Illinois Tool Works Inc (ITW) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 CFC International Earnings Conference Call.

My name is Ann Marie, and I will be your coordinator for today.

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

We will be facilitating a question and answer session towards the end of this conference.

At that time, directions will also be made.

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 your host, Mr. Timothy Gerdeman.

Please proceed, sir.

Thanks Ann Marie, and good afternoon everyone, and thanks for joining us on CFC International's Second Quarter Earnings Conference Call.

This is Tim Gerdeman of Street Smart Strategies, an Investor Relations and Management Consulting Firm working closely with CFC.

Without further ado, I'm pleased to introduce CFC's management team, which will be participating on today's conference call, including Greg Jehlik, President and Chief Operating Officer who will speak about the operations in the second quarter of 2004 and provide an outlook for the remainder of the year.

Mark Mitravich, Vice President of Sales who will speak about CFC's product lines, and Dennis Lakomy, Executive Vice President and CFO who will lead off the conversation today by discussing key financial details from the most recent quarter.

Dennis?

Thank you, Tim.

Let me also add my welcome to everyone who has joined us this afternoon.

I'd like to talk today about our consolidated statements of income and our balance sheet.

However, before we begin, I'd like to 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 law 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 revise 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 relating to CFC's business are set forth in 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 may refer to non-GAAP measures as defined under SEC rules.

As required by those rules, we have provided a reconciliation of those measures to the most directly comparable GAAP measure in our earnings press release.

Now, first I'd like to speak about the second quarter.

Sales in the second quarter of 2004 were up approximately $19.4 million, up 16% from $16.7 million in 2003.

Approximately $300,000 of this increase represented the strength of the Euro compared to the same quarter a year ago.

Holographic sales in '04 came in at $4.5 million, compared to $4.9 million in the second quarter of '03, representing an 8.4% decrease.

This decrease was primarily due to soft first quarter '03 sales, followed by an abnormally large second quarter '03 sales.

The second quarter of '03 represented the largest holographic sales quarter in calendar '03 by in excess of $1 million.

Printed wood grain products came in at $6.1 million for the second quarter of '04, up 37% from $4.5 million a year ago.

Mark Mitravich will speak more about this increase a little later on.

Pharmaceutical sales amounted to $2.6 million, which represents an 11% decrease compared to the prior year's quarter sales of $2.9 million.

This decrease was primarily in the U.S.

CFC did not lose market share, and we anticipate sales to be up about 3% for the year.

Security products for the second quarter of '04 sales amounted to $3.3 million, up 127.4% from $1.5 million a year ago.

This increase is primarily to early gift card volume and new customers.

Specialty products for the first quarter of '04, sales amounted to $2.9 million, down about 3.5% from $3 million in the same quarter a year ago.

Gross profit for the second quarter of '04, not including depreciation and amortization amounted to $6.3 million or 32.5% of net sales compared to a year ago $5.7 million in gross profit or 32.4% of net sales.

This increase in dollars is primarily result of increase in sales, and in the second quarter, increased raw material costs caused gross profit as a percentage of sales to decrease.

Operating income in the second quarter of '04 amounted to $834,000, up 41.1% from operating income of $571,000 a year ago.

As a result, we had net income in the second quarter of '04 of $521,000, or 12 cents earnings per share on a fully diluted basis, compared to net income of $110,000, or $0.03 earnings per share on a full diluted basis in the prior year second quarter.

And now I'd like to talk a little bit about the first half of the year.

Sales in the first six months ended June 30, 2004, amounted to $40.2 million, up approximately 24% from $32.4 million in sales in the first half of '03.

The strength of the Euro contributed approximately $1.2 million of the sales increase.

Holographic sales in the first half of '04 came in at $8.6 million compared to $8 million in '03.

This represented a 6.9% increase.

This increase is primarily due to an increase in the ordering pattern of our domestic packaging customers.

Printed wood grain products came in at $13.9 million sales dollars for the first six months of '04, up 49.3% from $9.3 million a year ago.

Pharmaceutical sales amounted to $5.8 million for the first six months of '04, which represented a 2.7% decrease under the previous year's sales of $5.9 million.

This decrease represents a softness in the U.S. market.

And as I stated before, we have not lost any market share and we do anticipate pharmaceutical sales to be up approximately 3% for the full year.

Security products for '04 sales amounted to $5.5 million, up 71.3% from $3.2 million a year ago.

Again, this increase is primarily due to early gift card volumes and new customers.

Specialty products in '04 sales amounted to $6.4 million, up 8.5% from $5.9 million a year ago.

This increase in sales was primarily due to the strength of the Euro on sales made in Europe, couple with an increase in domestic volume.

Gross profit for the first half of '04, not including depreciation and amortization amounted to $14.1 million, or 35.1% of net sales, compared to a year ago of $11.3 million, or 34.7% of net sales.

This increase in dollars is primarily a result of increased sales.

As a percentage, in the first quarter, labor and fixed costs were down as a percentage of net sales due to increased productivity, better utilization of fixed costs, which was partially offset by material costs increases in the second quarter of '04.

Operating income in '04 amounted to $2.8 million, up 135.6% from operating income of $1.2 million a year ago.

As a result, we had net income for the first six months of 2004 of $1.6 million, or $0.37 earnings per share on a fully diluted basis, compared to net income of $356,000 or $0.08 per share on a fully diluted basis in the prior year.

Now a word about some of our balance sheet highlights, comparing June 30, 2004 to December 31, 2003.

Trade accounts receivable were up approximately $1.9 million, or 19.5% primarily due to the increase in sales.

Net inventories increased to approximately $500,000, or 3.5%, primarily due to an increase in finished goods to better service our customers.

And as a result, working capital increased approximately $2 million to $12.6 million.

Capital expenditures in '04 to date through June 30 have amounted to $2.2 million, of which $1.6 million represents the purchase of the Landon building immediately west of our Chicago Heights facility.

Bank debt increased to $25.9 million, from $24.8 million, primarily due to financing the acquisition of the Landon building immediately west of our Chicago Heights facility, less scheduled debt payment.

And now I'd like to turn it over to Mark Mitravich, our Vice President of Sales.

Mark?

Thank you Dennis.

I'm pleased to report that the positive results that we achieved in the first quarter have continued into the second quarter.

In the printed wood grain business, with 49% year to date increase in sales was a result of our ability to meet the market demand of the improving retail furniture market on top of the challenge of filling the void in production capacity created when a major competitor exited the market in early January.

We were able to support the demands of the major furniture companies such as Furniture Brands and Ashley Furniture by implementing lean manufacturing practices, block scheduling, executing a stop product strategy and increased communications with our customer base.

We are continuing to leverage our global manufacturing capabilities by producing printed wood grain products in both the U.S. and in Germany for major flooring companies such as Yunu (ph).

We will be highlight our expanded stock products and printed products at the bi annual International Woodworking Machinery and Furniture Supply Fair in Atlanta in late August.

Our gift card business continues to be strong with increased volume from historical customers such as Best Buy, Outback Steakhouse, and Breakers, as well as new customers such as Home Depot and Quiznos.

Although our holographic sales dipped slightly in the second quarter for 2004, year to date sales are up almost 7% over the same period in 2003, with a strong order book for the third quarter of 2004.

We are continuing to see steady demand from the major oral care products companies such as Colgate and Proctor and Gamble for toothpaste packaging, plus increasing demand for holographic products for golf ball boxes, cosmetics packaging and lottery tickets.

We're also continuing to attract and develop new holographic accounts in Latin America, Europe, and in Asia.

Now I'd like to turn things over to Greg Jehlik, our President and Chief Operating Officer, who will talk about some of the initiatives going forward.

Greg?

Thank you, Mark.

The atmosphere at CFC continues to be upbeat and very exciting.

We had a very strong first half of the year, and we see that continuing into the third quarter.

Incoming orders are very solid across all product groups.

In the third quarter, we're also going to have an exciting new product introduction, that of HoloLam Plus.

HoloLam Plus is an enhanced version of HoloLam which is a full faced holographic film laminate using the manufacture of credit cards and gift cards.

Our expectations are very high for this launch, and we're very excited about this new product.

This past Friday, on July 23, CFC launched a totally new website.

The whole look and navigation is different, and you can see it at www.cfcintl.com.

Primarily as I mentioned, there is simpler navigation, easy access to information, you can check stock on it from the stock products that we added to inventory, and there's some online ordering.

On the operations side, we continue to focus on expense control and manufacturing efficiencies.

Through some new hires in management, we've brought into our fold some Six Sigma techniques and tools to troubleshoot issues.

We've already used some of these tools and have had very positive results.

This week we're in the final stages of consolidating a remote warehouse into a new building adjoining this facility.

This consolidation will lead to better logistics and reduced lease costs going forward.

Dennis touched on the fact that our material costs have gone up in the second quarter, primarily in film, solvents and chemicals, about 2% year to date.

We expect this to continue to rise to almost 9% for the remainder of the year.

We're working closely with our supply base, as well as qualifying alternate sources of supplies where appropriate.

The company has also been focusing heavily on uptimes.

Thus far we've had a 10% increase in our up times year to date.

A number of tactics have been used to get this kind of result, primarily longer runs, the implementation of lean manufacturing initiatives, and moving several pieces of our equipment into a continuous run state.

CFC Europe continues their migration to manufacture more highly differentiated products.

Specifically the wood grain offering and color pharmaceutical products.

They are also changing their sales and marketing focus, looking beyond their traditional product groups and focusing on things like holographic packaging, of which they're having a number of good successes.

This week the executive team will be kicking off the planning process for 2005.

The annual operating plan is the roadmap that we work to and we will be building on a plan put together in 2004 as we look at 2005.

We're encouraged by the incoming business, as well as a result to this point, and we're happy to see what looks like a more robust economy here in the U.S.

So that concludes our formal remarks, I'd like to open the floor for any questions.

Ann Marie, would you be kind enough to poll for questions.

Absolutely.

Ladies and gentlemen, if you wish to ask a question, please press star one on your touch tone phone.

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

Again, to ask a question, the command is star one, and we'll pause for a moment as questions queue up.

And your first question comes from David Bof (ph) of Paradigm Capital Management.

Please proceed.

Hi, it was a good quarter.

I wanted to ask about pricing power.

Do we have any pricing power at this point, and can pass along the higher chemical costs?

In certain segments we do have some power.

But in a lot of those areas, frankly, the suppliers have even greater power.

They're looking at borderline allocation on some goods.

So it's somewhat of a stand off in that regard.

We have passed on some price increases already in some of the product sectors.

In some areas, we have long-term contracts that don't allow for that.

But where we can do it, we're working on it, but it's not an across the board scenario.

You said some suppliers are allocating, that supplies I guess are so tight.

What areas are you seeing that in?

Film.

We haven't seen it, this is Dennis Lakomy, as a company, but we've heard of other companies on allocation and we assume it will spread and eventually effect us but it has not affected us to date.

What products were they?

Film.

Oh, film.

Our raw materials.

OK, good, and is there seasonality in the business, because your guidance is, I think for around $0.52 and we've done $0.37 cents in the first half, so it seems like we've got $0.14 that we'll earn in the second half.

That's a very good question, David, this is Dennis Lakomy.

I think we're probably conservative in our estimates because in the past we've been much too ambitious and we just want to give a very conservative estimate of earnings for the year.

OK, great, and then the last question was on Sarbanes-Oxley.

Are we going to have increased expenses related to that in second half, and are you guys all set for the compliance issues?

Because we are a small cap company, we really don't have to conform until December 31, 2005.

We're working away at becoming Sarbanes-Oxley compliant.

I would expect the bulk of the cost to be in next, not this year.

We've incurred some this year, but internal costs, not external costs.

OK, and you guys intend to remain a public company?

Right now.

OK, that's it.

Thank you.

Thank you.

Good quarter.

Thank you.

Once again, ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your touch tone phone.

And you have no further questions at this time.

All right, well thank you very much Anne Marie, and thank everyone for joining us in the conference call.

And we're looking forward to a good second half.

Thank you for your participation in today's conference, this concludes the presentation.

You may now disconnect.

Good day.