Lexmark International Management Discusses Q2 2012 Results - Earnings Call Transcript

Lexmark International (LXK)

Q2 2012 Earnings Call

July 24, 2012 8:30 am ET

Executives

John Morgan

Paul A. Rooke - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John W. Gamble - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Eric Garfunkel

Shannon S. Cross - Cross Research LLC

Alban Gashi - Crédit Suisse AG, Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Ryan Jones - Barclays Capital, Research Division

Robert Schiffman - Crédit Suisse AG, Research Division

Presentation

Operator

Thank you for standing by, and welcome to the Lexmark International Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, July 24, 2012.

I would now like to turn the call over to John Morgan, Lexmark's Director of Investor Relations. Please go ahead, John.

John Morgan

Good morning, and thank you for joining us. Chairman and CEO, Paul Rooke; and EVP and CFO, John Gamble, are with me this morning. After their prepared remarks, we'll open the call for your questions as time permits. We ask that you please limit yourself to one question and one follow-up if needed, so that we can get to everyone.

Please note that Paul and John will be referring to specific earnings presentation slides by number. These slides were posted to our Investor Relations website located at investor.lexmark.com earlier this morning. Paul and John will be referring to non-GAAP measures during the presentation unless otherwise noted. Pursuant to the requirements of Regulation G, the company has provided reconciliations of GAAP to non-GAAP measures and a discussion of management's use of non-GAAP measures in the Supplemental Materials section of the earnings presentation slides.

Regarding our upcoming dividend schedule, Lexmark anticipates that the second -- I'm sorry, that the record date of its third quarter 2012 dividend will be August 31, with an anticipated payment date of September 14. Please note that future quarterly dividend payments are subject to board approval. We have also included our anticipated dividend schedule for the remainder of 2012 and 2013 in the Supplemental section of our earnings presentation.

Following the conclusion of this conference call, a complete replay will also be made available on our IR website. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and involve certain risks and uncertainties that are disclosed in the Safe Harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements, and Lexmark undertakes no obligation to update any forward-looking statements.

With that, I'll turn it over to Paul.

Paul A. Rooke

Thank you, John, and good morning to everyone. As John said, we'll be using a presentation slide deck and will refer to the slide numbers as we go to keep everyone on the same page. So let's begin.

Starting with Slide 4. Our second quarter financial results were less than we expected and reflected the impact of 2 dynamics since the first quarter. First, we saw larger-than-expected impacts from the changing currencies, particularly in the back half of the quarter. This accounted for roughly half of the revenue miss in more than all of the earnings per share miss versus our second quarter guidance in April.

Second, we saw weaker demand than expected, particularly in Europe, in the quarter. Because of the sudden nature of the decline in demand, including paid usage, we believe this change was driven more by belt-tightening dynamics due to economic uncertainty similar to late 2008, 2009 versus any new mobile or other secular trends.

We remain confident in our strategy and our competitive strength. In the second quarter, we saw continued growth in our Managed Print Services business with revenue up 12% for the first half, and we're recognized as a Managed Print Services leader by 2 additional research firms. We also saw a strong double-digit growth in Perceptive Software revenue.

However, given the impact of the recent trends on our results, I think it's important to make clear that we are committed to improving our profitability while we also continue to invest in our strategic areas. We're currently monitoring and evaluating the ongoing impacts of currency shifts and a softer economic environment, and will make adjustments accordingly while continuing to invest in the higher usage Hardware and higher value Software segments to enable long-term growth in the quarter. As we've demonstrated before, we are capable of making adjustments as required to overcome tough challenges. And we remain committed to our long-term operating margin assumption of 11% to 13% despite this short-term setback.

Our focus is squarely on the needs of business customers. We are building and growing our solutions business through organic expansion and acquisitions, and we remain committed to our capital allocation framework, returning greater than 50% of our free cash flow to shareholders through dividends and share repurchases.

On Slide 5, you can see the second quarter financial highlights. Revenue for the second quarter was $921 million, down 12% year-to-year. Basically, there were 3 headwinds: First, currency had about a $50 million impact year-to-year, and as I mentioned before, it accounted for roughly half of the revenue miss versus our April guidance. Second, we saw weaker demand for Hardware and Supplies, and we believe the Hardware weakness was primarily driven by customers deferring decisions on large account business. Supplies saw the expected drawdown in inventory, but also saw some usage softness driven by the economic environment. And third, the Legacy supplies declined as expected.

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