Illinois Tool Works Inc (ITW) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2004 CFC International earnings conference call.

My name is Anne Marie and I'll be your coordinator for today.

At this time, all participants are in listen-only mode.

And we will be conducting a question-and-answer towards the end of this conference.

If at any time during the call you require assistance please press star zero, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to Mr. Timothy Gerdiman (ph).

You may proceed, sir.

Thanks, Anne Marie and good morning everyone, and thank you for joining us today on CFC International's first quarter 2004 earnings conference call.

This is Tim Gerdiman at Street Smart Strategies, the Investor Relations Firm that closely with CFC.

Without further ado today I'm pleased to be introducing CFC's management team which will be participating on the conference call, including Roger Hruby, Chairman and CEO, who will say a few words about the first quarter 2004, and provide an outlook for the remainder of the year.

Greg Jehlik, President and COO who will speak about the operations in the first quarter of 2004.

And without further ado I'll turn the call over to Dennis Lakomy, Executive Vice President and CFO who will begin by discussing key financial details from the first quarter results.

Dennis.

Thank you, Tim.

Let me also add my welcome for those of you who have joined us this morning.

I would like to talk to you today about our consolidated results of operations, and some of our balance sheet highlights.

But before we begin the lawyers insist I remind everyone that today's conference call and related question-and-answer session, may include some statements that are not strictly historical in nature and are considered forward-looking information within the meaning of the federal securities laws for which CFC claims protection of the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995.

This information which is provided in an effort to assist you in understanding CFC and its results may contain projections and expectations of CFC that represent our current beliefs, intentions or strategies regarding the future.

Forward-looking statements are only predictions, and are not guarantees of performance.

These forward-looking statements speak only as of the date made, and may differ materially from actual results in the future.

CFC assumes no obligation to review these statements to reflect new information future events or otherwise.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking information, and other risks related to CFC's business are set forth in the documents filed by CFC with the Securities and Exchange Commission.

Specifically the most recent report on Forms 10-Q and 10-K, and other reports filed from time-to-time with the SEC.

Also, during this call we refer to certain on GAAP financial measures as defined under SEC rules.

And as required by those rules, we have provided reconciliation of those measures to the most directly comparable GAAP measures in the presentation and in our earnings release.

Sales in the first quarter of '04 were 20.8 million, up about 32.6 percent from 15.7 million in the first quarter of '03.

And the good news is we are pleased to report that this increase was across all of our product groups.

Holographic sales in the first quarter of '04, enjoyed an increase of 30.4 percent, primarily driven by the sharp increase in the ordering pattern of our domestic packaging customers.

Printed products increased 60.6 percent.

This increased was due to a major competitor exiting the marketplace, creating a vacuum that CFC quickly filled.

Pharmaceutical sales were up 5.4 percent.

This increase was primarily in Europe.

Security products were up 20.8 percent.

This increase was primarily due to the early start of the gift card business which typically doesn't start until August.

Specialty products were up 20.5 percent.

This increase was a combination of the strength of the Europe on sales made in Europe, coupled with increased sales domestically.

Turning to gross profits, not included depreciation and amortization for the first quarter of '04, amounted to 7.8 million or as a percent of sale 37.5 percent, compared to the prior year quarter, of 5.5 million or 35.2 percent as a percentage of sales.

The increase in gross profit dollars is primarily a result of increased sales.

In the first quarter, labor and fixed costs were down as a percentage of net sales, due to increased productivity and better utilization of fixed costs.

Operating income in the first quarter of '04, amounted to $1.9 million, up 219 percent from operating income of 614,000 a year ago.

We had net income after tax in the first quarter of 1.1 million.

This represents a 357 percent increase or 25 percent - 25 cents per share on a fully diluted basis compared to the net income of 246,000 or six cents per share in the first quarter of '03.

Some balance sheet highlights, comparing March 31st, '04, to December 31st, '03 are as follows.

Trade receivables are up about $3 million or 30.4 percent.

This increase is due primarily to the increase in sales.

And I'm pleased to report the aging has the same SKU.

And the day sales and accounts receivable has actually improved about two days.

Net inventories decreased by about 84,000 or 0.6 percent due to a significantly better inventory turnover.

As a result, our working capital in the first half, in the first quarter increased a half million dollars, to 11 million.

Capital expenditures in the first quarter of '04 amounted to 1.9 million, of which approximately 1.6 million was for the purchase of the land and building immediately to the west of our Chicago Heights facility.

Bank debt increased 25.7 million from 24.8 in the prior year end.

Primarily due to financing the acquisition of the land and building immediately west of our Chicago Heights facility, net of scheduled principal payments.

In summary, this is the best quarter the company has ever had.

And I personally continue to be optimistic about the future.

My last point, Germany made a profit.

And the profit was in excess of our expectations.

However, my view of the European economy is that it will continue to be flat for the rest of the year.

And now I'd like to turn it over to Greg Jehlik, President and Chief Operating Officer.

Greg?

Greg, Jehlik: Thank you, Dennis.

What a difference a quarter makes.

Virtually all areas that negatively impacted us in the fourth quarter of '03, have come back around to have a positive impact in the first quarter of 2004.

Our wood grain business is up over 60 percent as Dennis mentioned.

This is a function of the exit of a competitor, and most robust sales for our furniture customers.

The resources we invested in doing hundreds of color matches as well as the hiring and training of new operators is now paying off.

The significant point is that we are processing this increase in business with the same amount of equipment, block scheduling, longer runs, and lean manufacturing techniques are just a few tools being used to accomplish this.

In addition the supply agreements that we entered in to with several of our customers, has contributed to our success due to better forward planning.

The gift card business has picked has picked up nicely with a Q1 over Q1 sales increase of 49 percent.

Projections for this business for the rest of the year remain strong.

Our holographic packaging business is up 30.4 percent.

As a matter of fact, like the wood grained area, it was our biggest quarter ever in this area.

Overall demand was healthy in addition to landing new pieces of business in the U.S. and Europe.

Europe has begun the aggressive shift in its business model, moving away from the less attractive graphic spoils in to higher growth areas such as wood grain products, holography and pharmaceuticals.

This transition is underway within the manufacturing process, as well as how CFC Europe is going about their sales and marketing.

The success Europe experienced in Q1 hitting their sales and profit goals is certainly a positive indication.

The management team of CFC is committed to achieving the annual operating plan and is formulated, and we'll continue to follow this plan as the year goes on.

Now I'd like to turn things over to Roger Hruby, our Chairman and Chief Executive Officer.

Thank you, Greg.

First, as you've already heard from Dennis and Craig, our first quarter of 2004 results were terrific.

We said both net sales and net income records for our quarter.

No question, the economy domestically has improved.

Most of our customers across all of our product lines have shown increased sales for this quarter versus 2003.

And I think the economy will continue to improve, perhaps not at the same pace as the first quarter, but we see durable good orders, and certainly in the furniture industry, trophies, RTA, SUV, all markets that will increase.

And as I've said all of our product areas have shown increases over 2003.

Our European operation in Germany has shown a significant profit to the first quarter as well.

This is a mild stone for us.

The last two years has been difficult for us, as is the case in a lot of businesses.

We decided CFC to stay the course, and keep training people.

The cost of training new people is tremendous.

It's not just in the direct cost, but it's in the problem of producing quality.

And we have made that commitment that last year, and you are all seeing the results, certainly of the first quarter of this year.

We've been able to increase our sales dramatically without significant increase in our cost.

This is a high technical manufacturing process.

And requires very well trained operators.

Fortunately for us, our only major competitor decided to exit the business here in January.

And of course, this is a positive development for CFC.

And we've capitalized on that.

And I think, as we look forward, we'll see even better results in our printed products.

Certainly, our manufacturing team should be complimented for the plan they put in place, and the ability to be able to absorb this additional business without any major problems.

Our business going in to the second quarter looks strong.

Our printed product orders are up significantly over 2003.

In fact, our orders look like they're up almost double what they were in 2003 in the printed products.

And we have the ability and the capacity to capitalize on this tremendous increase in business.

Our recent purchase of the additional property and buildings that is adjacent to our Chicago Heights facility has been a significant help in allowing us to expand our capabilities by providing us with additional warehousing and space for the future.

In the fourth quarter, we invested in new air pollution devices in the fourth quarter.

And this has been a significant tool for us to be able to expand our business.

I could go on and on with all of the opportunities that we see for the rest of the year.

I've mentioned just a few of the exciting opportunities that we now have.

And we would be pleased to answer any questions that anybody has.

Thank you very much.

Ladies and gentlemen, if you wish to ask a question, please press star one.

If your question has been answered, or you wish to withdraw your question, please press star two.

Again, to ask a question, please press star one.

And we'll pause briefly as the questions queue up.

Anne Marie, are there any questions?

At this time I'm showing there are no questions.

OK.

We'd like to thank everybody for listening to this call.

Actually, I apologize.

I am showing you have one question in queue.

Thank you.

I am showing it's from Rob Norfleet of Davenport.

You may proceed.

Hi, guys.

Good quarter.

Thanks, Rob.

Just a quick question.

If we look at the printed products area, obviously sales were up 60 percent for the quarter.

Can you quantify what percentage of those sales were organic in nature.

And, you know, the percent increase that was directly related to the exit of our primary competitor?

I'm just trying to gauge whether there was some organic growth that we didn't just get all of the sales increase from the exit of that competitor.

Rob, this is Dennis Lakomy.

My best guess is of that 60 percent, 50 percent - 10 percent represents organic growth of our prior customer base.

And the rest of it is new customers from the competitor exiting the market.

It would appear in talking to our historical customers, that their business is up in the neighborhood of eight to 12 percent.

OK.

And can you just discuss a little bit obviously you've been very successful in getting the majority of the customers to come over to you all.

Are any of them though, you know, obviously you implemented price increases above where the competitor was pricing.

But have there been any of them switching to either different sources, or using different products, as opposed to CFC's products?

This is Greg Jehlik.

To this point, we haven't seen any major migration to other technologies, in particular paper.

Although with the situation, the vacuum that's been created, I think it would be naïve to think that people aren't looking at other processes and our other competitors.

Most of which are potentially in Asia.

We have not seen a product construction that can do what the CFC product does.

Yes, just switching gears for one second.

Dennis, what do you expect cap ex for the year to be at?

And also DD&A?

Depreciation and amortization for the year, I would expect that to come in just under $5 million.

And cap ex for the year, we had a high cap ex in the first quarter because of the purchase of the building to the west of the Chicago Heights property.

I would expect cap ex for the remainder of the year to come in at about two million.

Great.

And just last question just kind of dealing with the capital structure, obviously this year we're going to do a good job of generating some free cash flow.

In looking at uses of cash, what would kind of characterize as your top use of cash right now, whether it's reinvesting back in the core business or reducing debt?

Basically, we'll be reducing debt, and investing the rest of the proceeds in the core business in terms of capital - necessary capital.

Great.

Well good quarter, again.

Thanks.

Thanks, Rob.

We appreciate it.

Again, ladies and gentlemen, if you wish to ask a question, please press start one.

And there are no further questions at this time.

Thank you very much, Anne Marie.

And again, let me thank everyone for joining us this morning.

And we look forward to speaking with you at the end of the second quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.