remedied that by crowing one of the acquired plants. And it was inefficiencies occurring in Europe as we move production from plants that were closed to our remaining plants. And we did say that on a going forward basis we didn't expect that to continue. As for the gross margins for '04 we don't comment on that, we give top line guidance and bottom line guidance, and Bob is certainly free to call us if he'd like to talk in generalities about our outlook for this year, but we really don't give specifics anywhere between the top and the bottom line.

Okay. And can you give us a sense of what your operating income was by region?

That is going to be in our 10K. As you know, we're in the process of finalizing those numbers, and once again, you know, Bob could be free to call us I would say early next week, and we'll be able to discuss that with him.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from Amy Norfloss of Pilot Advisors. Your question, ma'am?

Good quarter, guys.

Thank you.

Can you break out the sales by region or do I have to wait for the K for that also?

We can give you that.

Okay.

Hang on, please. We have in the Americas in the fourth quarter $86 million of sales.

Mm-hmm.

We had in India $55 million of sales. And we had in Asia Pacific 54.

Perfect. And the inefficiencies in the gross margin about the two plants, Bob, that you just spoke about, do you quantify that? I mean, is there any way to quantify it so I can see what a true gross margin would have been if I add in those two that are not going to continue?

We haven't quantified that, but it is a significant piece of the difference between our 36.6 and last year's 37.4.

Okay. Great. And then the last question. Can you elaborate a little bit more on the pickup in sales and where you're seeing the pickup, and is it specific products? Is it -- I mean, as much more details as you can give us, that would be great.

I think the strongest pickup we've had has been in the Asia Pacific region, and that really stems from India right through to China. And you'd expect that as more and more of the apparel begins to shift to that region. But Latin America, which is part of the Americas, really improved very well, and I would tell you that southern Europe, eastern Europe, France did well, you know. So European business also increased nicely. So I think it's kind of what we expected. Pretty much Asia with the strongest pickup, Europe next, and then the Americas third.

And is it a specific product line? Is it a specific customer? Is it anything more that you can give us aside from regions? Is it, you know, labels, printed labels, woven labels, graphics -- I mean, is there anything --

No. I think it's just -- you know, it's just more business. I mean, often we'll sell complete packages. It could be some bar code printers. It could be regular printers that we sell for labels. But normally, it's a complete package of products, not any specific one. So it just -- you know, improvement. You know, we've picked up some market share, and we're doing some better cross selling, we've got better focus. I think we're -- I think we're sort of got some momentum building in terms of growing the top line.

Great. Thanks, guys.

You're welcome.

Thank you.

Our next question comes from Tom Lewis of Risk Reward Advisory. Your question, sir in

Good morning and great quarter.

Hi, Tom.

First question. Did you take a reserve for the closure of that latest plant back in the fourth quarter, or was there just no reserve? Because you said there weren't going to be -- you weren't expecting any such charges in '04.

Yes, Tom. Good question. I did mention that we closed one of the acquired woven label plants in January. And under the generally accepted purchase accounting rules you have up to one year to deal with those situations after you acquire a business. So in fact, the severance associated with that, and believe me, it's not significant. I mean, probably less than half a million dollars. But under the rules that goes to goodwill rather than to the P & L.

And Jack, I was wondering if it would be possible, you talked about how in the fourth quarter, you talked us through the changes in the dollar amount of the SG&A.

Right.

Is it possible to get at that for the year in terms of the 10 or so million-dollar increase in SG&A expenses?

It is, but I don't have it in front of me, Tom. But please give me a ring.

I can go through that with you.

Okay. Fine. And last question, I guess, as long as we're all here on the call, halfway into the first quarter of the year, what can you say about the tone of business so far this year?

I felt that -- I said this at the last conference call, Tom. That the fourth quarter was beginning to be strong and if we had a good -- a strong fourth quarter, we had a good opportunity of continuing that into the first quarter, which would be really important. So far January has kept that pace. So we're kind of hopeful that that will continue. And we've got a good start into the first quarter.

Okay. Great. I'll get back to you later. Thanks.

Okay.

Thank you. Our next question comes from Matthew Kempler of Sidoti. Your question, sir?

Thank you. Good morning. The first question is really a follow-up on Amy's question. Regarding your five product segments, I was wondering if you can talk to which ones you saw growth in 2003 and which product segments you expect to see the majority of the growth coming from in 2004.

I don't think we break those out that I'm aware of.

Publicly, that is.

Yeah. So I really can't comment on that.

Well, I'm not talking specific dollars.

I don't have that information in front of me, anyway. You're talking about product segments.

Right. Not specific dollars but you know, woven labels versus your apparel systems versus your bar code systems.

Almost every one of our product areas improved.

Okay.

And I mean, we could talk more specifically, but I would tell you that it was pretty much broad-based. It wasn't anything that absolutely, you know, died. A lot of these businesses are really connected. I mean, one goes with the other. And so -- but I think in general we basically had a really good quarter across the board.

Okay. Can you elaborate further on the elimination of quotas in China? What that entails and what it means for Paxar and maybe some of the local competitors there.

I think right now for everything that I read and hear when the quotas come off more and more business will go to China. Although there is a question in everybody's mind as to whether or not in January '05 the U.S. government has the right to slow that process down. And all indications seem to be that they probably will do that. So there may not be just a wide gate opening. But it will -- we see this as not impacting us pretty dramatically here except that China being the strongest probably Asian country in every respect may pick up more market share from other Asian countries. And that's really the concern everybody has right now. I think almost 93% to 94% of all apparel is now made outside the United States. And a good hunk of that is made in Asia. And I think we'll see a shift from other Asian countries into China. I'm not sure that impacts us negatively in any way that I can see.

Okay.

Matt, I read one trade report that indicated that currently 20% of U.S. apparel imports come from China and there was a projection that by 2010 that would double. We're talking six years out.

Okay. And Jack, you had talked about part of the reason the cap ex will increase next year is to take over manufacturing of some products currently being outsourced.

Right.

Can you give us an impression of what the gross margin differential is on the products that are being outsourced and what you should generate on product when it's internally manufactured?

Better. Double digits better, Matt.

Double digits better.

Yeah.

Okay. And over what time frame does that happen? Is that something that happens by the second half of '04 and we see the benefit in '04 or do we start to see the benefit in '04?

'05. It's gradual but think in terms of '05.

And finally, on the restructuring side, can you give us an indication of from the restructuring beginning in the first quarter and then what's been initiated in the fourth quarter how far along we are in the cost savings and what the incremental benefit remains for 2004?

I'm not sure how to answer that. Please be a little clearer.

Sure. The target -- when you initiated restructuring in the first quarter, you targeted, you know, some $15 million of potential savings between SG&A and cost of goods, and then you initiated the restructuring in the fourth quarter as well. How much of those savings have been recognized on an annualized basis so far?

Right. Well, what we said in our April press release is that we were targeting $10 million of SG&A reduction, and we believe we got half of it in '03 and we'd get the full benefit in '04. And then in October we talked about 10 to 12 million dollars of improvements, and we weren't specific as to SG&A cost of sales. And you know, we accelerated what we did so that there would be no charges this year. And originally we were talking about perhaps as much as $5 million of charges in '04. Instead we pulled what we could do forward into '03 so that again, on the conference call last time we estimated the charges in the fourth quarter of '03 to be 8 million. They actually came in at 9.6. That's a reflection of the acceleration. And so we think that the savings based upon what's been done through '03, will be in that $10 million range. We think that we got probably in the range of 3 to 4 in '03 and we'd get the balance in '04.

Okay. Thank you very much.

You're welcome.

Our next question comes from Eric Swergold of Gruber McBain.

Good morning. A couple questions for you. I know you dope want to give specific guidance on the gross margin or the SG&A lines, but can you talk about in a big picture sense what your peak gross margins were a couple years back and then on the SG&A side 200 basis points improvement this quarter year over year. You know, within some reasonable time frame, say, 18 months to do years, what do you think you can get SG&A down to from 28% currently?

The first question was what were peak gross margins?

)8)Yes.

Well, in fact, gross margin was 39.2% in the year 2000. It was 38.4% in '01. It was 38.5% in '02. And the full year, as you saw in the release, 37.6. If we talk about a peak, I mean, we're talking about 39.2%.

You've got some room on the gross margin line. And then on the SG&A line, 200 basis points improvement if you took a big picture swing at it, you know, over a reasonable time frame, what do you think you could get that down to?

Again, I'm not sure of the question. We finished the year with, again referring to the press release, SG&A was 30% of sales. Your question is can we get that down 200 basis points?

Well, it was 28 in the fourth quarter. So I'm wondering on an annual basis what you think you can get it down to eventually.

That's pretty hard to know. We have -- maybe the way to answer that question is we said we want to get back to double-digit operating income as we move forward. We haven't given a time frame for that. But we'd like to be there or at that rate at some time this year. So you can sort of work your SG&A back from your gross margin using that.

Okay. And then did you give the cash flow from operations number for the quarter?

I did. It was $17 million.

And given that you've got quite a bit of cash in the bank now and you didn't repurchase any shares in the quarter and you threw off that kind of cash in the fourth quarter and given the relatively modest increase in cap ex for next year, what are you going to do with the rest of the money?

Well, we did -- I mean, I mentioned that we paid down $11 1/2 million in debt in the first six weeks of this year. We have some debt that's fixed and some debt that's available for repayment. So there's another 15 million that's available for repayment. And other than that, as we've said, from time to time we look at all alternatives, and we've used it for acquisitions, internal growth, and share repurchase.

And what's the highest cost debt that you could repurchase right now, or repay?

It's sub 2%.

Okay. Thanks very much.

You're welcome.

Thank you. Our next question comes from Robert Pregman of Bear Stearns. Your question, sir?

Hi, Arthur. How are you doing? I just want to say it's really nice to have you back at the top. What you've done in eight months is really terrific. This is the first conference call I've wanted to be on for the last year. And I think it's a good footnote that it seems as if we won't have any further restructuring charges going into '04, which I think is ahead of time. So that's terrific. Everything we read about this RFID, I always read Wal-Mart, you know, connected to it. Do we have any connection as far as that's concerned? Can you talk about that at all?

Yeah, we do. We attended a Wal-Mart conference along with a whole variety of other people in November in Bentonville. Part of a gathering that they brought their top 125 vendors to. And after they talked to the vendors, we had a bit of a show, and it was very, very well received. So we are part of the electronic product council, which sort of gives us the credibility of being a player in that market. But we're working with Wal-Mart along with lots of other folks who are. And we're working with other people. I mean, if you went to the NRF show and maybe you read about metro, which is a large German company --

Right. I have.

And they had the store of the future there, which was quite amazing. Lots of neat technology. We're working with Metro in Germany. We're working with Martin & Spencer in a whole new program in the U.K., which has -- which has completed a one-store test and will now go to a three-store test in I think march. And so, you know, I mean, this is really interesting technology. It's the first breakthrough since bar code 30 years ago. For the retail industry. We think it's pretty exciting. The costs are coming down pretty dramatically, you know, month by month. And I don't think anybody sees any great revenue stream happening, you know, this year, but there is definitely opportunity out there. I mean, I've read reports that people are estimating that this is a more than a $3 billion market by 2008, which is very interesting. It should only happen. But there's no question as this technology -- two things that are really for certain. The costs are going to come down dramatically, which will enable more people to use it. And the second thing is the technology, that's outstanding in terms of improving the retail supply chain and retail inventories. And as a result the combination of those two really are going to provide great impetus to that whole business. You know, the question is how quickly? What's the time horizon? And that -- I don't think anybody has a magic crystal ball.

Well, you know, at least we're at the forefront of it, and keep up the good work. That's all I can say.

Thanks, Bob.

Thank you.

Thank you. Our next question comes from Rob Hilf of FMI. Your question, sir?

Thanks, guys.

Hi, Rob.

How are you guys?

Good, thanks.

Congratulations, Arthur and the Team, on seven months of doing some pretty good work here, I guess. My question goes more along the guidance and sort of thinking about what you've talked about in terms of gross margin and where your issues were in the last quarter and maybe how you can get that back up to a little bit of a higher level. And then thinking about where some more cost savings are coming from on SG&A. Looking at where the guidance is it doesn't seem to sort of foot as I do it from the back of the envelope. And I'm just wondering if there's some conservatism baked into the numbers or if I'm missing something. You can get a 37-plus gross margin and, you know, a run rate of 28% SG&A number. It seems like a margin of 9% would be reasonable. And I guess earnings numbers sort of backs out something higher than that -- or lower than that. Any thoughts on what I'm doing wrong?

I don't think you're at all unreasonable on your gross margin expectations. But quite frankly, the 28% SG&A to sales that we had in the fourth quarter is not baked into our projections for the year.

Is there a reason why the 28% -- or the fourth quarter should be lower than maybe next year if you're able to continue to, you know, experience I guess cost savings going forward, you know, things -- or maybe we're hitting on all the cost savings that you've instituted.

Actually, Rob --

Do you know what I mean?

I allowed you to drag me into the elements of your model, which is something I resisted doing earlier. But you know, I'm happy to do it -- have a general conversation with you offline.

Okay.

But you know, the 28% was driven by a pretty significant increase in sales in that one quarter. And you know, is there any conservatism in our guidance? Yes, of course.

Good. I think that's okay. Just making sure that I'm sort of thinking along your lines. So we'll talk later.

Thanks.

Thanks.

Thank you. Our next question comes from Amy Norfloss of Pilot Advisers. Your question, ma'am?

Have you guys seen Avery in the marketplace? I mean, are they becoming more competitive? Or are you seeing them or hearing about them or doing anything?

Avery who?

Got you.

We -- you know, they're clearly, you know, our biggest competitor. It's -- we don't particularly -- I think it's been pretty quiet. That's all. I don't hear too much about them. And obviously, we compete every day, but it's -- in the beginning I think after the acquisition that they made there was a lot of talk both publicly and in the industry, and that seems to have really calmed down and gotten very quiet. So -- it's a great company, and we like to compete with them. They're really good competitors. But you know, it seems to be --

But it's a rational market basically right now. They're not coming in to try and disrupt the marketplace.

No.

Perfect. Okay. Thank you.

You're welcome.

Thank you. I show no further questions at this time, sir. You may continue, Mr. Powers.

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

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may now disconnect.