希悅爾 (SEE) 2005 Q3 法說會逐字稿

Good day and welcome to this JohnsonDiversey third-quarter 2005 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 Lori Marin. Please go ahead, ma'am.

Good morning. This is Lori Marin, Vice President and Corporate Treasurer of JohnsonDiversey. I'd like to thank everyone for joining our investor call. Today, we will discuss our results for the quarter and nine months ended September 30, 2005. I am joined on this call by Joe Smorada, our Executive Vice President and Chief Financial Officer, and Clive Newman, our Vice President and Corporate Controller.

On this call, we intend to provide an update on the general status of the business and the financial results for the third quarter and first nine months of 2005, an overview of the balance sheet at September 30, 2005, and a brief overview of our three-year restructuring program. We will be meeting with our bankers later today to discuss a proposed amendment to our senior secured credit facility that will provide us with the financial flexibility and liquidity required to execute this comprehensive program. Information regarding the public portion of that meeting can be found on our website.

Some of the statements that we will be making 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 Statements Concerning Forward-looking Statements in the JohnsonDiversey Registration Statement on Form F4 that was declared effective by the SEC on November 27, 2002, in the JohnsonDiversey Holding Registration Statement on Form F4 that was declared effective by the SEC on January 8, 2004, and in the Form 10-Q report for certain risks and uncertainties that we may face.

The discussion today includes reference to EBITDA for various periods. EBITDA is a non-GAAP measure within the meaning of the SEC's Registration G. In accordance with Regulation G, our Form 10-Q report includes a reconciliation of EBITDA for the fiscal quarter ended September 30, 2005, to net cash provided by operating activities which we believe to be the GAAP financial measure most directly comparable to EBITDA.

Our Form 10-Q report for JohnsonDiversey and JohnsonDiversey Holdings were filed with the Securities and Exchange Commission yesterday, November 8, 2005. They are also posted on our website 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 shares of JohnsonDiversey. Other than 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 of the two companies are the same. Accordingly, we will address the results of both Companies on this call.

I would now like to introduce our Executive Vice President and Chief Financial Officer, Joe Smorada, who will go over financial results for the quarter.

Thank you very much, Lori. I am very pleased to report that we had a solid quarter with an improvement in sales growth; a stabilization in our gross margin, despite continued raw material cost increases; and strong cash flows that enabled us to make significant debt repayments in the quarter.

On an as-reported basis, our net sales in the third quarter of 2005 were $834 million, an increase of $50 million or 6.3% as compared to the third quarter of 2004. Net sales for the first nine months of 2005 were $2.5 billion, an increase of 141 million or 5.9% over the first nine months of the prior year.

The increase in sales in the third quarter was primarily due to pricing price increases taking hold in all business sectors and geographic areas; a particularly strong quarter in North America; the expansion of developing markets in Asia-Pacific, Latin America, Central and Eastern Europe, Africa and the Middle East; and the strengthening of the euro and other foreign currencies against the U.S. dollar from prior-year levels.

On a constant currency basis, and after adjusting for acquisitions and divestitures, our net sales for the quarter increased 5% compared to the third quarter of '04. On this same basis, net sales for the first nine months of 2005 increased by 3.1% versus the same period a year ago.

Sales in North America, as I said, grew 8.1% in the third quarter versus the same period a year ago. This strong improvement shows continued momentum in this region, with growth being primarily attributable to key customer wins, including a significant deepening of our relationships with key distributors with our JohnsonDiversey Advantage program and the impact of pricing actions.

In our Europe, Middle East and Africa region, third-quarter net sales grew by 1.9% as compared to the same period a year ago. We continue to see double-digit growth in developing countries in Central and Eastern Europe, Africa and the Middle East. At the same time, we're seeing continued pressure in the established markets of Western Europe, resulting from softening economies in key countries and from consolidation in key market sectors, including distribution, building service contractors and food and beverage customers.

Both the Asia-Pacific and Latin America regions showed solid sales growth in the quarter. Asia-Pacific posted sales growth of 6.3%, led by the key markets of China and India. Latin America grew by 10% versus the prior year, resulting from improved economic conditions and growth in the distributor markets, the food and beverage business, and the lodging sector. In Japan, net sales increased by 2.8% in the third quarter, despite significant economic pressures.

Our polymer business delivered almost 12% net sales growth in the quarter, primarily due to price increases in response to the significant rise in raw material cost experienced over the past year.

Our gross profit percentages have improved throughout 2005, but do remain below prior-year levels, as our pricing actions have not fully offset the unprecedented increases in key raw material and transportation costs.

In our professional business, we reported gross margins of 43.3%, an improvement of 190 basis points from the fourth quarter of 2004, and despite continued escalation in raw material prices, remained flat with the margins recorded or reported for the second quarter of 2005. However, margins still remained below levels of a year ago, primarily due to the continuing impact of increased crude oil and natural gas costs on our raw materials.

We also continue to experience escalating freight and transportation costs in North America, clearly attributable to the rise in crude oil prices and changes in the U.S. transportation legislation that has reduced carrier availability.

In our polymer business, we reported gross margins of 26.2%, an improvement of 380 basis points from the fourth quarter of '04 and 90 bips higher than the third quarter of 2004. Pricing actions in the polymer business have largely offset the impact of higher crude oil and natural gas costs on key fuel stocks and supply and demand in balances for certain other raw materials.

As a percentage of net sales, SG&A expense in the third quarter of 2005 were 32.9%. This compares to 34.6% in the third quarter of 2004. Excluding the impact of foreign currency, selling, general and administrative expenses were relatively flat with the same quarter a year ago. The impact of cost containment programs has offset general inflationary pressures.

For the third quarter of 2005, EBITDA was $91.8 million, compared to $84.4 million in the third quarter of 2004. This increase was primarily due to higher gross profits and the savings from our cost reduction and cost containment programs that have offset inflationary pressures in SG&A.

EBITDA for the first nine months of 2005 was $263 million, compared to $277 million for the same period last year. This decrease in EBITDA was primarily due to the impact of raw material cost increases that we have not been able to fully offset with price.

The Company reported net income of $8.4 million in the third quarter of 2005, compared to net income of $4.4 million in the third quarter of 2004. This increase in net income in the third quarter was primarily due to the previously discussed increased gross profits and the positive impact of our cost reduction programs.

For the first nine months of 2005, the Company reported net income of $5.7 million, compared to net income of $27.4 million in the same period last year. The decrease in year-to-date net income was primarily due to lower year-to-date EBITDA, an increase in interest expense resulting from ineffective interest rate swap agreements, and the write-off of unamortized debt issuance costs associated with the April 2005 debt amendment, and lastly, an increase in the income tax provision.

JohnsonDiversey Holdings reported net income of $2.2 million in the third quarter of 2005 and a net loss of $12.7 million for the first nine months of 2005. As previously mentioned, the main differences between the net income of JohnsonDiversey Holdings and JohnsonDiversey are interest expense and related taxes on the senior discount notes, as well as dividend income.

Capital expenditures in the first nine months of 2005 were $65 million, compared to $85 million in the first nine months of 2004. This significant decline over the prior year is due to tight controls over spending, particularly in North America and Europe, and lower spending on capitalized software.

Cash spending during the quarter related to restructuring and integration-related activities, excluding capital expenditures, was $15.3 million, as compared to $13.5 million for the same period in the prior year.

Before turning things back over to Lori to discuss the balance sheet, I would like to give you an introduction to our recently announced restructuring program. As you know, we're facing significant challenges in our business resulting from structural shifts in material markets, supply and demand imbalances, and the impact of natural disasters, including the hurricanes' impact on refining capacity. We're also facing increased costs related to medical benefits, pensions and transportation.

In response to these factors, we have developed a restructuring program that we believe will revitalize the financial performance of the Company, eliminate complexities, add to our efficiencies and make us decidedly more productive, and lastly, provide a platform for growth.

Specifically, we have designed a comprehensive restructuring program, as I said, to address the challenges and address the opportunities that our business is facing and will face. The plan includes a redesign of our structure to create a lower-cost, leaner organization. It encompasses the closure of a number of manufacturing and other facilities in order to optimize our supply chain and improve our market competitiveness. It entails a workforce reduction, unfortunately, of approximately 10%, excluding planned divestitures, and the divestiture of or the exit from certain noncore or underperforming business units. The businesses being considered for divestiture contribute in the aggregate in excess of $500 million in net sales and may include the sale of Johnson Polymer.

I would now like to ask Clive Newman, our Vice President and Corporate Controller, to provide you with some additional details with respect to our restructuring plan.

Thanks, Joe. The implementation of the restructuring plan is expected to result in cumulative pretax restructuring and other non-recurring period cash charges totaling between 345 and $370 million, including approximately 20 to $30 million in the fourth quarter of fiscal year 2005 and 150 to $175 million in fiscal year 2006.

Over the duration of the program, we expect to incur on a pretax basis approximately 195 to 210 million in employee-related costs, including severance, pension and other termination benefits; 150 to 160 million in other associated costs, including facility closures and contract termination fees; and about 60 to 75 million in non-cash asset write-downs.

We expect the restructuring program to require capital expenditures of approximately 50 to $65 million, primarily for new manufacturing facilities to support our supply chain optimization and expansion in developing markets and for strategic IT investments.

Total annual savings associated with this restructuring program are expected to be approximately 150 to $175 million by the end of fiscal year 2008. We expect the implementation and execution of our program to take two to three years, and therefore expect to incur the majority of the associated costs by the end of fiscal year 2008.

I will now turn the call back over to Lori Marin, Vice President and Corporate Treasurer, who will discuss the Company's cash and debt position.

Thank you, Clive. During this third quarter of 2005, debt balances decreased by $146 million to $1.18 billion, with reductions in short-term debt made primarily with cash flow from operations. Additionally, debt was repaid during the quarter with the proceeds from several transactions, including a $29 million payment from Unilever in settlement of certain acquisition-related pension obligations; cash proceeds of 18.6 million from the divestiture of the Canadian and European commercial laundry businesses; and a $6.5 million payment from Unilever received in connection with certain changes to our master sales agency agreement. These changes were made in anticipation of the conversion of the current master sales agency agreement to a 10-year master license agreement, which will occur on January 1, 2006. JohnsonDiversey Holdings' debt balance at the end of third quarter of 2005 was $1.48 billion, which includes 300 million of senior discount notes.

As of September 1, 2005, the Company had total credit availability of $311 million under our senior secured credit facility. Of the total credit available at the end of the quarter, we could have borrowed 98 million and still have been in compliance with our financial covenants.

As I've previously mentioned, we will be meeting with our banker later today to discuss a proposed amendment to our senior secured credit facility. In conjunction with this amendment, we will be requesting the extension of maturity on the revolving credit and Term Loan B facilities and changes to certain covenants, terms and conditions which will provide us with the financial flexibility and liquidity to allow us to execute our restructuring plan.

If we are able to successfully amend our facilities, we believe that the cash flows from operations and the proceeds from divestitures, together with available cash, borrowings under the senior secured credit facilities and the proceeds from our receivable securitization facility, will generate sufficient cash flow to meet our liquidity needs for the foreseeable future, including the implementation and execution of the new restructuring program.

This concludes our presentation. I would like to remind you that our Investor Relations website can be accessed at JohnsonDiversey.com. We consider this website to be a key communication tool with the investor community, and we encourage you to periodically take a look at our site. Documents related to the JohnsonDiversey senior subordinated notes and the JohnsonDiversey Holdings senior discount notes, as well as both Companies' financial results, can also be found on the Investor Relations site.

A recording of this conference call will be available for replay for the next two weeks by dialing into the numbers listed on the press release announcing this call. Please direct questions related to our financial results to Kathy Powers or to me. John Matthews will continue to be the contact for all non-financial matters. Our contact information can also be found on our website.

We will now move on to the question-and-answer session. We will not be taking questions regarding the proposed refinancing on this call. These questions will be addressed after our bank presentation that will be held later this morning at 10:30 Eastern.

(Operator Instructions). Thomas Sulcet, Jefferies Investment (ph).

I just wanted to start off asking, given the size of the restructuring program, whether you could give some more detail with respect to where the restructuring will take place, how you will conduct it and maybe some comments around why it's happening now as opposed to earlier, or potentially what's different from earlier restructuring efforts, would be a great start.

Thomas, Joe Smorada. Let me just take your question in order. Where will this program be effectuated? Across the Corporation. As you might expect, it would be largely in our European-Middle East-Africa region, as well as our North American regions, because they are by far the majority of the Corporation. We will, however, have participation from the other regions as well, because this is a team program.

And we would expect to have certain changes made in our corporate organization, as we've said in our 10-Q. Why? Well, you know, it's almost an incredible redundancy, but it's just so significant we can't help but reiterate it, that which is the unbelievable increases in our raw material costs, whether it be crude oil, whether it be natural gas that drives the feedstocks, our transportation costs -- we as well as others have had tremendously increasing costs around Sarbanes-Oxley and other regulatory compliance, medical costs, other types of pension expenses and what have you.

So there's been a natural inflationary creep, if you will, with respect to the structural fixed costs in our business, as well as an exponential increase in our raw material costs. So we've got that kind of a cost environment. Then you take the fact that several years ago when Johnson acquired the Diversey Lever business and integrated two very large businesses that were very geographically dispersed, you get what might amount to the one plus one equals two situation. So you are adding together, but you're not necessarily at that juncture getting the fine-tuning and all of the things that you would expect in an evolutionary sets of next steps.

So, the why would be to deal with the externalities attendant to cost factors and the internalities, if you will, relative to certain inefficiencies, certain complexities, certain redundancies and a plethora of expertise that we have developed just by virtue of the fact of melding these together.

So, that's the why. We have much stronger economic aspirations for ourselves than currently exist. And we want flexibility around our covenants in order to be able to manage our business more effectively. And what is different from before is the fact that heretofore was, as I said, a merger, if you will, or a coagulation of two businesses, and that in itself is a tremendous feat.

Now, what we're talking about doing is reshaping around our core businesses so that we will be able to invest around those core businesses and restructure our organization to be very, very customer-focused again in respect to core, and allowing ourselves to reduce costs further, if you will, to that which we think are more acceptable benchmark levels, all of which is designed to get us to enhance cash flow, all of which is designed to help us retain our common goal with respect to debt paydown. That's a mouthful. I'm sorry.

Thanks, Joe. If you don't mind, maybe I can just ask a bit further -- particularly in Europe, where it appears that there is some opportunity to cut the costs, can you just talk about how this will work, whether you are closing plants and taking out capacity, or whether you will end up with the same capacity, but at a higher level of efficiency a couple of years down the road? And in terms of management and sales, whether you are taking out a lot of people, but still end up with a sales force that's going to have the equivalent sort of sales power or even investing in your sales force as part of this restructuring?

Let me just firstly say that there is -- with respect to facility closures, we have said openly in our Q that we will do so. I would not submit that it is unique to EMU (ph) or what have you, and I don't think it would be appropriate to get too, too specific in that particular vein.

Clearly, with respect to facility closures in a manufacturing world, what is doing so to get better utilization -- this type of business is not necessarily conducive to a continuous operation mode, but certainly it would be our desire and intent to maximize our capacity utilization.

And, furthermore, we would expect to look to added -- decomplexifying, if you will, by virtue of SKU reductions, and again, that just lends itself to consolidation and better capacity utilization. With respect to -- to use a cliche, feet on the street, we have absolutely no intent of reducing our feet on the street, and clearly, our program is designed to invest in a sales effectiveness program to enhance our capability, absolutely not to detract from it.

Okay, great. Thanks. But I just -- one more question that's related to the operations in Europe. You mentioned in the Quarterly and the 10-Q a couple of times I think that a negative factor for the European business is the consolidation among your customers. Can you just explain how this negative factor works for you?

Firstly, it works for all of us, including our competitors. So it is not just a unique factor to us. What is happening is some countries where there have been some economic problems, if you will, certain distributors have found themselves, for whatever their particular reasons, they've chosen to sell themselves, if you will, to some of the larger distributors.

In some cases, sometimes we win; sometimes we don't. It depends on the ultimate end distributor. But what's happening is there's just been too many distributors and some of the smaller ones have not been able to survive effectively.

The other factor that's a pretty widely known phenomenon is in the food and beverage area. You know, the major bottling operations have clearly been going through a consolidation. They themselves are doing so obviously to generate their own capacity utilization and enhance the efficiencies, and frankly, undoubtedly, some of the bottling has given way to alternative packaging around alternative drinks, whether it's water, juices or what have you. So it's clearly having its effect on the big soda producers.

Richard Phelan, Credit Suisse First Boston.

First question, can you update us with respect to the search for a new CEO, and I guess I'm wondering in the context of this restructuring program, does that change the framework of this restructuring, and was the decision to go ahead with this part of the process of the previous CEO's departure?

Firstly, I will take the last first. Greg Lawton, our CEO, has had a time frame that has been public knowledge for some time. And currently, we are sitting in a situation where we have a major restructuring to undertake to be followed by what we hope to be a very attractive growth program. And Greg has stepped forward and said, look, that horizon is not necessarily the best for myself, and perhaps the best thing for the Company is if I retire earlier than I originally said and allow for an opportunity for someone to come in with a longer view. So, view that in a different context.

With respect to the status of a new CEO search, that search is underway. It's being handled by one of the more highly acclaimed executive recruiters, Heidrick & Struggles. Mr. Johnson and others have interviewed some candidates. They are giving consideration to those candidates, and will consider some internal candidates as well. So, the search is progressing.

With respect to the question of changing, will someone come in and change the restructuring program and so forth? It is our belief and understanding that any candidate that would be considered would be recognizing the fact that there is a great deal of commitment around this program that we believe has been well-thought-through and validated, accepted and endorsed by our Board of Directors and what have you. So we would hope that he or she who may come in would be able to augment, if you will, the thinking around it as opposed to being someone who would come in and want to change.

So there is no thought with respect to changing that program. The restructuring program leadership, if you will, is frankly led by myself, and I do have a great deal of background and experience in this particular area, and that is not expected to change.

Just a follow-up. Did the previous integration program -- I think when the Company were originally put together, there was a synergy target of $150 million. That was later upsized to 250 million. Based on where we stand today, where will the Company end up at the end of 2005 in terms of completion of the originally anticipated synergies?

We are highly confident that we're going to end up in that 200 million type of range. So, I think the Company has done a terrific job in that respect. And a logical follow-on question is, well, if you had all that, where did it go? And if you merely look at the change in our margins over the last couple of years with respect to raw material changes, you can see that it's a very good thing that we had those synergies, because they were very critical with respect to offsetting costs. But we expect this program -- that particular part of our evolution is generally complete.

And I guess with respect to the restructuring program, there's obviously an important platform related to divestitures and you have even mentioned the polymer division as a potential candidate for sale in the text of the release. Where do you stand in terms of the process with those divestitures, and what process will you go through to effect those, and what else besides polymers can we look at as potential candidate here?

Again, I will address your last point first. I think it would be inappropriate to get overly specific on this particular call with respect to other candidates. There is a great deal of sensitivity, if you will, and also there's a great deal of strategy with respect to divestitures that we might be giving up at this point. We also need to just be absolutely certain before we go out on some of these particular properties.

Where we have -- firstly, let me just double-underline the operative word that you used, potential, because we're not going to sell anything below fair market values. Those candidates for divestitures are those that are non-core, non-strategic and underperforming, and therefore they would be logical, but there's not a need for a fire sale, and that's by no means an intent.

More specific to your question, with respect to the larger divestitures, we have retained and are working with some of the largest and most prestigious investment banking firms I think in the U.S., and where more appropriate, we have engaged with certain boutique investment banks for the properties that we don't think would be attractive and necessary to require one of the largest firms.

We are well down the path with respect to thinking out what may be the appropriate types of expectations around valuations and have done our homework with respect to market comps and what have you. But, again, these are considerations, etc., and I think I will just let it go at that.

Okay. Is there a range of anticipated proceeds from the portfolio of companies that potentially could come up for sale?

I don't think we're quite ready to disclose on that.

Last question, related to the restructuring, if I might. Just the cash to effect the restructuring actions -- the 345 to 370 million, is it fair to assume that you anticipate borrowing from the senior banks, and that's the meeting after this call, to put those facilities in place?

Certainly, our refinancing requests are centered around helping us implement the restructuring program, yes.

The public portion of that bank meeting, is that something that is available to join by conference call?

It certainly is.

You can find the information if you go onto our website.

Were you able to hear that?

Yes. I heard that. Great. And the last question, just related to the business -- I'm sorry, on Q4, can you just discuss planned price increases in the core professional segment that you anticipate for the last quarter?

I think it would be inappropriate just at this point for us to disclose that for any numbers of reasons, competitive being one of them. I'm sorry. I'm going to refrain from answering that right now.

David Andrews, Temco (ph).

Couple questions. You indicated in your opening comments that you may sell polymer, and you seemed to emphasize may. And I was a little confused by that, because that seems to be the significant portion of the expected divestiture sales businesses. So can you help me understand whether that is up for sale or not?

The reason for the word may, I think I've already stipulated, is to the extent that divesting of the business is at a value that is appropriate, okay, as far as work appropriate against a potential keep value, then we would sell the business. If we don't have an appropriate type of situation, we are prepared if we needed to to take alternative strategic steps. That's the word may.

Okay, I understand. I apologize if you had mentioned that before. Secondly, would it be reasonable to assume that the margins in the non-polymer businesses that may be divested are fairly similar to the margins of the polymer business?

This is Clive Newman, the Controller. It wouldn't be fair to assume that margins in the polymer business are in the mid-20s and in the professional business in the low 40s. That detail -- you can find that detail both in the executive overview and in the MD&A section of our 10-Q. We do pull those two segments apart.

Right. But of the professional segment that is to be divested, would it be reasonable to assume that that's below the average for that entire segment, since you are divesting them?

I think that would be going too far to say that. There are a number of, as Joe said, strategic and underperforming businesses that we're looking at. They have very different business models, and the shape of that business model could very materially change the margin, but not the bottom line. So I don't think you can say that, David.

Okay, so can you say that they are, then, average for that division?

David I think if the take-away is our goal is to improve our financial performance, and taking the context of the actions that we would be taking to doing so, I think that could lead you to your answer.

Yes. Okay. And then, are there any -- I understand that you would not want to talk about valuations for these businesses -- perfectly understandable. But I'm sure in your own work to try and pull together some sense of what you could potentially get, there are some market transactions that you would consider and take a look at. Are there any specific transactions you can point to in this business of a fairly recent nature that would give an outsider some insight into what kind of multiples are out there?

I personally wouldn't think it appropriate for us to say specifically, but I do think that frankly, if you think of the polymer business and you think of other people that are in the space, I think you could probably find available public information around what other transactions have been.

Okay. And then lastly, in terms of the working capital -- the cash flow from working capital for the quarter, I noticed payables had a huge swing. Can you talk a little bit about where your days payable is, and I'm really trying to get at how permanent is that swing -- are we going to see a pull-back in prior quarters?

David, I don't have the days payable information quite at hand. What you do see playing out as we move through the year, which I think will in part answer your question, is there is an increase in accruals for things like customer rebates and employee and management and sales bonuses. So those tend to build as we move through the second and third and fourth quarter and come out in the first half of the following year. So I think that probably answers your question.

Okay. So my take-away from that is we'll probably get some reversal in the next couple of quarters?

Yes, you would. Some of the movement you're seeing in Q3 also reflects I think the low starting point at the end of Q2 for payables.

Right. And then other assets had a big swing. Was that the Unilever settlements on pensions -- most of that?

Yes.

On behalf of everyone at JohnsonDiversey and JohnsonDiversey Holdings, I would like to thank you all for attending this conference call and for your continued support and interest in our Company. Have a great day.

Thank you all.

And that will conclude today's conference call. Thank you for your participation.