Lexmark Earnings Call INSIGHTS: Currency Impacts on Guidance, Weakness in Europe

On Tuesday, Lexmark International, Inc. (NYSE:LXK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Currency Impacts on Guidance

Eric Garfunkel – Sanford Bernstein: This is (Eric Garfunkel) dialing in for Toni. If we look at your updated guidance for FY ’12, it’s about $1 lower than you had previously stated. Can you just help us understand the relative impacts of currency, the macro environment and more specifically also assumptions around changes in supplies inventory and supplies usage? Then I have one follow-up.

A Closer Look: Lexmark Earnings Cheat Sheet>>

Paul Rooke – President and CEO: Eric, it is a more significant drop certainly in our full year guidance there, primarily currency and this weakening demand environment that we’re seeing are the primary factors. Certainly we continue to have the Legacy headwind that declines as well. But back to the economic demand impact, what we’re seeing a couple things. We’re seeing it in our channel where the channel gets a little nervous about taking on inventories, particularly in fluctuating currency environments. As we mentioned, we are seeing it in our end user demand as well which is a subset of our install base in our Managed Print Services business, but nonetheless an indicator of end user usage and we saw a decline there as we went through the quarter. So, those are the big factors in adjusting our demand. As we mentioned, if we go back in history and looked at this, and we saw similar impacts back in the late ’08-’09 timeframe and whether this is a repeat of that, we don’t know. We’re not here predicting the future, but all we can say is that we’ve seen the change and reflecting it in our guidance here for the remainder of the year, and we’ll see, as we go, whether it returns to the normal patterns as it did before.

John W. Gamble Jr. – EVP and CFO: Yeah. In terms of relative magnitude, the currency and demand impact are kind of equal about 50%-50%.

Eric Garfunkel – Sanford Bernstein: Then my follow-up was just, if I look at your guidance, it’s based on spot rates of June 30, but it looks like the dollar has strengthened by about 4% versus the euro since then, and that seems to be a similar change that occurred in Q2 versus when you had set your guidance as of the March 30 spot rates and that was a $0.15 EPS impact. So, at current spot rates how confident are you guys in your current EPS targets for both Q3 and the fiscal year?

John W. Gamble Jr. – EVP and CFO: Yeah. So, obviously, we’ve seen the movements in currency rates, and so at this point we think we’re in a position to be able to deliver the guidance we indicated.

Weakness in Europe

Shannon Cross – Cross Research: I’ve one other follow-up. Could you talk a little bit more in detail on linearity in the quarter? I mean, clearly, you said it got worse, I’m just kind of curious from a geographic standpoint, sort of what you heard in the U.S. versus Europe, and were these from conversations with the channel and the customer, just if you can give any more detail on sort of what people are telling you as they look forward into the third quarter?

Paul Rooke – President and CEO: I’d say, Shannon, geographically, as we mentioned, it was more pronounced in Europe, although we did see weakness across the other geos, but certainly more in Europe. The backend was worse than the front-end, and I’ll leave it at that. But on the channel and the whole supplies usage piece, I mean, we don’t have full visibility into our channel or end user, but we do obviously interact with our channel folks and they – I think as in some of the these geographies there is more nervousness during uncertain economic times and so they tend to pull back on the inventories they hold and the end user data, like you say, is a subset of our total installed base, but yet an indicator that we felt was strong enough to reflect it in our guidance.

Shannon Cross – Cross Research: John, can you talk a little bit about – you said you were going to work on targeting the receivables in the second half. Can you give some specifics in terms of what you’re doing there, because clearly with $55 million in free cash flow in the first half you’re going to have to see a pretty substantial increase in the second half to meet your targets? So, anymore details on specifics on what you’re doing on working capital would be great.

John W. Gamble Jr. – EVP and CFO: Sure. So, the focus is – as we’ve said, inventory performance was good and we’ll continue to work inventory. We think we can make some continued performance improvements in inventory. Payables, payables should naturally improve, right because we did obviously reduce production levels as we saw weaker performance in the second quarter. So, we should see the cash benefit of the lower production levels that we had in the second quarter in the third quarter. So, that should happen naturally. Receivables is a place that requires the most work and there it’s really a focus of certainly on collections but more than that since collections performance really hasn’t been – has been okay, it’s really around the overall revenue cycle and cash collection cycle, starting right from billing processes all the way through collection process, and we’re just going to see what we can do to accelerate each of the pieces of those activities, especially as it relates to the services business and a software business.