艾利丹尼森 (AVY) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Paxar Corporation Third Quarter 2004 Earnings Conference Call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn things over to your host, Mr. Bob Powers, Vice President of Investor Relations.

Thank you Megan. Good morning and welcome to Paxar's third quarter 2004 conference call. On the line for management will be Arthur Hershaft, Chairman and Chief Executive Officer and Larry Segall, Vice President and Controller. This morning before the market opened, Paxar reported third 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 pro formas of the Company's operations within its prevailing business 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. Arthur Hershaft will now begin our management presentation. Arthur?

Thank you and good morning, and welcome. We are going -- Larry Segall, our Vice President and Controller will go through the numbers for the third quarter and then I will provide some overview of the operations for that quarter, and some of the things we are doing that will impact the Company going forward. So with that, I am going turn it to over Larry.

Thank you Arthur and good morning everyone. Let's begin today's discussion by first reviewing the income statement. Sales reached $194 million in the third quarter, which incidentally is the strongest third quarter in Paxar's history. These sales represented a 14 percent increase over the $171 million level in 2003 and they were also higher in the $186 million to $191 million range previously announced as third quarter guidance. As you saw in our press release this morning, the 14 percent sales increase in the quarter was driven by strong 10 percent organic growth with contributions of 2 percent growth from our Alkahn acquisition and another 2 percent by foreign exchange.

We take a look at the business on a geographic basis, our Asia Pacific region reported strong 33 percent sales growth. Our America's region contributed 8 percent growth and EMEA, our Europe, Middle East and Africa region increased by 6 percent.

Gross margin in the quarter was 38.7 percent and that compares to a prior year gross margin of 37.9 percent, which translates into an 80 basis points improvement. Those margins continue to benefit from our initiatives to reduce manufacturing costs and improve operating efficiencies in existing Company facilities, but also from our efforts of leveraging our capacity through the consolidation of a number of US and UK manufacturing facilities.

SG&A expenses of $59.2 million in the quarter was 30.5 percent of sales. That compares to $52.6 million or 30.8 percent of sales a year ago. The dollar increase in SG&A included variable related increases, cost associated with the Alkahn acquisition, exchange and certain incremental expenses. These were partially offset by fixed cost containment efforts in the current year as well as savings from cost reduction initiatives that we took in 2003.

Our operating income in the quarter was $15.9 million or 8.2 percent of sales. In 2003, operating income was $8 million or 4.7 percent of sales including restructuring and other charges. If we take out these items in 2003, operating income would have been $12.4 million or 7.3 percent of sales. Net income was $10.2 million or 25 cents per share compared with $7 million or 18 cents per share on a pro forma basis in 2003.

And this translates to a 39 percent year-over-year increase in earnings per share. Let me again point out that these results represent record high third quarter earnings for Paxar from regular operations and they exceeded our per share guidance for the quarter, which was 20 cents to 23 cents per share. In the quarter, we provided income tax at the rate of 23 percent. Again based on our full year forecast of earnings by business units and the global tax rate mix, we expect 23 percent to be the effect of 2004 income tax rate. Turning to the topic of guidance, we have updated our guidance always for the full year. For the fourth quarter, we are maintaining our previously announced guidance of earnings per share in the range of 27cents to 31cents on sales of 195 to $200 million. For the full year, we have upwardly adjusted both the bottom and top of the guidance range by 5 cents to 2 cents respectively and these revisions now give us a range for the full year of a $1.13 to $1.17 on sales of $792 to $797 million.

Let's turn to the balance sheet. We finished the quarter with $85 million of cash and cash equivalents up from $69 million at June 30. This increase is primarily attributable to $24 million of cash generated from operations, off set by nearly $10 million of capital expenditures in the quarter. As mentioned last quarter, there has been no outstanding borrowings under our revolving credit facility since its complete pay down in the first quarter of this year. As such long term debt remains constant at $163 million and total debt increased slightly to $168 million reflecting some borrowings at the local business unit levels. Total debt to total capital was 28.9 percent was lower than the 29.5 percent levels that we announced in June 30. Accounts receivable was $126 million at September 30, down from the $138 million level of June 30 reflecting business seasonality. Inventories were $101 millions of September 30 compared to $95 million at the end of the second quarter with the increase primarily resulting from plant replenishment in anticipation of 4Q sales levels. Focusing now on cash flow, we generated operating cash flow of $23.6 million in the quarter. In 2003, we reported $20.3 million. The increase of $3.3 million results primarily from the following items. An increase in net income as well as positive changes in working capital totaling $7.3 million dollars in 2004, offset by a $4 million charge to restructuring taken in 2003 to reflect a non-cash write-up of usable property and equipment. Depreciation and amortization were $8.2 million in the third quarter of this year and $8.5 million last year. Our capital expenditures were $9.9 million in the third quarter. With full year, we continue to expect capital expenditures to be in the range of $37-39 million with depreciation of $34 million. Arthur, that completes my remarks.

Thanks Larry. About a year ago, we created some thing called Back to Basics. It was a simple slogan that our entire management team could rally around and focus on those things that we all felt were important and needed improvement. Part of that Back to Basics was driving topline growth, improving margins, holding and improving our SG&A cost and improving cash and I thought that after we have had now four quarters, since we announced this policy and by the by our management team is done an absolutely terrific job in each of these categories. I thought it would be just interesting for me quickly as I go through this to talk about what happened over the last four quarters. When I look at topline growth all in including acquisitions, organics, and exchange etcetera, but total 13 percent in the forth quarter of last year, 16 percent in the first quarter, 16 percent in the second and 14 percent in the third.

Gross margin improvement again starting with the fourth quarter 36.9, 38.3, 39.3 and the very strong second quarter and 38.7. So, a distinct improvement in margin. SG&A as percent of sales, again 28 percent in the fourth quarter, 30.9, 28.3 and 30.5. So, pretty consistent in sort of holding the percentages where they needed to be. Working capital as a percent of sales in the fourth quarter was 23 and we are now at 21.5, so a real improvement in working capital percentages, which help drive significant cash flow in each of those quarters. Fourth quarter $17 million, first quarter 16.4, second quarter 25.4 and in the third quarter 23.6 as Larry has said. So, a terrific job by a simple slogan, lots of hard work by a great management team all around the world. So, I want to congratulate them. As I look at the third quarter, obviously the focus is in the area of growth and we grew the total business in the Americas at 8 percent, in EMEA 6 percent and of course Asia Pacific 33 percent, that's the second quarter in a row where our Asia Pacific business exceeded 30 percent, 35 percent in the second quarter, 33 percent in the third quarter. Clearly the Asia Pacific business is benefiting from the migration of a lot of our business moving offshore, particularly in the Hong Kong, China area. That's an area of significant growth for us obviously and significant investment. So, all in all in the third quarter I thought was outstanding and really sets the stage as we go forward.

Let me now switch gears and talk a little about RFID as is probably the single most important change that's taken place in supply chain technology, maybe since the advent of barcode. When this happened and this was announced, let's say more than a year ago, Paxar's position was very, very simple. We had a great line of products that fills that need, starting with printers, labels, consulting services, software and field service. We were focused on the retail and retail apparel industry already. And so our job was very, very simple, make sure that we told the market both the consumer goods markets and the apparel market and the retail market that we were -- we had great products and we could service their needs as we went forward. Along those lines, that drove 2 different strategies, one was a marketing strategy, let's get out and talk to all of those people that have the potential or interest and that's almost everybody in our particular channel. And at the same time, developed the technology (TECHNICAL DIFFICULTY) we went forward. So, here are some of the things that we've done. We've been now talking to, first of all, let me just say that we have placed so far for the first -- through September about 105 printers, and we have been in conversations with at least 250 of the 300 suppliers who are moving on the Wal-Mart mandate. So, we are out talking to everybody. We've been at 15 trade shows this year, showing our products and we have made many, many, many presentations to (TECHNICAL DIFFICULTY) lots of customers who are very, very interested in this concept.

In terms of additional things we are doing, we have in October, we announced that we have introduced the first one by 4-inch label that can be read by our readers and our printers. That's important because a lot of people -- to begin this implementation mainly to slap and ship as it's called. And that's sort of labeled -- it goes in conjunction with a bar code label rather than replacing a bar code label. As we go forward now, we're now online and up and running with our insertion equipment. So, we now have the capability of producing about 100 million of these labels per annum with the equipment that is up and running and actually producing labels today. In the fourth quarter, we will develop a 96-bit reader and labels for a class 1 and class 0 plus. And we are around -- and we have shipped a variety of printers, about half a dozen printers now into Europe with European protocol. And that is very interesting, Metro is driving that initiative. As we go out and we talk about RFID, clearly item marking has been on our mind, because (TECHNICAL DIFFICULTY). So, on the RFID front, we are investing a lot of resources, we're investing a lot of capital, and we think this is just a terrific opportunity for PAXAR and we're kind of right on top of it. With that I'm going to -- one more comment on our searches for both a COO and a CFO. All I can tell you at this point it's ongoing. I have nothing new to report on it, but we're working diligently to try to fill both of those roles, and as soon as we have something to say, we'll kind of bring you up to date. With that I'd like to open up the conference call to questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning gentlemen, congratulations on a good quarter. First question is, just wanted ask you, organic growth was impressive at 10 percent. Was there any pull through from Q4 into Q3 or is your guidance maybe a little conservative. Your guidance for Q4 and [Inaudible] 0 to 4 percent organic growth. So, I was just wondering where the drop off from 10 to 0 to 4 comes?

I don't think that quarter 3 drew anything out of quarter 4. I think we've established our guidance several quarters ago and we're kind of sticking to it. I mean it's -- this is a business that -- we don't have all that kind of visibility in advance and as far as we can see, that's kind of what it looks like for us today.

So, it sounds like it could be conservative potentially. Just one question, you were just speaking about RFID obviously. Your competitors spoke about $30 million in investment for RFID next year and you said you intend to invest substantial resources in capital. Could you give us some idea of the range of the investment you expect to make in RFID next year and the potential sales that might result from that?

It would be very difficult to sort of estimate sales at this point. Going forward this is a sort of quickly emerging but slowly emerging -- quickly and slowly. So, it will be difficult to put our hands on a revenue number. As far as investment, we will probably invest somewhere between $3 million to $5 million in RFID in '05. Bear in mind while saying that the competitor that you mentioned is really involved in a much more vertical manufacturing setup and for different reasons. Our business -- we're really applying this technology to our particular channel. So, our development is in the printer and the reader side, in the insertion side and I am working very closely with people who design inlays. So, it's a little different.

Okay, great. That helps to clarify very much. I just -- a last question. Do you have operating profits by region; can you give us the sales by region?

I don't know. Larry, you got that available?

Operating profits by regions for the -- for Q3? Just bear with me for one second.

I think that's going to be in the queue, isn't it?

Yes.

We may not have that right here Bob, but we will get it for you.

Okay, great. I will get back in the queue.

Chris Kapsch, Black Diamond Research.

Arthur, the -- it's pretty much given that January 1, these export or import quotas will be lifted, and there is wide expectations that that will result in a fairly massive shift of production in the textile and apparel industry to Asia, particularly China, so just wondering how you see that playing out and do you feel that Paxar is positioned well and or do you foresee -- the need for making accelerating investment in China or acquisitions there?

The answer is yes, yes, and yes. Clearly, the end of the quota system is going to drive more and more of business into the Asian market, I mean, most of it has been driven out of the US today, but I think you'll see an allocation of more and more of the production going into Asia, into China, particularly and potentially India and a few other Asian countries, I think that benefits us, because we are well positioned to manufacture those sorts of products in those areas, and have had really good experience doing that. Some of our growth in Asia has in fact shown the impact of that. We are investing very, very heavily, almost three quarters of our total CapEx is now going to be geared, in fact this year is starting to be geared towards the whole Asian Pacific area. So, we are building out about as quickly as we can and quickly as we could train people to operate these manufacturing locations. But I think it will benefit us, because we have a footprint.

The growth there in the region of 33 percent was pretty strong, and your biggest competitor also poses similar growth there. I am just wondering if you had a sense for -- it seems like that might even be above and beyond the market growth. So, there is some notion that both you and your large competitors taking share, do you think that is the case and I assume that it's at the expense of mom and pop competitors?

It's hard to tell. I am not sure what their increase represents or where it actually takes place, but all we know is that we don't think we are losing any market share anywhere. We are growing market share, but I think a lot of that is not particularly coming out of anybody, I think the whole market is shifting to that part of the world, and I think at the end of the day, more and more people are manufacturing the goods over there as compared to potentially taking tickets as an example, having been made in the United States and attaching the distribution center. So, I think more and more are vertical integration that's taking place in the Asian market and that's helping the growth. There may be some market share of gains, and I wouldn't guess as to where that might be coming from, but I think the market, at least the Asian market, is growing if not the whole global market.

[Inaudible] , MTGS Advisors.

Just a couple of questions. On the RFID for us, you indicated that you would be working in the fourth quarter on developing any [Inaudible] in labels. Whose reader -- what reader companies are you working with on that?

Well, we are working with all of them. We are working with Alien, we are working with Matrix, working with [Inaudible] . I don't think we are excluding anybody, we are kind of working with all of them and -- but we will in fact I think show that product in Pack Expo in November in Chicago.

And then, I guess that everybody is talking about your competitor, but in Avery in the third quarter, I guess acquired company [Inaudible] manufacturing I guess in Germany. Was that something you were competing for or you already well represented there or can you talk about that, what kinds of acquisitions you are looking at these days?

Yes, we bought the biggest more woven label (ph) company in Germany in the year 2000. So, and they actually happened to be in the same city. So, Avery acquired this company today, we were not competing with them, did not think that made any sense for us. As far as acquisitions going forward, we are certainly -- now aggressively looking to build out our footprint and looking at to add acquisitions in those areas where we think the business is migrating, that would be Eastern Europe, Northern Africa, Latin American and clearly Asia.

And then to make sure you are right on the number of labels you will be able to produce next year to 100 million?

Correct.

What do you expect - where the type of label prices these days?

Depending upon the size of the label and the quantity, etcetera, but they are running anywhere from 25 cents to 40 cents, or 45 cents each.

Robert Bruggeman, Bear Sterns.

First, I want to congratulate you for a terrific job and the back to basic strategy obviously is working and if I were you I would take a very long time to find a new COO, that's the first thing. Second thing is I am just wondering at this time whether you are considering or would considering rewarding new long core and longstanding shareholders, with some sort of a -- like an annualized stock dividend. We used to do for a couple of years, I think we did 5 for 4, now if that is too high, maybe an annualized 5 percent stock dividend. Have you ever thought about doing something like that?

We used to do it every year, I think we stopped doing it in 1997, but last year we did a stock dividend and it really has not come up. It might be something that we might want to look at, but clearly it has not, did not come up before, but it is a good thought, Bob.

I just wanted to make it and hope you will do it.

Robert Hoffman, [Inaudible]

Great quarter. Just wanted to -- we have heard from Mark & Spencer that they are using your products and they are doing it or whatever you would call, label level or how do you (ph) project. Can you talk a little bit about the success that you are seeing there? I guess confirmed that it is you and then talk about the success.

We say we are working with Mark & Spencer, I think that where we are is that we have gone through 4, 5 tests with them and we are still in the test mode. So, that is kind of where that project is.

My sense is that they are seeing a very nice, a very high ROI given how they contract the inventory and shrinkage and things like that. Is that a fair statement as well?

I am not in a position to really comment on that, but clearly right now they are really exploring the values and the benefits, and my guess is they have seen some or they would not continue to test this on an ever-larger scale.

Any other tests that you can talk about on the label side of it, Arty?

I think there is just a lot of people interested clearly because this is something that it started out with a mandate and that is kind of where sort of the technology usually starts out and then people say all its about and how can it add values to what I do. So, in almost every presentation that we are making now, particularly in the apparel side. We are making presentations on item marking and probably case marking. I mean it's a combination of presentations because they all want to know about item marking even though it's not something that tomorrow they are going to particularly do, but we all recognize that the cost of RFID is going to be down over time as the volume grows and as the price of this product is reduced, more and more people will be able to think more seriously about the implementation of using it. Clearly, it adds tremendous value to the supply chain on almost every level. It's a question of people building out the infrastructure and being able to afford to add it to their product line. So, I think I don't have anything more specific than that, I mean MNS has been the one that has been talked about by MNS more widely, but I think that there are a lot of people taking a look at it today.

David Zacks,. Hockey Capital (ph) .

Calling just regarding the margin targets. I think at point on the last conference call or the one prior, the discussion of exiting this year, exiting this year 10 percent double-digit operating margin level. Is that still feasible in your judgment and sort of where do you see the operating margin targets?

Well, I think our operating margin target is still a double-digit target. We are probably not going to hit, I think we are going to come close but I don't think we are going to hit that target this year. It is still a target and we are hoping to sort of hit that -- we are closing and closer to it, but we are not there yet.

Okay, and I guess I would put my 2 cents in about the stock dividend then say I would be opposed to that and if you chose a dividend, I would use cash as opposed to dilute shareholders in some regard by issuing shares. Thank you.

Gray Glass, Anderson and Chadwick.

Just a couple of quick book-keeping questions, CapEx estimates for '04 and '05 and then, is there any reason to anticipate any kind of change in the tax rate going into '05?

The CapEx spend has been, Larry, 30 --

CapEx spend for 2004 is still projected at $37 to $39 million and for '05 similar.

I think that would probably be similar. I think it is, as far as the tax question is concerned, I think it is a little too early for us to sort of a comment on that. At this point, as we begin to sort of develop our plans going forward and being to look at our projections but that is something that we are going to get to certainly by the next conference call.

Terry Legbutter of Freeburg Investment Management.

My question is about the RFID protocol and it seems like, just recently as 6 months ago, there were a couple of competing standard protocols in the market place and I was wondering if that is still the case or if the industry has started to gravitate towards one or the other end?

I think there are at least 3 or maybe 4 protocols out there. The industry is gravitating toward a single standard, which depending on who you talk to -- happens sometime late this year or by early or mid next year, but clearly there is a standard that is being driven by EPC global and I think everybody hopes that that standard will be in place as quickly as possible but that is happening.

If EPC global is pushing one standard, why is that there is a place for -- that the others are still hanging on out there?

I think there is probably two answers to that, coming to a consensus on what the standard should be has taken sometime and that I think just as we speak either now or in the next couple of weeks has finally come to a conclusion and now it will take the industry quite a bit of time to get to that protocol. And so in the mean time, this is the stopping and therefore people are using other protocols in order to make this happen. So this is an evaluation, I think, it will live up to a standard, but it will take some time to get there.

Do you think that the lack of the standard has kept some people on the sidelines as far as adoption not wanting to mess with the complexity of something that is still evolving?

Yes for sure. I think and that's why we came out 6 months ago with our upgraded printer that we would serve you today and really upgrade to the new protocol as they got developed. But clearly people, some people are sitting on the sidelines saying - I'm not going to commit any significant resources until I know exactly what the standard is. What we have to do is, we will have to get there some other way and there are other ways such as Q service (ph) which we introduced couple of quarters ago.

We were able to through a service bureau environment make these tags for them -- make these labels for them.

And now one last question. You mentioned Europe being on a different standard, are there different standards for bar codes? Different protocols by geography right now?

Bar code or RFID?

Well I guess what I am wondering is -- is it likely that long term all geographies are going to be on the same RFID protocol? The ability -- is there an ability to live with different standards right now that you see in bar codes?

Right now, there are different standards. But I think sooner or later from what we can see there is going to be a global standard. Whether or not everybody is going to adhere to that standard is another question, but there is definitely a move to make one single global standard.

(Francisco Serano, Ballacad) (ph) .

Hello Arthur, I would like ask if you've mentioned before that you are looking at future acquisitions in Europe, North Africa, Asia, and Latin America? How much of your business is going towards Latin America or is majority going to Asia right now?

Now I think that -- I think we see pretty good growth in Latin America, certainly not nearly as much growth as we see in Asia for sure. But simply growth in Latin America.

And do you have any concrete plans that positions in the woven label industries, any part of the world in the up coming year?

Nothing that I merely -- I am not in a position to sort of discuss now.

Chris Kapsch, Black Diamond Research.

I just had some followups in the RFID space. You mentioned, I guess, you had 105 RFID printers. I am curious if that number which has increased sequentially, is it mostly still for evaluation projects or your are having some customer of yours that are also Wal-Mart suppliers, having taken multiple printers at this point?

I think the answer is yes. We've beginning to see more and more customers actually buying. So we've got sales taking place there in the US and sales taking place in Europe. So, on both fronts the answer is yes. However still have -- still putting a lot of printers into partners, still lot of printers into retailers that are testing etc. But actually we've are achieving some sales.

And just following up on another question about this protocol or standard being delayed slightly and there is a notion that may prevent some -- would be customers from otherwise cutting purchase orders for these printers. I mean there a sense that there -- you'd have more printers placed if the RFID protocol was already ratified?

I think the answer, in general, is yes but there is a sort of normal evaluation that going to take place. People are being educated all the time about what this is all about and how -- what's the best way for them to implement it and it's not just an implementation in terms of the reader and the label, but they have to figure out how they are going to integrate this into their own ERP systems or middleware systems. So there is a real learning curve that needs to take place. So I don't think right now if we had Gen2 available that we would see an enormous upsurge in business. I think if there's an evolution and that will take place pretty much along the lines that you've spoken about and lots of other people have spoken about. It's really an '05, '06, '07 kind of ramp up.

Okay. And then just on RFID spending in '05. I think you mentioned 3 to 5 million. Does that include any additional capital expenditures? I know the existing insertion capacity is, I guess, is up and running now. My sense was there is the room to double that or is that what some of that capital is for, some of that spending?

Yes, some of that is for that and some of that is for next generation printers, as we are going to develop the next generation.

Peter Reid (ph) , C.L. King.

Could you just give us a frame of reference? You said that these RFID labels cost 20 cents to 45 cents per label. How does that compare to the current plain old barcode label?

Plain old barcode label is probably $0.01, $0.01 to $0.015, that was significantly more.

Now these new labels would basically replace that barcode label with the feature of the RFID chip inside?

That's correct.

And when you talk about these printers, what's different about the printers? Do they have the encoder as well, and they have to be able to print on a label with a chip in it?

Yes, that's exactly correct.

Okay. So they include the encoder as well.

They include the encoder or the reader. And so it's one unit, it will read and write to the chip, and it will also print the barcode information and other information on that same label.

And finally, the decline in margins sequentially, is that purely a function of the seasonality and the 20 million less revenue?

Sure.

There is nothing else though?

No, nothing else, exactly correct.

Sir, there are no more questions in the queue. Do you have any closing comments?

I just want to thank everybody for joining us this morning and we look forward to speaking with you next quarter.

Thank you, ladies and gentlemen for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.