Illinois Tool Works Inc (ITW) 2004 Q4 法說會逐字稿

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

My name is Chris Deaton (ph).

I'll be your call coordinator for today.

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

We will be facilitating a question and answer session towards the end of today's conference.

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

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Dennis Lakomy, Executive Vice President and CFO.

Please proceed sir.

Thank you Chris.

Good morning and thank you all for joining us today on CFC International's fourth quarter and year-end, December 31, 2004 earnings conference call.

I am pleased to introduce other members of the CFC Management Team who will be participating on today's call, including Roger Hruby, our Chairman, will make some comments on '04 and '05, and Greg Jehlik, President and Chief Executive Officer, who will speak about operations in the fourth quarter of 2004, as well as the calendar year-end 2004, and of course, I will talk about the financial results.

Before we begin, let me remind you today that the 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 represents 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 greater detail in documents filed by CFC with the Securities and Exchange Commission, specifically reports filed from time to time with the SEC.

Also, during this call, we will refer to non-GAAP financial 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 measures in this presentation and in our earnings release.

With this said, I would like to speak about the financial results, specifically beginning with the fourth quarter.

Sales in the fourth quarter of '04 were 20.7 million, up approximately 35% from 15.3 million in the fourth quarter of '03.

Holographic sales in '04 came in at 5.1 million compared to 3.1 million in the fourth quarter of '03, representing a 64% increase.

This was primarily due to stronger sales and introduction of our new HoloLam Plus, patent applied for, where sales amounted to 1.6 million in the fourth quarter of '04 alone.

HoloLam Plus is a fool-safe holographic material used for credit cards.

This was our largest sales of holographics ever.

Printed product sales were 6.6 million in the fourth quarter of '04, up 58% from 4.2 million a year ago.

Greg will talk a little bit more about this later.

Pharmaceutical sales amounted to 2.8 million, which represented a 13% increase compared to the prior year's quarter sales of 2.5 million.

The majority of this increase took place in Europe.

Security products for the fourth quarter of '04 amounted to 3.5 million, up 27% from 2.8 million a year ago.

This increase is primarily due to the gift card business.

Specialty products for the quarter in '04 amounted to 2.6 million, down approximately 5% from 2.7 million in the fourth quarter of '03.

Gross profit, not including a deduction for depreciation and amortization, amounted to 6.6 million or a 47% increase compared to the same quarter a year ago of 4.5 million.

This increase is primarily the result of increased sales and increased productivity.

Operating income in the fourth quarter of '04 amounted to 808,000, up double from an operating loss of 596,000 in the same period a year ago.

The company's restated foreign currency exchange game (ph) in the fourth quarter on a pretax basis amounted to 477,000, compared to 210,000 in the fourth quarter of '03.

As a result, net income in the fourth quarter of '04 amounted to 858,000 or 19 cents per share on a fully diluted basis compared to a loss of 72,000 or a loss of 2 cents a share in the prior fourth quarter, as restated.

And now I'd like to talk about the calendar year-end, December 31, '04, compared to the calendar year-end, December 31, '03.

Sales for the 12 months, '04, were 82.6 million, up approximately 32% from 62.8 million in 2003.

Year-to-date holographic sales in '04 came in at 18.7 million compared to 14.9 million in '03.

This represents a 26% increase.

This increase is primarily due to the ordering pattern of domestic packaging customers and HoloLam Plus, patent applied for.

Printed woodgrain products came in at 29.7 million in '04, up 73% on a global basis from 17.1 million a year ago.

Pharmaceutical sales amounted to 11.8 million, which represented a 6% increase over the previous year sales of 11.1 million.

This is on the high side of the expected annual growth rate for this product group.

Security products for '04 amounted to 10.8 million, up 29% from 8.4 million a year ago.

This increase is primarily due to an increase in the gift card volume as well as attracting new customers.

Specialty products in '04 amounted to 11.5 million, up 2% from 11.4 million a year ago.

Gross profit for '04, not including depreciation and amortization deductions, amounted to 28.6 million, an increase of over 40%, compared to a year ago of 20.3 million.

Again, this increase is a result of an increase in sales, increase in productivity and better coverage of our fixed costs.

Operating income amounted to 5.8 million, up significantly from operating income of only 339,000 a year ago.

The company's restated foreign currency exchange game for '04, on a pretax basis, amounted to 806,000 compared to 682,000 in '03.

Net income in '04 amounted to $4 million or 90 cents per share on a fully diluted basis, compared to net income of 261,000 or 6 cents per share in the prior year as restated.

In summary, CFC had a great quarter and the best year ever to this point in time.

Some balance sheet highlights comparing December 31, '04 to December 31, '03 are as follows: Trade receivables were up 2.7 million or 28% due to the increase in sales.

Net inventories increased approximately 4.7 million or 36% primarily due to purchasing approximately 1.4 million of raw film to avoid cost increases and obtain rebates, and approximately a $1 million increase in (inaudible) and finished goods.

Of this material, half of it should be shipped in the first quarter and the other half should be shipped in the second quarter.

Working capital, as a result, increased $5.4 million to 15.6 million, again, primarily due to higher receivables and inventory.

Capital expenditures in '04 amounted to 3.8 million, of which 1.6 million was used to purchase the land and building immediately west of our Chicago Heights facility.

Bank debt decreased to 21.3 million from 24.8 million, primarily due to paying down revolving debt in Q4, offsetting the cross (ph) to financing the land and building to the west of our Chicago Heights facility.

During the final review of the financial statement, it became apparent that the company had not reported the translation of foreign currencies accurately regarding inter-company payables in Europe to the U.S.

As we investigated this issue, we found that the income that should have been recorded in the profit/loss statement was recorded as income in the translation adjustment on the comprehensive income line in the company's equity section of the balance sheet.

As a result of not properly recording the favorable effect, due to the strength of the euro against the dollar, the related to the restatement, net income after tax was increased by approximately $500,000 in '04, 423,000 in '03, and 463,000 in '02.

We now put new procedures in place effective immediately to prevent this occurrence from happening in the future.

It is the company's intention to properly restate its financial statements and equity sections, which will be lowered (ph) by the tax effect on the income that has been transferred to the company's profit/loss statement.

This also will result in a corresponding change in the company's current taxes payable.

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

Greg?

Thank you Dennis.

The Management Team and employees of CFC are proud to report the record setting results of 2004.

As Dennis has mentioned, sales and profitability grew dramatically in '04.

We've mentioned throughout the year the opportunity presented to us in the woodgrain area.

The company successfully seized this opportunity and satisfied the needs of the marketplace.

I'm happy to report that in spite of a 73% increase in sales on existing equipment, CFC fulfilled every woodgrain order throughout the year.

Lead times have normalized to around 6 weeks and we are handling as much printed woodgrain volume as ever.

We are confident that we will maintain this stair step of business going forward.

What's exciting (inaudible), only two-thirds of our 2004 growth was due to the jump in our woodgrain business.

The other third, about 9%, was good organic growth due to the introduction of new products and better overall service levels.

We see this trend continuing.

HoloLam Plus, our full face, holographic laminate, used on transaction cards and gift cards, had significant introduction.

Over $2.4 million was sold in the last four months of 2004.

We believe there are more opportunities in 2005 as we ramp up and add new features to this product, including the ability to register the image as well as embedding security features into this decorative film.

We have invested in a stocking program for certain products where availability and ease are most important to our customers.

Currently, we have 14 different woodgrain patterns, magnetic stripe reels, signature panel, and rainbow holographic film, all on the shelf, ready for immediate shipment.

We continue to focus on improvements in CFC Europe, basically have transferred various technologies from the states, giving Europe the ability to manufacture a better mix of products.

These products, such as woodgrains, pharmaceuticals, and holographic materials are more highly differentiated, thus representing higher margins.

As a result of the actions by the team in Europe, as well as the support from the U.S., CFC Europe generated a profit in 2004.

On the operations side, we continue to invest in our people and focus on continuous improvements.

During the year, we reduced scrap 13%, increased our on-time delivery to 92%, increased productivity of 14%, and increased up-times on average of 10%.

The investments we made in 2003 and throughout 2004 in lean manufacturing initiatives are starting to pay dividends.

As we enter 2005, formal Six Sigma training is under way.

Ten greenbelts are currently being trained.

The 2005 annual operating plan has been completed.

This plan is essentially our roadmap for the year.

Our key focal points during the year will be holographic packaging, holographic security, card products, and maintaining the gain in printed products.

Our resources are focused towards these areas.

As an example, the company has recently purchased three additional embossers, one of which will reside in Germany and complete our technology transfer to Europe.

Product development will continue to be a key area of focus for CFC in general, as we look to continue to grow our business through innovation and successfully solving customer's problems.

Overall, we look to continue growth in 2005 on a global basis.

The CFC team remains committed and motivated to keep the momentum of 2004 rolling strongly into 2005.

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

Thank you Greg.

And I too would like to welcome everybody to this call.

First, I'd like to congratulate our worldwide team for the results they produced in 2004.

As you have already heard from Dennis and Greg, this was the best year in the company's history.

The manufacturing team in particular should be complimented for executing the plan put in place to substantially increase the throughput in 2004.

I'm also really pleased to report our German operation, reported a profit for the year.

Our business continues to be strong.

We expect earnings per share in 2005 to be $1.10 to $1.15.

What more can I say?

It's been a wonderful and exciting year for CFC stockholders.

The start of our 2005 year continues the successes we've enjoyed in 2004.

And I think if there are any questions, we can proceed with those.

Thank you gentlemen.

If you wish to ask a question, please press star, followed by one, on your touch-tone telephone.

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

Press star, one, to begin.

Please stand by for our first question.

You have no questions at this time.

Again, that's star, followed by one, for any audio questions.

And your first question comes from Dave Starkey (ph) of Smith Barney.

Please proceed.

Hi guys.

Great quarter and I wanted to ask you if there is any seasonality in this business other than the normal, Christmas gift card related buying?

I think there are probably two areas where we have seasonality, typically the printed patterns are strong in the first quarter and the gift card business is very strong in the fourth quarter.

And is that gift card business much greater than the other?

No.

Actually, it's the smallest - one of the smaller segments, but we think it will grow significantly over time, that whole security products sector.

Right.

Okay.

And so you think that this estimate that you've got out there is going to be more of a - there isn't a back-end load a quarter, it's more of a steady quarter-to-quarter progression?

It's pretty steady quarter-to-quarter.

Okay.

You guys have a history of being pretty conservative.

I'm assuming you're being so now, I'm hoping anyway.

Yes.

Well, we've had a history of being conservative and I think that's the way to play the game frankly.

And now on your balance sheet, I notice you've got some long-term debt still.

Is that as a percentage of your capital a pretty reasonable number?

Yes.

Yes.

Do you expect to be paying some of that down this year?

We do.

Okay.

All right.

Thank you.

And your next question comes from Kevin Greenberg (ph) of Meadowbrook Capital Management (ph).

Please proceed.

It doesn't matter how many times I say the (inaudible).

Anyway gentlemen, I wanted to - great job by the way executing the business plan.

Thank you.

I wanted to know how you prevent commoditization from occurring.

It seems to be that there are competitors in this space.

Some of them have run into problems in the past, I guess, due to aggressive accounting practices, but really that's nothing to do with you.

How do you avoid commoditization of your products?

Well, what we try and do is keep moving the bar through innovation and product development so that we are displacing ourselves, and essentially we've always been a solutions oriented company, solving problems for our customers.

And regardless of the product family or the application, I think that the technologies we employ and the actual end product is superior and does things that cannot be easily replicated, and thus, preventing those products from being commoditized.

Well, there's a second (inaudible) that net is producing quality and if you continue to product consistent quality, competitors have a tough time competing with it.

All right.

I appreciate it.

Thank you.

Thank you.

Again, that's star, followed by one, for any audio questions.

You have no questions at this time.

All right.

Well, thank you Chris.

And let me thank everyone for joining us.

We look forward to speaking to you again after the end of the first quarter and we'll talk to you then.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.

Thank you.

All right.

Well, she'll come back on in a second.

Good job.