Tim Gallaher - Treasurer and IR Director
Frank Russomanno - Vice Chairman and CEO
Paul Zeller - SVP and CFO
Imation Corp. (IMN) Q4 2009 Earnings Call January 21, 2010 10:00 AM ET
Good day, ladies and gentlemen, and welcome to the Imation announcement of the Q4 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).
I would now like to introduce your host for today’s conference call Mr. Tim Gallaher. You may begin sir.
Thank you Kevin. Good morning everyone and welcome to our quarter four and full year 2009 earnings conference call. I am joined today by our Vice Chairman and CEO Frank Russomanno and our Senior Vice President and CFO Paul Zeller. Before I turn the call over to them for their comments followed by your questions I want to remind everyone that certain information discussed on this call does not relate to historical information may be deemed to constitute forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from any projected results. The risk factors that could cause results to differ are outlined in both the press release as well as our filings with the SEC.
With that I would like to turn the call over to Paul Zeller.
Thanks Tim and good morning everyone. Let me start by introducing Tim Gallaher who just recently joined Imation as our Treasurer and IR Director coming to us with over 20 years of experience in finance, banking and treasury. Tim replaces Matt Skluzacek who recently left the company as he and his family relocated to Europe. I am sure a number of you will get a chance to meet Tim over the coming quarters.
Now let me get to the quarter. We finished the year very strong on a number of fronts. We began to see encouraging signs in terms of revenue, where our rate of decline in our core tape and optical storage business has moderated from recent quarters. In addition, we saw growth in several important other storage categories including external and removable hard disk, flash products as well as Blu-ray optical media. We generated significant earnings improvement from a difficult fourth quarter last year and we still have some room to go in terms of our margins. We are encouraged by the stabilization in our business model. Finally, and very importantly we had a very strong quarter in terms of cash generation with cash up $50 million in the quarter as we made significant progress on our working capital initiatives especially in inventory.
Now some of the details, revenue was down 12% in the fourth quarter compared to Q4 of 2008. This was a much improved decline rate compared to our recent quarters which have average nearly a 20% decline since the onset of the economic downturn in the fourth quarter of ’08. In dollar terms, our revenues totaled $451.7 million in the quarter. As expected this was our strongest quarter of 2009. The moderated declines in tape and optical products and a better currency environment were the main factors. Our revenues from optical products declined 7% to a $194.1 million. Our rate of decline in this business has steadily improved since Q4 2008.
We are continued to benefit from our consolidation strategy where we have seen momentum with our retail customers. In addition, Blu-ray revenues were up nicely year-over-year. Magnetic product revenues declined 12% to a $127.8 million in fourth quarter. This was encouraging after having seen decline rates of about 30% in each of the last four quarters. We saw improvement in demand patterns across the broad spectrum of tape products from the data center to entry level.
We saw indications of budgets spring up in the quarter. We are currently assessing to what degree this is a function of longer term changes in demand pattern versus the impacted by motivations to use up year end budgets that have been cautiously managed during the year. We believe both factors were present. Our flash revenues were up 30% coming from our international markets, our main area of focus in this category. Europe was particularly strong. In our remaining products, our revenues were down 26% driven by electronic products where we have intentionally lowered our exposure to the higher risk LCD TV category which was at its peak in the fourth quarter a year ago.
Partially offsetting this we delivered very strong 40% growth in our external and removable hard disk products. Though yet on a relatively small base, we were pleased with these results. From a regional segment standpoint, our Americas segment which excludes electronic products, performed well especially in optical products which were actually up slightly in Q4. Revenues were also solid in Asia lead by Japan as well as South Asia. Our revenues were up in all major product categories aided by positive currency translations.
Europe remained our weakest region with 20 plus percent declines in both tape and optical revenues. These declines were somewhat offset by strength in flash products. When we look at our overall 12% decline in revenues that came from about a 7.0 impact from lower volumes a 9.5 point impact from price erosion offset partially by a 4.5 point positive impact from currency translation.
Our gross margins in the quarter were up 1.2 points from the fourth quarter of 2008 to 15.3% of sales. Sequentially margins were down modestly as expected. Improvements in our electronic products margin drove the year-over-year improvement. Our optical gross margins were once again solid in the quarter relatively unchanged from last quarter as well as the prior year. We saw particular strength in Blu-ray optical margins which were at their highest levels we've seen.
In magnetic tape our margins were on par with last quarter but still down versus the prior year driven by a planned slowdown in manufacturing that we began in Q3 to improve inventory levels.
In our remaining storage categories Flash and Hard disk, margins were down modestly from the prior quarter but still higher than earlier in 2009. In consumer electronics our margin significantly improved from Q4 of 2008 as you may remember we had some inventory write-offs at the end of '08 as demand slowed significant at retail. Sequentially our margins were down somewhat in electronic products and as we donated some excess inventories to the Boys and Girls club of America and though we recorded tax benefits below the line there was an impact on the gross margin line in the quarter.
Our operating expenses totaled $55.4 million in fourth quarter that’s down $19.5 million or 26% from the fourth quarter of 08. It was driven by lower legal cost after settling the Philips litigation in July of last year as well as by our restructuring and cost control action. As the percents of sales OpEx was 13.5% in the quarter that’s down 2 points from the prior year.
As anticipated OpEx in the quarter was up somewhat sequentially from Q3 due to higher sales in marketing cost in our seasonally stronger fourth quarter and also due to Q3 having been benefited by some one-time items as we mentioned last quarter.
We are pleased with the results we are seeing from our cost actions with our OpEx ratio at the lowest level in two years. Our rolled on employee count ended the quarter at approximately 1210 that’s down about 2% from last quarter but down over 20% from the prior year. These reductions were driven by both manufacturing restructuring actions and our OpEx restructuring program. In terms of restructuring our total charges were $3.8 million in the quarter and were a continuation of our structure realignment we announced at the end of 2008.
Including restructuring and other charges our operating income was $4.5 million in the fourth quarter. If we exclude those charges operating income was $8.3 million. That represents a $16 million improvement over the $7.7 million operating loss we had in the fourth quarter of 2008 calculated on that same basis excluding restructuring and related charges and in that period as well goodwill impairment charges. This improvement was driven by lower OpEx spending that was also enabled by improved gross margin which mitigated the majority of our revenue decline.
Non operating cost totaled $1.8 million in the quarter, down from Q4 2008 which was $3.5 million and included higher than normal foreign currency losses in that period. We had a $4.6 million tax benefit in the fourth quarter on pre-tax income of $2.7 million this unusual relationship having a tax benefit on income occurred because of the mix of income and loss by country.
Specifically we had a net loss in the U.S. from a tax standpoint where our tax rates tend to be higher and income internationally where our rate is lower. This coupled with some discreet items in the quarter contributed about $0.14 to per share earnings versus having had a more normalized tax rate.
On a per share basis we had earnings of $0.18 and if we adjust that to exclude restructuring and other charges, that would have been net earnings of $0.22 per share and that would have been up form $0.42 per share on a comparable basis in the prior year.
Cash and equivalents ended the quarter at $163.4 million up $52.4 million from last quarter and up over $74 million in just the last six months. This strong result was driven by significant reductions in working capital especially inventory, where we were able to reduce our days of inventory supplied by nine days in just the fourth quarter. Improved earnings were also a significant contributor with EBITDA excluding charges at $19 million in the quarter.
We were also benefited by the sale of some excess real estate in California which netted about $12 million in cash in fourth quarter. Capital spending for the quarter was $1.8 million. We are obviously very pleased with our cash performance which was a major area of focus in the quarter. So in summary we are pleased and encouraged by both our earnings and cash flow improvements in fourth quarter and it was good to see our core storage revenue trends begin to improve and to see measurable results from our working capital initiatives. At this point I will hand the call over to our CEO, Frank Russomanno. Thank you.
Thank you Paul and good morning everyone. As Paul has already noted in his remarks and as we have outlined in our press release this morning we had a solid finish to the year. We returned to profitability in the second half of 2009 and delivered significant year-over-year earnings growth excluding restructuring and other charges in the fourth quarter. We are encouraged by our ability to attain these results despite the ongoing challenges of a difficult global economic environment. Regionally, our strongest performance was in the America’s and Asia Pacific which was aided somewhat by currency translation.
We are pleased with our strong cash generation which was driven primarily by working capital improvements, as part of our company-wide emphasis on achieving operational efficiency. We use the targeted approach that enabled us to improve asset utilization across all areas of our business. But we will not stop with one-time improvement; achieving long-term operational excellence is an ongoing area of emphasis as we continue our company transformation. Under the umbrella of what we call project XL, we have identified key global processes that are critical to operational efficiency and has begun process improvement programs in each of them. For example, last quarter I mentioned that we have successfully implemented a new product lifecycle management process that provides full visibility and control for all aspects of our product life cycles, from concept to development and product launch to end of life to ensure that we move quickly and maximize profitability for all our products. Other operational focus areas within this company-wide project XL effort include sourcing, demand and supply planning, order management and finance processes.
This type of operational excellence starts with leadership. We've made a key operations higher in the quarter with Carl Thielk joining Imation as Vice President of Global Supply Chain Operations. Carl has responsibility for all global sourcing; supply planning, distribution and process improvement. He is an experienced global operations leader with more than 20 years of integrated supply chain management in the electronics field most recently with Motorola Corporation. We know that we have more work to do as we strive for operational excellence but through key targeting areas we expect to see continued improvements.
Paul has talked about the moderating rate of decline we saw in our core storage business during the quarter. I'd like to take a few minutes to address our approach to our product portfolio in both storage and consumer electronics and accessories. First some comments about our magnetic tape business. As noted, the quarter rate of revenue decline was 12% compared to the 30% range we experienced throughout the year. We believe this was helped by some end of the year IT spending but warn a caution that we expect continued decline rates that could be higher than that of Q4.
We continue to optimize our magnetic tape business where we remained the global share leader. As previously announced, Imation was the first developer licensed with the newest Ultrium LTO-5 tape format, the world's first multi terabyte magnetic tape with double the capacity of existing cartridges. We have submitted our qualification samples and expect to launch during the first quarter of 2010.
We are seeing traction with our new data protection offerings such as our LTO Secure Scan tape diagnostic and locking product and our DataGuard RAF tape tracking systems, these products designed around our core tape business help companies manage and monitor their critical archive data and meet increasingly important security and regulatory requirements.
In our optical business, our decline rates continued to improve throughout the year while Imation's overall market share has continued to increase. Evidence that we are successfully executing our optical consolidation strategy in Japan for example TDK Life on Record brand attained a number one market share in both DVD and CD for 2009 earning the Tokyo based BCN market research firms BCN 2009 awards as the country's best selling optical brand. And we anticipate additional consolidation in the US in 2010 while we remain solidly positioned as the global optical share leader.
We saw our Q4 growth in certain storage products including flash and removable and external hard-disk drives. In the fourth quarter, we landed new placements of TDK Life on Record USB flash drives in several European accounts. We saw some encouraging growth on a small base in two key areas. Our RDX removable hard drive business grew over four times the previous year's level and Blu-ray disk doubled in size compared to the previous year we also saw good progress in our external hard disk drive business.
In 2010, we plan to selectively launch new secure data storage devices that meet the stringent security and regulatory requirements of commercial and government users. Earlier this month we announced the partnership with MXI Security to develop the manufacture flash and hard disk drives that will be fixed, validated and manufactured in US. Both key requirements for our U.S. Government users. We expect to also launch products that are similarly validated to meet key Canadian and European security standards.
As we have talked about for some time our transformation strategy includes not only entering new storage areas but also extending our portfolio of brands into audio and video consumer electronics and accessory categories.
Our teams just returned from a successful international consumer electronics show in Las Vegas, where we showcased new products across Imation, Memorex, and TDK Life on Record and XtremeMac brands.
Imation brand highlights included our new Pro WX the world’s first wireless USB external hard drive which was featured on MSNBC as one of the top five CES products for the small business user. This application of new wireless USB platform is an external hard drive is a good example of how Imation intends to remain at the fore front of new technologies with our offerings.
We also announced several new Memorex audio products design for iPods and iPhones including new travel speakers and portable docking stations. These are new designs and in already successful audio portfolio that saw good retail sales during the recent holiday season.
Further extending the Memorex brand we announced a full line of gaming accessories for the Wii platform and a new line of AV cables that will replace an incumbent brand in a large U.S. retailer for 2010. In our XtremeMac product line designed for the Mac enthusiast, we announced new iPod and iPhone cases and chargers including an international charging station with adapters perfect for travelers.
And for our TDK Life on Record, we gave retailers a first look at an entirely new line of high-fidelity audio products which we planned to launch globally in the second half of 2010.
In past calls I referenced our 3S operating philosophy that is helping us to drive improvements in simplicity, size and speed in all areas of the business. As I just described, we are simplifying and streamlining our business processes to operate more efficiently through focused project XL programs.
We are sizing our business appropriately focusing on fewer but higher impact areas to execute more effectively. And selectively entering those new product categories in storage, CE and accessories that we believe will deliver the best results and we are acting with speed to respond faster to our partners, customers and changing business conditions. This 3S mentality is infused through our global organization and is starting to yield results. In summary and as we have stated in previous quarters, we remain fully committed to our proper transformation.
We are encouraged by the response to our new storage consumer electronics and accessory products while we continue to optimize our existing storage portfolio. With a strong foundation of brands including a Imation, Memorex, TDK Life on Record and XtremeMac, we continue to execute on our brand and product strategy.
As we look back on 2009, we believe we have made very real progress in our transformation. Our focus on operational excellence and financial strength over the past several quarters has established a solid platform as we enter 2010 and we are cautiously optimistic for the New Year.
Now Paul and I will take your questions.
Ladies and gentlemen if you have a question or a comment at this time (Operators Instructions). Our first question comes from Chuck Murphy.
Good morning guys. A few questions, first I was a little surprised I mean usually you have a big sequential improvement in electronic products not so much of a sequential improvement in tape and optical and it was kind of just the opposite this quarter and I was wondering if you had a good explanation for why that was?
One of the key things we've been talking about Chuck really as a theme for 2009 was be more selective and focused on quality business to improve the business model drive cash flow and what the key things we did really exiting 2008 and especially in to 2009 is rationalized our participation on the video side in CE especially TVs.
That was a really big part of 2008 fourth quarter and actually caused some of the real issues in terms of write-downs and some of the issues in terms of selling that inventory out in earlier part of 2009. That had a lot to do with why we had kind of the kind of year-over-year decline we had and didn’t have as big a bump-up from Q3 to Q4 as you would have seen last year for example.
And I think it's fair to say that consumer spending is still a bit muted and it’s not a great environment. I would say we were if there was any degree of concern about CE that was par outlaid by the fact that we were quite encouraged by the storage side of the business which did see a bit of a comeback. And so I agreed to the extent that the CE business fundamentals are different between Q3 and Q4 but there are some reasons.
Chuck in addition to Paul's comments two other things we like you to think about we have been saying all along that we are learning how to participate in this CE business and we believe we made great strides in doing that this past year. With that in mind we understand this market place better and if looked at the research data and NPD available data and just about every electronic category has been down through most of the this year including some of the most competitive areas like the large screen TVs but we have become much more selective and much more focused on improving the margin capability of this business so that's why you see this change here.
Maybe just one final comment Chuck that is that we are quite encouraged about the prospects of the business in the sense that we have got of new products we have had, we have had a good reaction and meetings with some of our key channel partners to our brand positions to some of the products that are coming out and we had a quite good (inaudible). So I think overall we are relatively encouraged by the business actually looking forward.
In tape and optical sales I mean were there certain products within those markets through certain channels or in markets that did better than the others?
Yeah the just overall the decline rates moderated kind of across the board. And that was true frankly from the [skeps] all the way up through the data center. Obviously the [skeps] aren’t very large but it was pretty broad based and a key part of that obviously is what we have been saying all year which is fourth quarter ’08 when we finally got to fourth quarter ’09 and was going to create a much better comparison and we can’t underestimate how challenging fourth quarter last year was and that’s why some of the caution about whether we are going to be able to solidify on a 12% decline rate. I think that’s still an open question for us and we do know that while we saw demand certainly pick up in fourth quarter and budgets loosen up, to what degree as I said that was a long term change in demand patterns in a more permanent sense versus kind of a use of budget in calendar year folks I think its an open question that we are going to launch very closely in 2010 here.
Chuck talking in very broad terms and like our comments stated the Americas was very strong for us in those product categories and also we mentioned Asia in our comments. But Japan in particular and in the case of optical we also have mentioned to you our consolidation strategy around the brands that we own and the success we are having with that consolidation so that’s really helping that optical business.
Got you. Okay. But given kind of electronic products I mean I realize a lot of it has to do with the economy but are you feeling any different about that kind of being the future of the company.
I think it would be too strong to say it's the future of the company, its part of the company. We have these two major segments, we have a storage component to our company and we have a consumer electronics and accessories. And this transformation is meant to optimize and grow both, in the case of the consumer electronics and accessories piece of the business, its still an important opportunity for us going forward and we are learning how to participate in that business in a very difficult environment right now, where there is a quite a bit of competition.
Okay and could you last question could you just talk a little bit about the fourth quarter gross margin, usually the reason why its down sequentially is because electronic products are bigger piece of the mix but that wasn’t necessarily the case this quarter. Was there something else?
No, it did well. It wasn’t really mixed. So you are right, usually there would have been relatively speaking a little different mix in fourth quarter. One of the things we saw was we continue to have a little bit soft gross margins in tape because of the move we made in third quarter to kind of ranch it back manufacturing capacity and that continued through fourth quarter and so because of that there was a continuing issue in those gross margins and literally it was just a little bit in most areas. There was no big issue in fourth quarter with gross margins, we are little bit down in Meg and a little bit down in Flash and optical is pretty flat but there wasn’t any major drivers. But for our fourth quarter, we were pleased with the gross margin.
And I guess one last comment is you know you have seen an announcement about how we made a relatively sizeable donation of some CE products and that did impact our margins in the quarter. I mean not dramatically but it was measurable. And it was the right thing to do on a lot of fronts. And we have really all year ago been kind of bringing inventories back down where they belonged in CE and really for that matter in the rest of the company but especially so in CE and our CE margins specifically have been a little lower all year long as we have been sort of moving out all of the inventory at very low if any margin if you will. So we've been pretty encouraged overall with what we've seen in the business model in CE in light of that.
Got you. Okay that’s all I had. Thanks guys.
(Operators Instructions). There are no further questions at this time.
At this time then I'd just like to thank everyone for attending the call and to say in closing that we believe we made some very strong progress this past quarter in our transformation and we're focused on continued operational excellence and building our financial strength in the future quarters of 2010. Thank you very much.
Well ladies and gentlemen that concludes today's presentation. You may now disconnect.
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