艾利丹尼森 (AVY) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Paxar Corporation’s Q1 2004 Earnings Conference Call. (Caller instructions.)

I would now like to turn the conference over to your host, Mr. Bob Powers, VP of IR. Mr. Powers, you may begin.

Thank you, Hector. Good morning and welcome to Paxar’s First Quarter 2004 Conference Call. On the line from management will be Arthur Hershaft, Chairman and CEO, and Larry Segall, VP and Controller.

This morning, before the market opened, Paxar reported first quarter 2004 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 markets around the world, as well as other factors set forth in Paxar's 2003 Annual Report on Form 10-K. For further explanation, participants are asked to refer to the final paragraph of Paxar’s earnings release.

Additionally, Paxar will hold it’s annual meeting of shareholders this Thursday, April 29th at 9:30 AM at the Intercontinental The Barclay New York, 111 East 48th Street, New York City and we invite you all to attend.

Arthur Hershaft will now begin our management presentation. Arthur?

Thanks Bob and good morning. Thank you so much for being with us this morning. I’m going to introduce Larry Segall, who will go through the financial results, and then I’ll provide some commentary on the background and what drove these results.

So, without any further ado, Larry.

Thank you, Arthur and good morning, everyone.

Sales reached $189m in the first quarter. This represents a 16% increase over the $163m level that we achieved in 2003. This was also higher than the $175m to $189m range that we previously gave as guidance. As noted in the press release, we produced solid 6.0% organic growth in the quarter, with another 6.0% coming from the Alkahn acquisition and 4.0% attributable to foreign exchange. Our Asia-Pacific region continued to achieve strong growth with a 16% increase and that is before sales added by the Alkahn acquisition. And our Europe-Middle East-Africa regions contributed a 9.0% increase before foreign exchange.

Gross margin was 38.3% and that compares to 37.4% in the previous year, a 90-BP improvement. The higher gross margin reflects reduced manufacturing costs, as significantly consolidated our capacity and improved efficiency by discontinuing production in certain of our US and UK manufacturing facilities.

SG&A of $58.3m in the quarter were 30.9% of sales. That compares to $53.2m or 32.6% of sales a year ago. Of the $5.1m increase in SG&A, Alkahn contributed $2.5m, exchange accounted for $2.3m and sales related increases added another $1.6m. This means that our base spending level actually fell by $1.5m in 2004, reflecting the impact of cost reduction initiatives that we took in 2003.

Operating income was $14m, or 7.4% of sales. In 2003 operating income, before the $3.1m restructuring charge, was $7.8m or 4.8% of sales. Net income was $8.7m or $0.22 per share and that compares to $3.4m or $0.08 per share on a pro forma basis in 2003. These results exceeded our per-share guidance for the quarter, which was $0.15 to $0.18 per share.

In the quarter, we provided income tax at a rate of 23%. Based on our analysis of regional earnings and the relative rate mix, we believe this to be a representative rate for our overall 2004 income taxes.

Turning to the balance sheet, we finished the quarter with $50m of cash and cash equivalents. That is down from $64m at the beginning of the year. This reflects the $27m pay down of all outstanding borrowings under our revolving credit facility and $8m of capital expenditures and these were offset by cash generated from operations in the quarter.

Total debt of $167m or 30% of total capital is down from the $194m, or 34% of total capital level that we saw at the beginning of the year. Accounts receivable was $129m at March 31st and that was up slightly from $127m at the beginning of the year.

Inventory was $96m at the end of the quarter and that compares to $94 at the beginning of the year. Benefiting from improved inventory management, this modest increase in inventory is expected to support our seasonally higher second quarter sales levels.

Turning to cash flow, we generated operating cash flow of $16.4m in the quarter. In 2003 we produced $2.5m. The increase of $13.9m results primarily from two items: An increase in net income and also in working capital.

Depreciation and amortization were $7.6m in the first quarter of this year and they were $6.7m last year. Our capital expenditures were $8.4m in the first quarter. We expect both capital expenditures and depreciation for 2004 to be in the range of $34m.

Finally, some brief comments on our share repurchase program. There were no Paxar common stock purchases in the first quarter of 2004 and we do continue to have $28m of remaining Board authorization for such stock repurchases.

Arthur, that completes my remarks.

Larry, thank you. It sounds like a great quarter. I want to make a couple of comments.

About a year ago, we had a conference call and we talked about changing the direction of the business and we called it “Back to Basics”. And that Back to Basics program was a four-point program that was all geared to get Paxar back on track and I think that this Back to Basics program frames the first quarter and what we’ve been able to accomplish.

First, let me talk about item one, which is top line growth. That was a real focus for us and continues to be a focus, which was going to be driven by new products in new markets and by our four basic product lines, brand development, information services, and supply chain management. All of which are doing well and continue to grow.

Talking about top line growth, we should note that in the fourth quarter we had organic growth of 3.0% and we followed that up in the first quarter with organic growth of 6.0%. So, we’re beginning to move the organic growth, the core businesses, a little bit better every single quarter.

Gross margin improvement was the number two item in Back to Basics and there we had a series of consolidations and restructuring that took place in ’03 and a little bit into the first part of ’04. And lots of productivity improvements filling our plants and bringing them up to full capacity that has definitely helped or gross profit margin and we look forward to that continuing as we move forward into the balance of the year.

SG&A improvement, no question that that was a real focus: Price controls number one, and number two cost initiatives. We did a lot of downsizing - a lot of right sizing I would say - in ’03 and early ’04 and we’re beginning to see the benefit of that. And of course cash flow, which is very, very critical, that Larry mentioned, and that has also been a focus and has been really good.

Most importantly, I must tell you that all of the employees of Paxar are really responsible for this turnaround and really taking “Back to Basics” to heart - a major change, adapting to change, and embracing change. So, congratulations to all of the people at Paxar for really turning in a wonderful quarter.

Let me go on and speak a little bit about the individual business units. In the Americas we had 8.0% growth, on plan and primarily driven by the Alkahn acquisition. Lots of restructuring in the Americas in ’03 and in the beginning in ’04 and they were primarily responsible for integrating 100% of the Alkahn acquisition, which is now complete. Big job and a job well done.

Europe was up 9.0%, with exchange, of course, 23%, but 9.0% organic growth and they benefited also from a refocusing of the business country-by-country, adding additional marketing programs, and also the consolidations that took place and the restructuring that took place in Europe in ’03.

Asia-Pacific grew at 16%, primarily driven by the migration of business from Europe and the United States. All told, including the acquisition, they grew at 24%, which is a lot of business to manage and so congratulations to the people in Asia-Pacific for handling this tremendous growth in business.

A couple of other comments: As I said before, we have now completed the integration of Alkahn. We went live by integrating the software systems, the ERP systems, I guess a week ago and that went very smoothly. Now we will be able to focus on additional acquisitions as we go forward.

Our RFID, which is something that we mentioned in our release, obviously it is something that everybody, the market, is focused on. It’s probably the single biggest change that’s hit the retail supply chain and the retail industry in a very, very long time. We’re making great progress in that area. We’ve introduced this implementation kit, which really allows a customer to get ready to be RFID-ready. That’s going well. We’ve actually moved 50 of those units. So far, after introduction, we continue to see a lot of activity on that program.

We believe, in general, that we’re very well positioned in the RFID area by being able to provide our own printers, with readers, integration services, a complete line of supplies, and fee of service, all focused because we are focused on retail and apparel. So, we think we’re very well positioned to handle RFID as it begins to develop in the future.

Last, as you know, we are in the process of conducting two very important searches, one for a COO and the other one for a CFO. Just a quick note that both of those searches are going forward, at this particular point, and we would expect to bring them both to a conclusion within the next 90 days. The CFO search, obviously, as we’ve said, will include internal and external candidates.

So, that sort of concludes my remarks and we would love to handle any of the questions that you may have. So, I’m going to turn it over to you and open it up for questions.

Thank you very much. (Caller Instructions.)

And our first question comes from Matthew Kempler of Sidoti & Co.

Hello? Hector, are you there?

I guess Hector killed the line.

Yeah. Yes. He killed the line.

He just killed the line when he went to get the question from Matt.

Okay, So he’ll call back in.

Is that what he’s going to do?

[Technical difficulty - call disruption.]

Our next question comes from Eric Swergold of Gruber & McBaine.

Perhaps my friend at Sidoti had the mute button on. Larry, I just have two questions for you this morning. First of all, what was the average -- I forgot, congratulations on a good quarter, by the way.

What was the average rate on the debt paid down during the quarter is my first question. My second question is, given Arthur’s comments on the consolidations and improvement in capacity utilization, what was the capacity utilization during the quarter and what are your long-term targets there? Thanks.

[Technical difficulty - call disruption.]

Ladies and gentlemen, please, remain on the line. Your conference will begin momentarily, one moment.

[Technical difficulty - call disruption.]

Ladies and gentlemen, once again, we’re going to begin the Q&A session. (Caller instructions.)

Our next question comes from Chris Kapsch of Black Diamond Research.

Yeah, hi Arthur.

Hi Chris.

Some technical difficulties, so I don’t know if this has already been asked. But recently you commented that by the end of calendar ’04 that you might hope to have a run rate of 39% gross margins and maybe 10% operating margins as you exit the year. And then given sort of the upward revision in expectations here and a stronger top line, I’m wondering if there’s a chance that we could see those levels achieved earlier in the year, coupled with the operational improvements that you seem to be achieving.

I think our goal is still to get the double-digit operating income and at least be at that rate by the end of the year and I would be reluctant to change that goal in any way, in terms of bringing it forward.

Okay.

It’s really a little bit too early to know.

All right and then last year there was some notion that part of the difficulty in the retail environment, in this particular space was a reduction in the order sizes, which caused some inefficiencies in the manufacturing plants. I’m wondering if, given the stronger sales environment, if the order sizes have improved and that’s allowing you to achieve better run rates as well.

I doubt if that has very much to do with it. I think we’ve adapted to the small quantities. I mean, there’s no question that the small quantities are now a little bit bigger small quantities, but I don’t think that’s made any difference in terms of productivity.

I think the main productivity improvement that we saw was due to the consolidations of manufacturing and productivity improvements. We’ve learned how to adapt to this new environment we’re in, which is no inventory, make small quantities when needed and where needed.

Okay.

So, we’re doing that much more effectively.

Fair enough and then, just following up on the ERP side on the RFID initiative, I’m curious. I know some of these installations of your RFID reader/writer in the field, it’s early going, but I’m just wondering if you have any feedback from customers in the supply chain space that have been able to test your turnkey system at this point.

Well, we have. I mean, it’s early days. Everybody is in a test mode. We’ve gotten, so far, good comments from the people -- we’ve got it out with a lot of people for testing, a lot of people that we have alliances with and really a lot of customers. So, everybody is in a test mode and so far we’ve gotten, I would say, a good response.

Okay. You guys are participating in the EPC Global effort to establish some of those standards. Do you have any sense on when those standards might be established? I know the group is targeting mid-year, but since you have some role in that I’m wondering if there’s any more visibility on those standards.

I don’t know that we have any more visibility than anybody else. I mean, I think everybody is talking about a third quarter. Whether that will happen or not is a question. This is a little bit of a moving target, but I think the industry, EPC Global, is looking to get some standards in place sometime in the third quarter, from what I understand.

All right. Okay. We’ll stay tuned on that. Thanks a lot.

Okay. Thanks Chris.

Our next question comes from Rob Labick of CJS Securities.

Hi, good afternoon.

Hi.

Question. Okay, the organic growth was very impressive, particularly in Europe. I was wondering if you could just give us a little more color on that, what was driving it and if it’s special programs and if it’s sustainable at these rates and if that’s implied in your guidance?

Particularly in Europe, remember we were comparing to a first quarter in ’03, so I’m not sure that we can read into that that we will continue at that particular rate, but we are more focused. We’ve have new markets, which are really beginning to kick in, in the European regions in Eastern Europe and Southern Europe.

And so, I would say, both the existing markets and the new markets are really helping us here and we’ve got a lot of new products that have really kicked in, that have really helped Europe a lot. There are a couple of RFID initiatives going on there, none of which show up in the top line but, I mean, there’s a lot of activity going on.

I think, in particular, the consolidations that we’ve been through in ’03 have helped with some market focus, because we’ve had several business units within each county who have now brought that down. So we have single business units in each country and that’s helped an awful lot to focus marketing and sales attention.

So, I would think that we would look at continued growth in Europe. Maybe not at those levels, because that was a comparison to a fairly weak ’03.

Okay great and what changed in terms of the tax rate for the quarter and sort of that you have changed for the year as well, what kind of mix shift is causing that change?

Change? I missed that.

It was the change in mix. This is Larry Segall - its Rob?

Yes. It’s Bob.

I’m sorry, Bob. When we planned our tax rate for the entire year we were not anticipating some tax planning capabilities that we were able to take advantage of. And after we’ve further analyzed that and combined that with our analysis of mix, clearly we’re looking at a 23% rate for the year.

That’s great and do you think that will be sustainable going forward as well or?

We believe, for the near term, yes. But again, as you know, we operate in many, many markets and so we need to examine that carefully each quarter, but at least for the next year and we feel comfortable with that.

Okay great and in terms of you’ve paid down, basically, your revolver and I guess all the debt you’re going through probably through ’08, what are your plans now with your free cash flow? You had a very strong cash flow in the quarter. Is it more repurchases? Is there any talk of a dividend? And could you give us any color on the acquisition front that you mentioned during the call as well?

I think our first opportunity is going to be in the acquisition area. We’ve been very acquisitive. We now have finished the Alkahn integration, as I said, and we’re now open to pursue other acquisitions. We, in fact, have been pursuing them, but we’re ready now to move forward a little more aggressively.

So, that’s about all I can say on that other than we are looking and talking to three or four different people in different areas of our business. That’s our first call for the cash and I mean we’re always looking at share repurchases but that doesn’t look very likely as we go forward. I think that probably the best use of our cash is going to be to build the business.

Got it and I know you don’t want to tip your hand, but are you looking in terms of products or geography for acquisitions?

Both. We’re looking at two geographical expansions and two product expansions in different areas. So, typical of what we do, nothing both on acquisitions that are products, that are driven into the same customer and the same market and geographical expansion to broaden our footprint and we’ll continue that process that’s worked for us.

Great. Okay. My last question and I’ll back in queue. Your Capex guidance is slightly lower than it was after the first quarter, I guess 34% versus 37%. Is it still going to be spent predominantly in Asia? I guess it was a little over 50% that was going to be in the Asia-Pacific region. Has that changed and how is that progressing?

That’s progressing well. Yes, 50% will be in the Asian region. It’s a little bit lower because we were not able to actually get to spend all the money as quickly as we thought we could, so we’re going to wind up spending a little bit less than we thought we would this year.

Okay, a great quarter. Thanks very much.

Thank you.

Our next question comes from Eric Swergold of Gruber & McBaine.

Hi. I was cut off when I asked my questions earlier. If you heard them, I’ll just get them on the conference call transcript. Did you hear them?

No we didn’t.

Okay. I had two questions for you and it took me a while to log back on so, if you’ve answered these, once again, feel free to skip over. The two questions I had were what was the average interest rate on the debt that you paid down during the quarter and the second question I had was with regard to the capacity utilization in the quarter. Obviously you’ve made some good strides there. What was the capacity utilization and what are your long-term targets for that? Thanks.

I guess the answer to the first question is probably under 2.0%.

Yes. It’s under 2.0%. Our revolving debt is at LIBOR plus a spread and so that’s the debt that we paid down.

Right. In the first quarter, in certain areas, we were at very high levels of capacity. Both our European business and our Asian business were at pretty close to 90% of capacity, maybe 85-90% and were really particularly in the last six weeks of the quarter.

In the US, in fact, a little bit less but maybe about 70% of capacity, US and Latin America, so, I think in general and we expect as we go forward, our second quarter is seasonally our strongest quarter. We expect to be at full capacity throughout the entire second quarter.

Okay and then once again, going back to the interest on the debts, don’t you have some higher coupon, longer-term debt that you could pay off once the revolver is done?

We have senior notes that, yes, that are 6.74%. They come due a little bit later on. Whether or not we plan to -- our plans are not to do anything in that regard.

Yeah. It would be difficult in order to -- there’s a big prepayment penalty that makes it very unattractive to pay it off.

Okay. Thanks very much. Good quarter.

Thank you.

And our next question comes from Matthew Kempler of Sidoti & Co.

Thank you. Same issue, if you’ve heard these questions already, please just let me know.

Okay, Matt.

But the first thing, regarding Europe, you mentioned that you’re expanding into some new markets in Eastern Europe and Southern Europe. Is this brand new business for Paxar or is this business that has shifted from other areas of industrialization?

You know it’s hard to know that if we weren’t in those areas we wouldn’t have gotten that business. We don’t know if that’s particularly migrated from one place or another or it’s new business because we’re there.

I mean, it’s very hard to track it down. In some cases, we do know. Specifically in other cases, you know it’s hard to tell. But I would say that the more places that we are geographically, the more opportunities we have for increasing our business.

Are there any other big markets out there that Paxar still needs to get into?

Big? Are you talking about geographic markets?

Yes.

We’re in, I would say, a lot of them. We think Eastern Europe has got great opportunity for us. We also think South American has got great opportunity and we do very little in South America. So, there are some major opportunities for us in other areas, but as we are going out now we are pursuing the Middle East, we are pursuing Southern Europe, Northern Africa and Eastern Europe.

Okay and another question. One of the things that we’ve seen, despite the fact that retail sales are steadily rising, is it appears that the business inventories remain near record lows. Do you think that software purchases improving some productivity are going to enable retailers to keep those inventories are record lows? Or do you expect that inventory levels will have to build throughout the year?

I think they’re going to have to build. I think what you’ve seen is that, with the upsurge at retail, there were several retailers that really didn’t do well because they didn’t have any merchandise. No matter how good your software is, you know it takes a while to manufacturer apparel, to design apparel, to get it all pulled together. And either somebody is going to be standing with lots of inventory and lots of liability or people are going to have to plan in advance and be able to move stuff through the supply chain.

So, I think what we’re seeing is not only increased business from retail, but filling that supply chain you’re getting both a double hit here.

Okay and then last question, regarding SG&A. I understand the variances in the year-over-year, but can you elaborate on why SG&A increased by more $3m sequentially, even though sales were down sequentially?

Are you talking about from the fourth quarter to the --?

First quarter, right. The SG&A climbed from $54.6m to $58.3m, despite sales coming down several million dollars sequentially.

You know what? I have to go back and take a look, because I don’t have that right in front of me.

Okay.

But I can do that for you, Matt.

Sure. Thank you.

(Caller instructions.) Our next question comes from Chris Kapsch of Black Diamond Research.

Yeah, just following up on just the prior question, in the spirit of your customers, particularly in the apparel space, using I guess technology to optimize their supply chain. That’s where, for you guys I guess, SpecStar comes into play. I’m just wondering how that is being received and if it’s helping you guys gain share in your view, if you could just provide some color on the SpecStar effort and offering.

The SpecStar effort is going extremely well. We’re continuing to develop it, so it adds a lot of firepower to our sales, but it’s going well. And obviously we’re just looking at a chart that we just put together and we now have 1488 locations with SpecStar in 49 countries and that pretty much, as I look at this global map, covers the entire world and this is growing rapidly, almost every month.

The need for transmitting information around the world is just growing rapidly and we will be taking advantage of that, because it’s important to our customers. It adds lots of value to our customers and it’s a real competitive edge, we believe.

Uh-huh. So, I mean, is it safe to conclude that this offering in technologies is one thing that’s helping you gain share maybe from some of the smaller, less sophisticated mom and pop sort of suppliers?

You know, it’s hard for me to say whether we gain share or we don’t get share. I mean our business is growing. The market is growing. I would assume that we gain some share from some places. But in some cases we’re just doing it better and it’s being more concentrated in, let’s say, a global player like ourselves as compared to regional players around the world. You know it’s hard to talk about share, but I think, clearly, we’re getting a bigger piece.

Fair enough. Thanks.

I’m showing no further questions at this time. Mr. Powers, I would now like to turn the conference back over to you.

We thank you very much for your interest and participation in today’s conference call and look forward to speaking to you during next quarter’s conference call and maybe even seeing you at the annual meeting. Thanks very much.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect. 10