Checkpoint
Q2
| Checkpoint
Q2
|
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) Checkpoint Systems Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKP)") else Response.Write("(NYSE: CKP)") end if %> UNION CITY, Ca., July 22, 1996/FOOLWIRE/ --- Checkpoint Systems reported Q2 1996 earnings this morning. The revenues for the quarter were $74.8 million, up $25 million or 50% over Q2 1995. Net earnings for Q2 were $6.2 million or $0.19 per share compared with $3.4 million or $0.12 per share in Q2 1995.
For the first half of 1996, revenues were $141.8 million, up $54.7 million or 63% above 1995 first half revenues. Assuming they had owned Actron during the first half of 1995, their revenue growth would have been a very healthy 26%.
As in the first quarter, they are happy to report that the growth was fueled by all their major product lines and all their distribution channels. Compared to their internal plan, they are within 1 percentage point for every product line they have and every distribution network they have. Therefore, they believe that the first half is fairly representative of the way the full year will play out with respect to modeling. They don't see any major shift amongst product lines and distribution channels. There is a lot of under-penetration out there, so their sensor lines are going to keep growing and their disposable labels will grow exponentially.
Their Q2 domestic retail sales were up 31% and their international sales were up 86%. European sales doubled over last year's Q2, depicting the positive results of the Actron acquisition. Canada grew 139% with the continued rollout of Shoppers' Drug Mart and Argentina grew 52%. They are doing well in the Asia/Pacific market from a distribution perspective. They are setting their sights on 1997 as being a year in which they will have a greater direct presence in the Pacific Rim and they are negotiating to put themselves in that position by the beginning of January. They see tremendous growth there, particularly in Japan where they are having a banner year with their distribution.
Their disposable label revenues grew $7.1 million or 69% over last year's Q2, bringing their year-to-date growth to 76% for disposable labels. They are extrememly pleased with this trend and credit their success to their increased penetration of source tagging. Currently, Checkpoint has about 400 vendors worldwide doing source tagging with well over 1000 SKUs just with one particular store and more on the order of 8000 SKUs in total. Checkpoint's revenues are about 15% ahead of plan on sales of disposable labels at two vendors for source tagging. There has been a real concerted effort on their larger RF retail customers to aggressively pursue source tagging at their vendor level. Many of their larger customers (including Walgreens, Rite Aid, Thrift Drug, Target, Thrifty/Payless) have been aggressive in requesting source tagging from their vendors and it is showing up on Checkpoint's total number of customers that are vendors who are buying disposable labels.
Tag unit volumes were up 78% and revenues were up 69% from disposable labels. This is a result of discounting due to the volume of tags that they are selling. The quantity of the orders they are getting from their national accounts warrant better pricing and that is what is bringing the average selling price down a little bit. Also contributing to this is the fact that they take some inventory from Tokai's manufacturing facility at just marginally higher cost than their own cost at this point. They are very pleased with their increase in sales of disposable labels, particularly in Western Europe and in all of their international markets. Those sales were up 137%. That is impacted by having acquired Actron, but they are doing extremely well -- particularly in countries like France, the United Kingdom, and Argentina.
Their hardware revenues grew $10 million during Q2 which represents a 51% increase over last year's Q2. To-date, their hardware revenues grew $24.4 million or 76% over the first half, representing their continued market share gains throughout the world.
In addition, their security services group, Alarmex, grew 26% for the quarter to $11.3 million and 21% for the first half to $18.6 million. The benefits of having CCTV as well as burglar and fire alarm capabilities is resulting in tremendous amount of cross-selling opportunities and closes for their EAS and security products group.
New customers during the quarter include food retailers Belchamps, and C&A in Brazil. Food retailers are the least-penetrated EAS market and a market in which they believe their technology is ideally suited. They will continue to concentrate their efforts in this important vertical market. They think, looking forward, people should expect a balanced performance between the US, South America, and Western Europe in terms of new business. They are currently working with stores in most major US supermarket chains. They expect that the next growth in this area will be in chain-wide rollouts and they expect to have at least one, maybe more than one, major supermarket chain rollout during 1996.
Their other new wins include Hills Department Stores and Prestige Fragrances, a subsidiary of Revlon. In addition, they will replace exisiting competitor's EAS equipment and become the exclusive supplier of EAS to Harris in the United Kingdom, one of the world's premier retailers.
Also, during the quarter, they received chain-wide commitments from existing customers Phar-Mor, Drug Emporium, and Oshua Foods in Canada. They have a series of customers that continue to roll out. The vast majority of their largest customers are healthy and are having internal growth as well as acquisition related growth that results in additional business for Checkpoint. For the major accounts they have in hand right now, Checkpoint will do close to 2000 stores this year alone in additional business.
They continue to talk to a number of non-EAS providers who have shown an interest in licensing opportunities. While they don't think it would be fair to comment on any of those discussions at this point, interest has been shown in licensing. Their relationship with Tokai continues to go well. Remembering that they are just finishing their first quarter of cooperation with Tokai, Checkpoint is pleased with Tokai's progress so far, in terms of their ability to come up the ramp and produce tags cost effectively.
As far as competition, their main competitor is protecting its current business with extremely low prices. They don't see that kind of strategy on new business opportunities for EAS where neither company has a dominant position. They certainly have seen the trend in existing accounts to be extremely low in price. This is primarily happening in the hard goods area. They will probably sell 35 million or more reusable hard tags but that is not the main focus of their business. In the mass merchandise segment, they are competing aggressively at every mass merchandiser around the world on a country by country basis and there is no evidence that the new tag introduced by Checkpoint's competitor has changed the marketplace opinion. Checkpoint sees the most significant issue in the marketplace as deactivation. They believe they have an extremely strong advantage in the deactivation area and, with their most recent and shortly to come deactivatio products, they expect that they will actually expand their benefit to the customer in that area.
Actron's Swiss production facility officially closed down at the end of May. This will have a very positive effect on Checkpoint's cost to produce going forward. They only have $1.5 million of disposable labels and $500,000 of electronics from the Actron acquisition. In addition, they are currently moving into their new central distribution site 10 kilometers North of Brussels in Belgium. They will deliver products to all their European customers from here as opposed to holding inventory in each location. As stated in previous calls, they expect this to have a very dramatic effect on their inventory levels. The integration of the Actron acquisition is virtually behind them and their entire focus is now on increasing their market penetration througout Western Europe.
Their margins for Q2 were up 2.2% over Q1 of 1996 and down less than 1% compared to their 1995 Q2 margins of 44.1% This reflects the positive effect of selling less Actron products and more Checkpoint products. They feel they are on track to continue 44% margins going forward.
SG&A expenses as a percentage of sales continued their downward trend to 30.3% for the quarter compared to 33.2% of revenues in last year's Q2. For the first half of 1996, SG&A decreased 4.1% as a percentage of revenues, going from 35.8% last year to 31.7% this year. They do not want to change guidance on SG&A percentages going forward because they pay bonuses to all their employees including their senior management based on a certain threshold of return on shareholders' equity. They do not start accruing for that bonus until they are certain they are going to achieve the numbers, which means that in Q3 and Q4, if they hit the consensus numbers, they will accrue somewhere in the area of $1.4 million per quarter on their SG&A line. So they have $3.8 million to accrue over the balance of the year. Other than that, they are keeping a very strong hold on their SG&A line, as always, watching it closely. But, that one item will take models back up to where they have given guidance in the past.
Open orders at the end of Q2 totalled $13.5 million versus $9.8 million in Q2 a year ago. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
Copyright 1996,
The Motley Fool |