Illinois Tool Works Inc (ITW) 2004 Q3 法說會逐字稿

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

My name is Anne Marie (ph) and I'll 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.

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 (ph), President of Street Smart Strategies (ph).

Please proceed.

Thank you and good morning, everyone.

I appreciate you joining us today on CFC International's third quarter 2004 earnings conference call.

Again, this is Tim Gerdeman of Streetsmart Strategies, an investor relations firm working closely with CFC.

Without further ado, I am pleased to be introducing CFC's management team, which will be participating on today's conference call to include Roger Hruby, Chairman, who will say a few words about the third quarter 2004 and provide an outlook for the remainder of the year, Greg Jehlik, President and CEO, who will speak about the operations in the third quarter 2004 and provide some plans for 2005, and Dennis Lakomy, Executive Vice President and CFO, who will lead off the call by discussing key financial details for the most recent quarter.

Dennis?

Thank you, Tim, and let me also add my welcome to those of you who have joined us this morning.

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

But before we begin, let me remind you 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 the 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 strategy regarding the future.

Forward-looking statements are only predictions and are not guaranteed the performance.

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

And 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 might refer to non-GAAP financial measures as defined under SEC rules.

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

This said, I would like to speak about the third quarter of '04 compared to the third quarter of '03.

We had a record quarter.

Sales in the third quarter of '04 were 21.7 million, up approximately 44.1% from 15.1 million in the third quarter of '03.

Holographic sales came in at almost $5 million compared to 3.7 million in the third quarter of '03.

This represents a 35% increase.

This was primarily due to strong sales in the August introduction of our new HoloLam Plus product for which we applied for a patent.

Sales of this product reached 1.1 million alone.

HoloLam Plus is a full-faced holographic material for credit cards.

I would also like to add that this was our largest holographic sales quarter ever.

Printed wood grain product sales were 9.2 million for the third quarter of '04, up 153% from 3.6 million in the quarter a year ago.

Greg will speak about this dramatic increase a little later on.

Pharmaceutical sales in the quarter amounted to 3.2 million, which represented a 21% increase compared to the prior year's quarter of 2.7 million.

This increase was primarily in the U.S.

Security products, which include products such as Mag Stripe, signature panel, give cards, intaglio printing and our sophisticated fulfillment system, sales in the third quarter of '04 amounted to 1.8 million, down 24% from 2.4 million a year ago.

This decrease was primarily due to the late arrival of material from gift card customers.

And the sales shortfall will spill into the fourth quarter.

Specialty products for the quarter - third quarter of '04 amounted to 2.5 million, down 7% from 2.7 million in the third quarter of '03.

Gross profit for the quarter, not including a deduction for depreciation and amortization, amounted to 7.9 million or a 71% increase compared to a year ago of 4.6 million.

This increase in dollars is primarily a result of increased sales and increased product - production productivity.

Operating income in the third quarter of '04 amounted to 2.2 million, up from a loss of 218,000 a year ago.

As a result, net income in the third quarter of '04 was a record setting 1.3 million or 29 cents per share on a fully diluted basis, compared to a net loss a year ago of 316,000 or seven cents per share loss.

I'd now like to talk about the nine months ended September 30, '04, compared to the nine months ended September 30, '03.

Sales in the first nine months ended September 30, '04, were 61.9 million, up 30% from 47.5 million in the nine months ended '03.

Year to date holographic sales came in at 13.6 million, up 16% from 11.7 million in '03.

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

Printed wood grain products came in at 23.1 million for '04, up 79% from 12.9 million a year ago.

And as I mentioned before, Greg will speak a little bit more about this increase a little later on.

Pharmaceutical sales amounted to nine million, which represented a 4.6 increase over the previous year sales of 8.6 million.

This is in the range of the normally expected annual growth rate for this particular product (inaudible).

Security products growth amounted to 7.3 million, up 31% from 5.6 million a year ago.

This increase is primarily due to the first and second quarter gift card volume as well as new customers.

Specialty products in '04 amounted to 8.9 million, up 4% from 8.6 million a year ago.

This increase was primarily due to the strength of the euro on sales made in Europe coupled with an increase in domestic sales.

Gross profit for the nine months ended September 30, '04, not including a deduction for depreciation and amortization amounted to 22 million, an increase of 39% compared to 15.9 million a year ago.

This increase is primarily a result of increased sales in production productivity increases.

Operating income in '04 amounted to five million, up from operating income a year ago of only one million.

Net income for the nine months ended September 30, '04 amounted to 2.9 million or 66 cents a share on a fully diluted basis compared to net income of 40,000 or one cent per share on a fully diluted basis in the prior year.

Now, I'd like to talk about some of the balance sheet highlights, comparing September 30, '04 to December 31, '03.

Trade receivables were up 3.4 million or 34%, primarily due to the increase in sales.

Net inventories increased approximately 1.1 million or 9%, primarily due to an increase in finished goods, specifically in printed products to better service some of the smaller customers.

Working capital increased to 3.5 million - to 14 million, primarily due to higher receivables in inventory, an increase in cash of approximately 3.8 million, offset by restructuring payables and rearranging some debt.

Capital expenditures in '04 for the nine months ended September 30 amounted to 2.5 million of which approximately 1.6 million was for the purchased of the Landon building (ph) immediately west of our Chicago Heights facility.

Total bank debt as of September 30, '04 amounted to 25.8 million, up from 24.8 million at the prior year end.

This is primarily due to financing the acquisition of the Landon building immediately west of our Chicago Heights facility less normally scheduled debt payments.

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

Greg?

Thank you, Dennis.

Fiscal 2004 continues to be a record setting year for us.

As Dennis mentioned, Q3 was our biggest quarter ever.

Our actions and investments early in the year in people, training, stock inventory and additional space are now all paying dividends.

This momentum that we've generated thus far is continuing into Q4.

We continue to have strength in our wood grain sales.

Successful integration of the dramatic influx that began in Q1 has taken hold.

Through our lean initiatives, block scheduling and better efficiencies, lead times have fallen dramatically to four to six weeks currently.

We feel confident that, with our service and quality levels, this business will continue throughout 2005.

Holography is as strong as it's ever been for CFC.

As Dennis mentioned, we've just had our largest quarter ever.

We continue to see new applications for packaging solutions and security application here and around the world.

In addition, we have just launched HoloLam Plus.

HoloLam Plus is a full-faced holographic laminate used in the manufacture of transaction cards and gift cards.

The brilliant effect of the holographic background lends itself for card issuers to create stunning and eye-catching cards.

CFC has also just ordered one new embosser and is finalizing plans to invest in further capacity in this growing area.

Our operations team has done an outstanding job around the world.

Europe continues its successful migration to new manufacturing technologies, while the U.S. has dramatically increased its output.

We have enhanced many processes while getting significantly more product out the door.

Just a few highlights.

We've had productivity increases in most areas.

These increases range from 8-45%.

Our up times have increased across the board.

Our on time delivery performance is the highest it's ever been at 91%, although work still needs to be done in this area.

In the U.S., we have successfully consolidated three external warehouses into our new adjoining facility, saving approximately $20,000 a month in lease.

Scrap is down 13%.

We are also working diligently to manage our material costs and ensure and uninterrupted supply of film, chemicals and solvents.

These markets will continue to be tight going forward.

We are aggressively managing our supply chain in this area.

Finally, the development of our 2005 annual operating plant is well underway.

Looking forward, Q4 looks solid and 2005 looks very good.

We see sustainable growth going forward.

We know we will not see the influx of wood grain business again, but there will be organic growth in the introduction of new products.

Continuous improvement in the execution of our strategies will remain a focal point.

With that, I'd like to turn things over to our chairman, Roger Hruby.

Thank you, Greg.

And I, too, would like to welcome everyone to this conference call.

First, I'd like to congratulate Greg on his promotion to chief executive officer.

It's time for a new generation of management, which Greg brings to our company.

I will remain as chairman and as you've already heard from Dennis and Greg, this was the best quarter in the company's history.

Our business continues to be strong.

And I believe this is only the start.

Our launch of HoloLam Plus has exceeded our expectations.

We expect this strong demand to continue.

The manufacturing team here at CFC, in particular, should be complemented for executing the plan in place to substantially increase our production.

Finally, I'm also pleased to report our German operation reported a six-digit profit.

Hurray.

All in all, CFC's business, year to date, is the best in our history, both in sales and profits and a growth momentum in all of our products going forward.

It's an exciting time for CFC International.

Now, we would be pleased to answer any questions you might have.

Our fourth quarter earnings are going to be better than target, probably around 13 cents a share.

We believe our year ending will - the guidance will be somewhere between 70-75 cents a share.

As you know, we projected 68-72 cents a share prior guidance.

If there's any other questions, we would be pleased to answer them.

Yes, would you please - moderator, would you please poll for questions?

Thank you.

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.

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

And your first question comes from John Evans (ph) of Coker and Palmer (ph).

Please proceed.

Yes.

Can you talk just a little bit about the cash that you generated in the quarter and can you talk a little bit about free cash flow and maybe what you hope to do with it for the rest of this year and as you go into next year?

We've generated a large cash balance during the nine months, basically on our - as a result of our income.

And, you know, we would expect EBITDA for the year, on a reconcile to GAAP north of $10 million.

OK.

And I guess, do you look to pay down some of this debt or, I guess, are you looking to make acquisitions with the cash or can you talk a little bit about, you know, how you hope to maximize shareholder value with it?

We would be prepared to pay down debt and there's some additional equipment we'd like to purchase to expand the business.

So, we're building a (inaudible) to do both of those.

OK.

Thank you.

You're welcome.

Thank you, John.

And your next question comes from Rob Norfleet of Davenport & Co. Please proceed.

How are you all doing this morning?

OK, Rob.

Good to hear from you.

I want to congratulate you all on just a tremendous quarter.

Job well done.

Just a couple of quick questions.

I think you addressed most of them during the call.

You had talked briefly about, obviously, the impact of raw material prices, specifically films and solvents.

And again, obviously, a lot of companies, especially in this specialty chemical area are getting hit with these.

Can you discuss what kind of, you know, negative implications that the higher costs had on the quarter for to look at this from an apples to apples perspective?

And I guess, a little more detail in terms of what we're doing from a supply chain management perspective in inventory management to control those higher costs, again, as they continue to accelerate.

In Q3, we minimized the impact, probably only - in fact, material cost about 1% and a lot of that had to do with the supply chain management that has been going on all along with long-term contracts and agreements on film and chemical supplies.

We are going to continue on this path in to '05.

We have a number of proposals in hand right now from our major film suppliers and are working on the chemical side as well.

The one area that - and one chemical and solvent that's really problematic is MEK and we are working to secure adequate supplies of that.

We've arranged for extra storage so that when we come across it, which we're constantly looking for, we can secure it in storage so that we have our own storage going into '05, if the tightness (ph) continues.

As far as how things will flush out in material costs for '05, we're - we haven't dialed in those numbers yet, but we're working very diligently to manage that.

It's our single biggest line item on the P&L.

So we're spending a lot of time working with our entire supply chain on that.

OK.

Secondly, obviously, we've brought some new capacity on line to deal with the higher volumes that we're seeing.

What kind of capacity utilization rates are our clients currently running at?

Up time are varying from the 50s to 75, 80%.

It depends.

We have a number of different types of pieces of equipment and processes here.

Most of the productivity gains we've seen have been achieved by going to continuous run, so operating 24 hours a day, seven days a week.

And instituting some lean initiatives as far as quick changeovers and things like that.

So, we haven't added significant pieces of equipment like, you know, new printing presses.

We've really made do with our existing capital base.

This is Roger Hruby, Rob.

You know, one factor that is the size of the run.

And our runs are much larger and thus our ability to be able to produce more - a lot of it is predicated on this - how large a run in our production equipment we can make.

And we are continuing to increase the size of the runs, which is a significant improvement in our production.

OK.

Great.

Last question is it seems or appears that we've finally gotten Germany in the black and it appears is cutting that operation kind of going on the right foot.

As we continue to clearly accumulate cash - and this is a question that was asked earlier - and look at, I guess, additional ways to continue to grow the business in a value-added manner, are there any potentially small, bolt-on type of acquisitions or transactions that we may look to do?

I mean, is there even anything in the pipeline or are we just kind of sticking to our knitting right now?

We're sticking to our knitting right now.

That doesn't mean, though, that if an opportunity presented itself, as you know, we've always had possible acquisition candidates.

But our first - our vision has been and continues to be to maximize the value of our business right now and certainly Germany has finally shown it can make a profit.

And we're very excited about it.

Great.

Well, thanks again and congratulations on a great quarter.

Thank you, Rob.

Thanks, Rob.

And your next question comes from Robert Susman (ph) of Bentley Capital (ph).

Please proceed.

Good morning.

I've got two questions for you.

The fourth quarter guidance of 13 cents would imply that you would come out closer to 80 cents than the 72-76.

I'd like to understand, even at 13 cents, that would be back to the second quarter levels.

I guess, is that a seasonality issue or what is that?

You even indicated that one of the businesses is, you know, was held back in the third quarter and would actually make that up in the fourth quarter.

So, I'd like to understand the fourth quarter, you know, certainly, compared to the third.

And then, my second question is can you give us an idea of what your capacity could be for HoloLam next year and what that business could do?

Let me - you're a good mathematician.

Thank you.

The 81 cents is a possibility.

We're projecting between 70, 75% because the fourth quarter, historically, is somewhat seasonal.

The December - the December - you know, there's a lot of holidays in December.

And the number of days that we have in December are significantly less than any other month.

So, we're probably hedging it a little bit.

Robert, this is Dennis Lakomy.

I think the seasonality is the big thing.

The gift card business will be significantly strong in the fourth quarter.

Unfortunately, Europe tends to shut down for the Christmas-New Year holiday in December.

Also, the seasonality of some of our other product lines - printed products - tends to be a little weaker in the fourth quarter than in other quarters.

The stated guidance on the earnings release was 72-76 cents ...

That's correct.

... and we're very comfortable with that.

The second part of your question was - can you remind me?

Sure.

The HoloLam took off really well in the third quarter.

Can you give us an idea of what your capacity could be in that business for 2005 and what the potential volumes could be?

Yes, the capacity - we do not have any capacity constraints on HoloLam.

It's a multi-step product, so it goes through coding and metalizing and embossing and laminating.

But we have no bottlenecks and we would expect to do significantly more in sales next year, several million dollars.

We're still dialing in that figure, but I would expect it to be in the $5 million range.

And we can go significantly higher if need be.

Now, is that totally additive or are you cannibalizing some other product with HoloLam?

It's virtually all additive.

We had a first generation HoloLam product that did slightly less than a million dollars.

This enhanced product is really quite new and has a number of features that we've applied for patents on.

And so, most of the business that we are seeing is all incremental.

OK.

One last thing on that as a follow-up.

Can you give us an idea what the margins are in HoloLam and is there something that could happen there that could really blow the volume out next year, in terms of the credit, especially the credit card area, where you could get quite significant contracts and it could turn out to be a very substantial business for you?

Bob, this is Dennis Lakomy and, first of all, let me say that the margins are north of 65%.

Number two, we believe that we have a substantially better product and better process than the competition.

And the marketplace has acknowledged that by this dramatic increase in volume in the third quarter.

We've got some orders on the books now that take us through the first half of next year.

If more large companies that issue credit cards migrate to the look, it could be substantially higher than the number Greg indicated, but we're comfortable with that $5 million range today.

That sounds great.

I mean, I - so, is that to indicate - since this is going to be the major growth driver next year, does that mean margins are likely to be up next year versus this year?

I - this is Roger Hruby.

Yes, I think so.

I think, you know, if we can stay ahead of the material cost, which is always a problem in today's world, our margins should improve.

Because of product mix here ...

Yes.

... in terms of HoloLam.

Right.

OK.

Thank you very much and you did a terrific job.

Congratulations.

Thank you, Robert.

And you have no further questions at this time.

Well, thank you very much for joining us today.

We're very excited about the results.

We're very excited about the future prospects and we will be speaking with you at our fourth quarter conference call.

Thank you very much.

Thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a great day.