希悅爾 (SEE) 2004 Q3 法說會逐字稿

Please standby. Good day and welcome to JohnsonDiversey 2004 third quarter earnings results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Greg Lawton. Please go ahead, sir.

Thank you, and good morning. This is Greg Lawton, President and Chief Executive Officer of JohnsonDiversey. I’d like to thank everyone for joining our investor conference call. Today, we’ll discuss our summary results for the quarter, and nine months ended October 1, 2004.

I am joined on this call by Clive Newman, our Vice President and Corporate Controller; John Matthews, our Vice President of Corporate Communications; Francisco Sanchez, our Vice President and Corporate Treasurer, and Joe Smorada, our newly appointed Executive Vice President and Chief Financial Officer.

On this call, we intend to provide an update on management changes within the company, an update on the general status of the business, and the financial results of the third quarter, and first nine months of 2004. An overview of the balance sheet at October 1,2004, updates on the progress of our integration and synergy realization programs. A discussion of the status of our internal control systems and improvement plan. And finally, an update of the financial results for JohnsonDiversey Holdings.

Some of the statements that will be made in this presentation are not historical facts and are forward-looking. These forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Please refer to the risk factors and cautionary statement concerning forward-looking statement section in the JohnsonDiversey registration statement on Form S-4 that was declared effective by the SEC on November 27, 2002 and in the JohnsonDiversey Holdings registrations statement on Form S-4 which was declared effective by the SEC on January 8, 2004. For certain risks and uncertainties we face, including risks relating to the integration of the Diversey Leaver business and synergy realization.

The discussion today includes references to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC’s regulation G. In accordance with regulation G, our Form 10-Q reports, including a reconciliation of EBITDA for the three and nine month periods ended October 1, 2004, the net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to EBITDA.

Our Form 10-Q reports for JohnsonDiversey and JohnsonDiversey Holdings were filed with the Securities and Exchange Commission on November 12, 2004. They are also posted on our Web site at JohnsonDiversey.com and can be accessed by clicking on the investor relations link and selecting the relevant company.

JohnsonDiversey Holdings is a holding company whose sole asset is its share of JohnsonDiversey. Other differences in net income due to interest expense for the JohnsonDiversey Holdings senior discount notes, provision for income taxes, and dividends received, the consolidated financial results are of the two companies are the same. Accordingly, we will address the results of both companies on this call.

Before we discuss our financial results for the third quarter, and year-to-date I’d like to provide a follow up to our previous discussion regarding changes in our senior finance organization. As we communicated in our last investor call on August 16, Mike Bailey assumed a newly created strategic role within the company as Executive Vice President of Corporate Development and Clive Newman was appointed interim Chief Financial Officer.

As indicated in our press release, and Form 8-K report issued on November 12, we are pleased to announce that our Board of Directors has appointed Joe Smorada as Executive Vice President and our new Chief Financial Officer, effective yesterday, November 15. Joe will serve as a member of the company’s senior management committee.

Joe Smorada has an extensive and impressive employment background serving as Chief Financial Officer for both public and private companies for more than 25 years. Most recently, Joe was an executive consultant and Chief Financial Officer for Axel Johnson, Inc, a Stanford, Connecticut based company with international business interest and manufacturing energy and technology products and services. Joe’s experience as a public company CFO and his expertise in finance, accounting, internal controls, asset management restructurings, mergers and acquisition and governance make him an ideal fit for our company. We’re delighted to have Joe join our senior management team.

I’d also like to thank Clive for his service as our interim Chief Financial Officer during the past three months. Clive has been instrumental in driving our internal control improvement initiatives during his time and will be a valuable asset in assisting Joe in his new role. Clive has assumed his position as our Vice President of Corporate Controller and Chief Accounting Officer.

I would now like to turn our discussion towards some of the key trends and developments impacting our business for the third quarter and year-to-date. In the third quarter of 2004, the following business themes emerged. The company showed steady improvement in sales growth across all business segments and geographies. Our gross margin percentages remain under pressure as a result of raw material costs, primarily crude oil and natural gas.

I will discuss the short term impact of the gross margin reduction on our business, and describe our plan for recovery and future growth in this area. We continue to delivery on improved working capital cash flow and EBITDA performance for the year-to-date, and our integration and synergy programs have generated incremental cost savings in line with our expectations.

During the third quarter, we have accelerated growth in net sales overcoming a challenging, competitive, and economic landscape. Net sales for the three months ended October 1, 2004, grew 3% over the third quarter of 2003, excluding the impact of foreign currency exchange rates and acquisitions and divestitures. On this same basis, net sales for the first nine months of 2004 grew by 2.2% as compared to the first nine months of 2003.

Our improved third quarter, and year-to-date sales performance was driven by continued growth in Latin America, Japan and the Asia Pacific region as well as our in polymer business. In North America, we experienced a return to sales growth resulting from the successful restructuring of our sales model in our health and hospitality business.

I would now like to discuss how our business has performed on a regional basis. Please note that year-over-year sales comparisons are made on a constant currency basis, and are adjusted for acquisition and divestitures.

In our professional segments, the Asia Pacific region posted net sales growth of 8.3% in the third quarter of 2004 as compared to the third quarter of 2003, consistent with our year-to-date performance. We continue to benefit from very strong sales in India and China, which are two of our leading developing markets, as well as growth in Australia and Thailand.

In Latin America, net sales in the third quarter of 2004 grew by 5.4%, versus the third quarter of 2003. A significant improvement over the increase in net sales that was reported for the first half of 2004. For the first nine months of 2004 sales increased by 1.7% as compared to the same period last year. Our strong third quarter performance was driven primarily by the economic recovery in Brazil, growth in distributor markets in Argentina, and new retail and lodging customers in Mexico.

Net sales in Japan grew 3.7% in the third quarter of 2004 adjusted for the November 2003 acquisition of Dai San (ph) consistent with our year-to-date performance. We have experienced additional customer wins from our total solutions campaign which has more than offset some softness in the food service and building service contractor markets.

Our European region which also includes the Middle East and Africa showed net sales growth at 1.9% in the third quarter of 2004, as compared to the third quarter of 2003, consistent with our year-to-date performance. Growth in this region continued despite severe economic competitive pressures, a reduction in core inventory levels maintained by our customers, sales mix issues, and consolidation in key beverage accounts.

In North America, corrective action to our sales model as restored positive sales growth in the third quarter of 2004 as compared to the prior year. This improvement is consistent with our expectations, and we anticipate this will continue. Our success in this area has been driven by new customer wins, and renewals in the health and hospitality market.

Our polymer segment net sales excluding inter company sales to the professional segment increased 11.6% in the third quarter of 2004 as compared to the third quarter of 2003, slightly better than year-to-date performance. Sales growth in the polymer segment continues to be driven by volume increases in all regions.

On the subject of gross margins, we reported a percentage decrease from 44.9% in the third quarter of 2003 to 42.6% in the third quarter of 2004. This change was most evident in our polymer segment, and is a direct result of escalating raw material costs. The increase in our costs was driven by cyclical factors in the industry resulting in demand for certain material components exceeding supply. And higher crude oil and natural gas prices.

In our professional segment, gross margin percentage was down primarily due to unfavorable product mix, and the impact of the increase in crude oil and natural gas prices on our floor care business, where acrylic base polymers in common in product formulations. We plan to take several actions to combat these factors, including focus price increases in the fourth quarter, and in to fiscal 2005, the implementation of incentives and training programs designed to improve our product mix. And the continuation of our aggressive global cost production programs.

We also continue to drive innovation and have a pipeline of opportunities that we are commercializing this year and beyond. In North America, we have just launched a major food safety program called hot spots, to our food retail customers. This is a unique program that allows our customers to focus their resources on the highest food safety risk areas of their operation.

Historically, food safety audit programs have treated every area of the store equally in terms of audit time and evaluation. The hot spots program provides new tools and training to retailers allowing them to focus more time and evaluation on highest risk areas, such as the deli. Early feedback indicates that this is just the type of innovation food retailers are looking for. We plan to roll this program out to other sectors and geographies over the next year.

Another value added innovation we have just launched is the patented pace, high impact floor cleaning system. Pace provides a change in the way our customers clean their floors, combining innovative micro fiber pad technology, with the ability to dispense diluted product right from the cleaning tool. This process cuts cleaning time in half allowing our customers who efficiently clean more areas, more frequently leaving floors spotless.

I would now like to have Clive Newman, our Vice President and Corporate Controller, take you through the financial results for JohnsonDiversey and JohnsonDiversey Holdings.

Thank you, Greg. I would like to remind you that our reconciliation of EBITDA to net cash provided by operating activities can be found in our Form 10-Q reports for the quarter ended October 1, 2004, which can be accessed from our Web site.

On an as reported basis, net sales for the third quarter of 2004, increased by $65.1 million or 9.1%, to $784 million as compared to net sales of $719 million in the third quarter of 2003. Net sales in the first nine months of 2004, increased by $209 million or 9.7%, with 2.36 billion, as compared to net sales of $2.15 billion for the first nine months of 2003.

This increase in sales was primarily due to the strengthening of the euro, and other foreign currencies against the U.S. dollar, the impact of which was $33 million for the quarter, and $131 million for the year-to-date. And the current year impact from the November 2003 acquisition of Dai San in Japan which was $13 million for the quarter, and $38 million for the year-to-date.

As Greg indicated previously, on a constant currency basis, and adjusting for acquisitions and divestitures, net sales for the third quarter of 2004, increased by 3%, compared to the third quarter of 2003. And by 2.2% for the nine month period, as compared to the same period last year.

Our gross profit margins for the third quarter, and the year-to-date has declined as compared to the prior year, primarily as a result of raw material cost increases and unfavorable product mix, as well as higher freight and distribution costs.

Our polymer segment, and the floor care business of our professional segment, consists primarily of products, that are formulated from solvents, acrylates(ph) and resins that include propylene, ethylene and benzene, all of which are dependent on the price of crude oil and natural gas.

As you are ware, prices of these commodities have recently soared in the marketplace. For example, styrene cost, a key raw material in our polymer business are currently at a level of more than 50% above their peak in 2003. In addition, the availability of certain raw materials has been limited to a six cyclical mismatch between demand and supply. We are taking specific actions to improve our margins, including securing our required supply of raw materials. And implementing focus price increases in the fourth quarter, and in to fiscal 2005 to recovery raw material cost increases to the fullest extent possible.

Turning to SG&A, selling general and administrative expenses as a percentage of net sales were 34.6% during the third quarter of 2004, as compared to 36.1% for the third quarter of 2003, a 1.5 percentage point improvement, and consistent with year-to-date performance. The percentage decrease reflects benefits realized from our synergy and cost reduction programs, and our reduction in pension expenses of $5.8 million in the third quarter of 2004 resulting from adjustment to census data and planned curtailments in Brazil and in the United Kingdom.

These savings were partially by increased software amortization costs, higher employee benefit costs, and professional fees associated with our compliance requirements, and internal control improvement initiatives.

Restructuring expenses increased by $5 million in the third quarter of 2004, as compared to the third quarter of 2003, primarily due to higher severance costs resulting from the closure of facilities, and organizational restructuring. For the first nine months of 2004, restructuring expenses are comparable to the prior year.

EBITDA defined as net income before minority interests, plus net interest expense, the provision for income taxes, depreciation and amortization expense decreased $3.4 million or 3.9%, to $84.4 million for the third quarter of 2004, from $87.8 million for the third quarter of 2003. This modest decline is primarily due to the $5 million increase in restructuring expenses and a $1.7 million increase in other integration related expenses.

For the first nine months of 2004, EBITDA increased by $29.2 million or 11.8% to $277 million and $248 million for the first nine months of 2003. EBITDA as a percentage of net sales improved to 11.7%, as compared to 11.5% for the first nine months of 2003.

JohnsonDiversey reported net income for the third quarter of 2004 of $4.4 million, a $5.9 million decrease from the comparable period of 2003, primarily due to increased restructuring expenses, and lower gross margins. Net income for the first nine months for 2004 was $27.4 million, a $5.4 million increase from the prior year.

JohnsonDiversey Holdings reported a net loss of $1.2 million in the third quarter of 2004, and net income of $11 million for the first nine months of 2004. As previously mentioned, the main differences between the net income of JohnsonDiversey Holdings and JohnsonDiversey is the interest expense, and related taxes on the senior discount notes, as well as the dividend income.

Capital expenditures for the third quarter of 2004 were $33.3 million compared to $36.3 million in the third quarter of 2003 reflecting continued attention on effective management of our capital investments. Included in these amounts are restructuring related capital expenditures, of approximately $10 million and $11 million in the third quarters of 2004, and 2003 respectively.

I will now turn the call over to Francisco Sanchez, Vice President and Corporate Treasurer who will discuss the company’s cash and debt position.

Thanks, Clive. As of October 1, 2004, cash and cash equivalents were 39.9 million compared to cash balances of 24.5 million as of January 2, 2004 an increase of 15.4 million. In terms of outstanding debt, during the first nine months of 2004, debt balances have decreased by 91 million which includes 18 million of favorable currency impact. Cash to make these payments was primarily generated from proceeds from the Whitmire divestiture of 46 million, an expansion of our accounts receivable securitization program in Italy by 38 million.

Total term debt repayments during the first nine months of 2004 were 122 million. During the third quarter of 2004, debt balances decreased by 13.7 million to 1.31 billion as compared to 1.32 billion at the end of our second quarter. Debt repayments were made using cash generated from operations. In addition, cash from operations was also used to fund a $7.1 million decrease in the utilization of our accounts receivable securitization program, and make contributions of 27.6 million, to our defined benefit pension plans.

As of October 1, 2004, we were in compliance with all financial covenants under our senior secure credit agreement. JohnsonDiversey Holdings debt balance at the end of the third quarter of 2004 was 1.57 billion, which includes 265 million of senior discount notes. As of October 1, 2004, the company had total credit availability of 302 million under our senior secured credit facility. Of the total credit available, we could borrow 282 million, and still be in compliance with our financial covenants. This debt capacity coupled with cash holdings of 40 million, results in a total of 322 million in available liquidity as of the end of the third quarter of 2004.

I’ll now turn the call back to Clive Newman for an update on internal controls, integration and synergies.

Thank you, Francisco. Let me first give you a brief update on progress against our internal control improvement plan. During the March conference call to discuss our results for the fiscal year ended January 2, 2004, we discussed our disclosure in our annual report on Form 10-K, of certain reportable conditions that our auditors, Ernest & Young believed to collectively represent a material control weakness.

To recap, the masses identified included the complexity and detail associated with completion of final purchase accounting entries, particularly to push down to our many operating subsidiaries of pension and income tax adjustments for statutory purposes. The complexity of the analysis and accounting in support of our income taxes globally. The impact of the global integration and restructuring program on our fixed asset accounting, and documentation for our expanded domestic and international receivables securitization facility.

As we discussed before, the company is committed to and has a plan to strengthen the controls over these areas quickly. And to continue with the broad actions begun in 2003 to strengthen our overall internal control systems. I am pleased to report that we continue to make solid progress towards the resolution of the identified reportable conditions. In the third quarter, with the assistance of an outside consulting firm, we completed a comprehensive review of our financial statement closing process and our tax closing process. We plan to implement the recommendations from the process review during the fourth quarter. And this work will continue in to 2005. In addition, we issue global fixed asset accounting policies, and finalized all of the remaining significant open purchase price allocation matches.

Work to resolve the other issues disclosed is progressing on plan. We expect the finalization of the few remaining purchase accounting items with Unilever to be completed in the fourth quarter. The company continues to recognize, and as we move through the final phases of our complex and demanding global integration and restructuring program, we continue to place significant demand on the resources of our global finance, IT, and HR organizations and on our systems of internal controls.

We are committed to implementing our internal control improvement plan, and will continue to have in place mitigating controls and a robust disclosure and financial statement view process to ensure that the financial data we report are fairly presented in all material respects, and in conformity with US GAAP. Management and the audit committee continue their close oversight of this process.

Let me now give you a brief update on the integration and synergy program. Positive momentum in our synergy and integration program continues. Incremental cost savings resulting from synergies achieved during the quarter, are estimated at $16 million, which is 16% ahead of our plan for the quarter. Corresponding 2004 year-to-date figures are $51 million and 12% respectively. We continue to outpace our revised goal of cost synergy savings in excess of $215 million by the end of 2005. Total cash spending for integration related activities totaled $23.6 million during the third quarter of 2004, and $75.3 million for the year-to-date.

Highlights of our third quarter activities include, firstly a completion of our project to consolidate accounts receivable processing, and customer service functions in North America. This work has been done with minimal disruption to the business, and has resulted in lower receivables data out standing. Secondly, continued integration work in Europe, with a focus on completing our supply chain integration, and strengthening our logistics footprint in western Europe.

And finally, further expansion of our planned ERP projects on our two global platforms, SAP and Europe, and PeopleSoft elsewhere. We will continue to update you quarterly on the progress made against our integration plans.

I’ll now turn the call over to John Matthews.

Thanks, Clive. I’d like to point you again to our Web site at JohnsonDiversey.com. Documents related to the high yield notes and our financial results can be found on the investor relations portion of this site. We view this site as a key communication tool with you. And we encourage you to periodically access the site. Documents related to the JohnsonDiversey senior subordinated notes and the JohnsonDiversey Holdings discount notes, as well as both company’s financial results can also be found on this site.

A recording of this conference call will be available for replay for the next two weeks by dialing in to the numbers listed on the press release announcing this call. Please direct all questions related to financial results, to Kathy Powers (ph). I will continue to be the contact on non financial matters. Our contact information can be found on our Web site.

Our next conference call to discuss the results for the fourth quarter, and fiscal year ended December 31, 2004, will be scheduled for late March of 2005. We will now move to the question-and-answer session. Greg.

Let’s turn over to the questions.

Thank you. Today’s question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touch-tone telephone. If you’re using a speakerphone, please make sure your mute function is turned off to allow our signal to reach our equipment. We will proceed in the order that you signal us, and take as many questions as time permits. Once again, press star one if you have a question, and we’ll pause for a moment.

And we’ll take our first question today from Colleen Mager (ph) with Goldman Sachs.

Hi, how are you?

Good.

I was just wondering if you could elaborate a little bit on the raw materials impact? These price increase, what’s been the response from some of your clients, what’s the timing as far as the impact of when we can start to see it on your margins.

And as far as going forward, what have you done as maybe hedging or putting some controls in place? Because I would imagine that, you know, further price increases are difficult to push forward.

And then lastly, just on the competitive environment, what are your competitors doing and saying with regard to the (inaudible) situation.

OK. Let me take those, and I’ll deal with the various points you raised, Colleen. Let me deal with the polymer business first. As I said on the call, high natural gas, and crude oil prices are effecting, you know, three key feed stocks, propylene, nepholene (ph) and benzene which play directly in to some key raw materials in our polymer business, acrylic assets, acrylate, styrene and resins. We also – the polymer business is also faced with a supply storage with acrylic acid. That’s due largely to a collision of between reduced investment and new capacity in the last couple of years with increased demand from firstly the US economic recovery, but by far and away the biggest driver, there are very significant increase demand in China.

That supply shortage will correct as supplies bring new capacity on stream. But that’s a potential two year timeframe, so supply is unlikely to go away. What we’re – in terms of the polymer business, what we’re doing there is firstly, as I said on the call, we’re taking actions to secure supply, that’s the most important thing, is to make sure we can get the raw material we need. And we believe we’re in good shape there. About 90% of our raw material requirement in our polymer business is contracted.

We are then moving forward to implement pricing to the fullest extent possible. In terms of the polymer business, the size of some of the raw material increases we’ve seen, I mean if you look at a basket of our 16 top raw materials in polymer. I think that’s up 25% year-over-year. And clearly there’s a price – a cost increase environment there which is making is possible to pass price increases through to our customers.

We’ve taken three price increases so far in 2004, the last one in October. And we’ve already announced further price increases for February.

If I turn now to the professional business, there are three drivers behind the gross margin in the professional business Colleen, and raw material cost increases not the prime driver. We have a – the primary driver at the moment is an unfavorable product mix, which we’re seeing in Europe, Japan and Latin America. You should be aware of that. But also, the increased oil and natural gas prices are impacting the cost of products in our floor care business. Acrylic based polymers are a key raw material in floor care product formulations especially in North America, so there’s a direct link to what we’re seeing in our polymer business, in the floor care business in our professional segment. In addition, we have increased freight and transportation costs, particularly in North America to deal with as do many companies.

In terms of actions, immediate actions are training in incentive programs, to improve the product mix, and to facilitate pricing. We’re also putting in price increases in Q4, and in the first quarter of 2004, again to recover cost increase to the fullest extent possible. We’re also looking at freight and fuel surcharges to recover costs that are more likely to be of a temporary nature. These are not necessarily quick fixes, but they are fixes that we’re putting in place.

But we’re not stopping there. We’re also looking at medium term and longer term actions that we can take to improve our gross margins. We do continue to see significant opportunities as we bring these two businesses together in that area.

Let me give you a flavor of some of the actions we’re taking. We’re looking at lower cost sourcing, particularly for non chemical products. We’re also looking at selective reformulation work and material substitution. We believe there are opportunities there. And we also started a project to look at the aggressive policies and leverage in the area of non production item buying.

In terms of I don’t know to what extent that answers your question. I think we are moving in to a period with cost increases we’ve not seen for some time, and the prospects of those continuing. I do think that the climate is there to take price increases. And every evidence that we see, the competitors are doing likewise.

All right. And so the response hasn’t been overly negative from your clients?

Not so far in terms of the polymer price increases, the most significant of which have gone in. I mean they have gone in any with out any loss of business to this point.

And then, just on integration and synergies, you said you’re at 51 million year-to-date, expectations are for 250 by the end of next year. So I would assume, you know, the bulk of that is really going to be in ’05. Are we looking you’d like to ramp up mid ’05, or spread out generally across the quarters?

Right. The 215 million number relates to energy delivery over the full period of the integration plan, so from May ’02 through to the end of 2005, maybe I didn’t make that clear.

OK.

By the end of this year, we should have realized savings of almost $190 million, about $61 million being the expectation for this year. We do see ourselves on track to deliver the 215.

OK. Great. Thank you.

Once again, press star one if you have a question. A final reminder, if you do have a question press star one at this time. We’ll hear from Mike Dellow (ph) with Musinick (ph).

Hi, guys. Just to follow on with that last point regarding price increases. I mean one of the other things you were facing, especially in the professional areas, people shifting to like lower cost, but therefore, so lower margin goods. I mean are you at all concerned? I mean you just mentioned regarding polymers that, you know, so far you haven’t – it’s been pushed through without any significant loss of business. But are you continuing to see as you will push prices through and your customers are still under pressure, that for at least some time, that they’re going to keep moving to lower costs, small, you know, generic level margin goods.

Yes, down trading, I think is what you’re depicting…

Yes.

…is a threat in the business, something we do need to manage. We are currently working with our distributors. You find it most commonly actually in the indirect channels, where there are range of offerings, both the premium offerings, for instance to the lower cost. We do see evidence of down trading, but we’re working with our distributors, particularly with distributor partnering concepts to make sure that we have the ability to get in and control and influence the full range of the product offering. So to make sure that we can – we’re well positioned to take effect of any temporary down trading there may be.

And, I think, just to build on that this is Greg Lawton. We also have, obviously, a significant investment that we continue with moving forward on innovation to ensure that the value that we want to be providing that’s going in to the premium segment is maintained and built upon, as well as obviously working even more aggressively on the cost side of the business. So in combination as the environment shifts, we will obviously be addressing and looking at the – shifting to the lower ranges, but it doesn’t change the strategy and the focus that we must maintain and are committed to in the upper range as well and creating value for the customer on our existing lines.

OK. And could I just ask, is the training incentive programs, especially in the professional area that you’re increasing, is that mainly targeted at the distribution channels where you face, you know, a higher value product versus a more generic product.

It certainly includes the distribution channel, but it’s really providing a better awareness across the business in the context of where the best value for each customer fits in to the customer’s objectives. And obviously, lining that up with incentives to our people so that it becomes a win-win on both sides as it relates to mix and customer requirements.

OK. Thank you.

And there are no further questions at this time. I’ll turn the conference over to Mr. Lawton, for any additional or closing remarks.

Thank you. On behalf of everyone at JohnsonDiversey and JohnsonDiversey Holdings, I’d like to thank you for attending this conference all and for your continued support of our companies.

And that concludes today’s conference call. We thank you for your participation. And have a nice day.