Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Checkpoint Systems, Inc. (NYSE:CKP)

Q3 2008 Earnings Call

November 5, 2008, 10:00 a.m. ET

Executives

Robert van der Merwe – President, Chief Executive Officer

Ray Andrews – Senior Vice President, Chief Financial Officer

Bob Powers – Vice President – Investor Relations

Analysts

Robert Labick – CJS Securities

Ajit Pai – Thomas Weisel Partners

Operator

Good morning. My name is Nikisha and I will be your conference operator today. At this time I would like to welcome everyone to the Checkpoint Systems’ third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions).

I will now turn the conference over to Mr. Bob Powers, Vice President of Investor Relations. Sir, you may begin your conference.

Bob Powers

Thank you, Nikisha. Good morning and welcome to Checkpoint Systems’ third quarter 2008 results conference call. On the call from the company are Rob van der Merwe, President and Chief Executive Officer, and Ray Andrews, Senior Vice President and Chief Financial Officer.

If you’ve not received a copy of this morning’s third quarter 2008 results it is available on the company’s website at www.checkpointsystems.com. Click on the Investors tab. Additionally, an archived version of this conference call will also be available on our website.

Before we begin I would like to remind you that statements made on this conference call reflecting our future plans and strategies are forward-looking statements that are based on current expectations and assumptions. These expectations and assumptions are subject to risks and uncertainties which could affect our future results. Checkpoint’s actual results and the timing and occurrence of expected events could differ materially from our plans and expectations due to a number of factors, such as changes in overall economic condition and changes in the legal environment, as well as those factors disclosed in the earnings release and in our filings with the Securities and Exchange Commission.

Also, please be aware that all information disclosed and discussed in this conference call is as of November 5, 2008. Checkpoint undertakes no duty to update any forward-looking statements to conform their statements to actual results or changes in the company’s expectations.

At this time I would like to turn the call over to Rob van der Merwe. Rob?

Robert van der Merwe

Thanks, Bob, and good morning, everyone. Thanks for joining us today. I will briefly comment on the third quarter and then Ray will provide more detail on the third quarter numbers and, of course, the guidance for the full year. I will follow that up with closing comments and then we’ll take your questions.

Despite the difficult economic environment that had a significant impact on our July and August results as customers reduced inventories and slowed capital expenditures, and of course as the European market conditions deteriorated, we actually had an excellent September. However, it was not strong enough to compensate for the sluggishness in the beginning of the quarter and as a result we did not achieve the top line and bottom line results we had expected when we entered the quarter.

That said, revenue growth in the quarter remained strong, driven primarily by acquisition growth and foreign currency effects partly offset by an organic decline.

Our sales results benefited from Alpha in the US, which increased by almost 30% from the second quarter this year. We are also very pleased and encouraged by the strong response we have received from the marketplace for our recently introduced Evolve family of products. We’ve now registered over 1,000 installations with over 150 retail customers around the world.

We were particularly pleased that our EAS core, EAS hardware business, which is a significant part of Checkpoint, continued to experience broad based demand despite the general economic slowdown and slowdown in corporate spending.

The CCTV, or video analytics and burglar and fire alarm business, was down year on year, as I’ve mentioned before, primarily due to the slowing of new store openings. The Checknet business in Europe felt the effects of the general economic downturn. There were also some minor erosion in the retail display and handheld labelling businesses in Europe for the same economic reasons.

We were pleased with our gross margins that were effectively level to the quarter a year ago and up marginally from the sequential quarter despite the economic trends. During the quarter we did face some lingering production issues and lower capacity utilization due to product mix. Ray will shortly take you through these and other numbers in more detail.

So to summarize the third quarter, we were very pleased with the stability of our EAS hardware business and the favourable market response to the Evolve product line, and of course the strong and as expected performance of Alpha, particularly in the United States.

With respect to the fourth quarter, the ever-changing economic environment makes it very difficult for us to have a clear view into the quarter. As such, we believe it is prudent to adjust revenue and profit expectations down for the fourth quarter for a number of reasons. Firstly, the magnitude of the seasonal peak we typically experience at this time of the year where we ordinarily see a disproportionately strong fourth quarter will be mitigated by reduced demand, of course, in the marketplace as customers potentially delay buying decisions.

Secondly, as you’ve seen, the US dollar has strengthened significantly over recent weeks. If we assume current exchange rates hold for the quarter this will also translate into lower revenues on a comparative basis in the months ahead regardless of the strong results we’re experiencing in some of our segments. Now, you will recall that over 50% of our revenues are European based.

I still expect the insulating factors that we talked about last quarter to help us going forward. They include escalating levels of shrinkage due to retailer cost cutting and increased theft, new product momentum from Evolve and also from the Alpha range of new products, and market share increases in the apparel labelling business, particularly in the United States.

The down side that lower demand has on our EAS labels business affects the volume throughput and thus overhead recovery at our facilities around the world. We have assumed that the lower levels of EAS label sales we are seeing and saw during the third quarter will continue through the fourth quarter. Accordingly, we are and will continue to take costs out to mitigate the impact of low volumes and to help offset this trend until the economy recovers.

We are looking at additional ways of accelerating the benefits flying from the previously announced restructuring program and this will positively impact both apparel and EAS label costs related to those programs.

I will now turn it over to Ray to take you through the numbers.

Ray Andrews

Thanks, Rob. Revenue for the third quarter was $234 million compared to $204.6 million in the third quarter of last year, a 14.4% increase year over year. Foreign exchange had a positive impact on revenue of approximately $10.6 million or 5.2% of the growth in the third quarter.

Revenue from the businesses we acquired in the past year, including Alpha, [inaudible], and OATSystems business, it accounted for approximately 14.4% of the overall sales growth in the quarter.

We saw a 5.3% organic decline versus the third quarter of last year with softness in the US CCTV business, the EAS labels business, and the Europe Checknet apparel labelling business all playing a role in the decline.

Gross margins in the quarter were 41.7% compared with 41.9% in the comparable period of the prior year. Our third quarter 2008 clearance margins were positively impacted by the improvements in CCTV and Checknet along with a positive impact from the Alpha acquisition. However, this was offset by a decline in EAS labels, EAS hardware, and the [inaudible] gross margins in the quarter.

Now I’ll review results for the segments and then the geography. For the third quarter of 2008 the shrink management solutions segment reported an increase in revenue on a constant dollar basis while revenues in the intelligent labels and retail merchandising segments declined when compared to the third quarter of 2007.

Our shrink management solution segment generated revenue of $148.9 million in the third quarter of 2008 or 64% of total company revenue. This represents a year-over-year increase of 19.7% on a constant dollar basis. The growth in this segment was lead by the Alpha acquisition, which contributed $22.3 million in revenue in the third quarter on a constant dollar basis. The strong Alpha revenue in the third quarter is evidence of the seasonality of the Alpha business where revenues are heavily weighted towards the second half of the year.

Alpha revenue was offset by a decline in US CCTV business and a more modest decline in EAS hardware attributable to weak economic conditions, including reductions in new store openings. We have been successful in partially mitigating this effect by selling new solutions to existing customers and increasing market share, thanks in part to increasing interest in our [Libraries] platform.

The gross profit margin for the shrink management solution segment was 41.6% compared to 41.3% in the same quarter in 2007. An increase in CCTV gross profit margins was partially offset by a year-over-year decline in the EAS hardware business. The improvement in third quarter 2008 CCTV gross profit margins is attributable to the absence of installation efficiencies that we experienced in 2007 as a result of our significant growth in the business last year. While EAS hardware gross profit margins declined year over year, they showed a solid increase over the second quarter this year primarily due to product mix.

Our intelligent label segment reported revenue of $62.2 million for the third quarter or 26% of total company revenue. This represents a decrease in revenue of 5.8% on a constant dollar basis. Weak economic conditions coupled with continuing competitive pricing pressures in the US drove the decline in EAS labels revenue.

Library revenues also declined due to the January 2008 transition to the 3M distributor agreement when compared to direct sales in 2007. While weak economic conditions also impacted the Checknet apparel labelling service Euro business, particularly in Europe this was partially offset by our ability to win new accounts in the US. Overall Checknet revenue declined $200,000 compared to the third quarter of 2007.

The gross profit margin in the Intelligent labels segment was 38.7% compared to 40.4% in the comparable quarter over a year ago. EAS labels gross profit margins were impacted by manufacturing variances that were primarily attributable to reduced volumes that impacted capacity utilizations, production issues in Puerto Rico that resulted in increased craft and labour inefficiencies, and higher energy costs. We have been addressing the production issues by upgrading equipment and processes, although the improvements were not fully realized in the third quarter.

Library gross profit margins also declined due to the shift from a direct sales model to sales through the 3M distributor agreement. These gross margin declines were partially offset by the Checknet service bureau business which saw gross margin improvement due to our business in the US, as well as a shift from Europe to lower cost production facilities in Asia.

Finally, our retail merchandising segment reported revenue of $22.9 million for the third quarter or 10% of total company revenue. This represents the decrease in revenue of 4.6% from prior year on a constant dollar basis. The bulk of the decrease comes from our retail merchandising systems business and our hand-held labelling systems business declining to a smaller extent. The gross profit margin in the retail merchandising segment was 50.5% for the third quarter compared to 49.2% for the same quarter in 2007.

Moving on to geography. European operations reported revenue of $109 million for the third quarter or 47% of total company revenue. Europe revenue increased eight-tenths of a percent on a constant dollar basis over the prior year, primarily attributable to the benefits of the November 2007 acquisitions of Alpha and SIDEP.

US operations reported revenue of $87 million or 37% of total company revenue. This represents a 23% increase in revenue over the third quarter of 2007 and is primarily attributable again to recent acquisitions, including Alpha, and strong year-over-year results in the US Checknet service bureau business.

The Asia Pacific region reported revenue of $27 million or 12% of the total company revenue and generated 8% constant dollar revenue growth in the quarter. This is primarily attributable to the shift of a portion of Checknet service bureau business from Europe to Asia, as well as growth in the EAS hardware including revenue from the November 2007 acquisition of SIDEP.

Finally, the international markets region which represents 4% of total company revenue reported virtually no change in revenue from the third quarter 2007 on a constant dollar basis.

During the third quarter we spent $5.3 million or 2.3% of revenue on R&D, which is a slight increase from the $5.1 million we spent on R&D in the third quarter of 2007. We expect R&D spending for the year to be in the range of $21 million to $23 million.

Our [inaudible] administrative expenses for the third quarter were $73.9 million or 31.6% of revenue as compared to $62.1 million or 30.3% of revenue in the prior year. Foreign exchange increased SG&A by approximately $2.9 million compared to the prior year. On a constant dollar basis the remaining $8.9 million increase is primarily the result of approximately $8.6 million of expenses generated by the businesses we acquired in the last 12 months. The remaining increase in SG&A of approximately $300,000 is the result of an increase in bad debt expense primarily attributable to bankruptcies in Europe and increases in management expense to the additional costs during the transition related to the change in executive management late last year. This is largely offset by a reduction in variable compensation expense and a reduction in the Library selling expense through the 3M agreement when compared to the third quarter of last year.

During the third quarter we generated $5.6 million in cash from operating activities compared to $4.7 million in the third quarter of 2007. An improvement in inventory levels was the most significant factor in the year-to-year comparison partially offset by a reduction in the accounts payable balances.

Our days sales outstanding were 80 days and our days of inventory were 93 days at the end of the third quarter. We continue to work to reduce the accounts receivable and inventory levels.

Our capital expenditures in the third quarter were $3.3 million. We expect capital expenditures for the full year to be in the range of $17 million to $19 million. Interest expense of $1.5 million was partially offset by interest income of just under $700,000 for the quarter. During the third quarter of 2008 other losses or $1.5 million primarily due to foreign currency exchange losses which were largely attributable to the significant volatility in exchange rates we experienced in September.

Our effective income tax rate for the quarter was 19%. The third quarter effective income tax rate was impacted by the update of the expected annualized tax rate which now stands at 22%. This annualized rate excludes the impact of the $4.8 million valuation allowance release that we reported in the second quarter.

Rob noted that the impact of the economic environment on our customers and on foreign currency rates have led us to adjust for revenue and profit projections for the year. As a result, our projection of annual revenues has been amended to $920 million to $930 million and our projection of non-GAAP polluted net earnings per share from continuing operations has been amended to $1.21 to $1.27, including restructuring and other unusual items. This projection includes the dilutive impact of the June 2008 acquisition of OATSystems, which is performing consistent with expectations, and the impact of operational expenses associated with the restructuring plan we announced in August of 2008.

The restructuring plan has been updated and is now expected to result in after-tax restructuring charges of $3 million or approximately $0.07 per share through the completion of the plan which is expected to occur in 2010. After-tax expense of approximately $2 million or $0.04 per share is expected to be incurred in 2008. The plan is expected to result in annualized cost savings of approximately $6 million by also positioning our Checknet service bureau business for accelerated future growth. In addition to the restructuring charges, implementation of the program is now expected to require operating expenditures of approximately $0.03 per share in the second half of this year, including accents to expanding capacity with the objective of broadening growth.

We have reviewed our operating margin projections for the year in light of the impact on revenue of weakening economic conditions and the impact of foreign exchange rates on revenue and expenses. As a result we now expect to achieve operating margins in the range of 7% to 7.5%.

Free cash flow for the year is expected to be in the range of $40 million to $45 million, excluding the impact of future restructuring charges.

As of September 28, 2008, cash and cash equivalents were $93 million. Working capital is $286 million. Total debt was $141 million. The weighted average number of shares outstanding on a fully diluted basis was $39.4 million for the third quarter of 2008.

The recent tightening of the global credit markets has significantly increased the focus on liquidity across most companies, including Checkpoint. We believe that the strength of our core business and our ability to generate positive cash flow will sustain Checkpoint through this challenging period. We are working to reduce liquidity risks by accelerating efforts to improve working capital while reducing expenses in areas that will not adversely impact the future potential of our business.

Now I’ll turn the call back over to Rob.

Robert van der Merwe

Thanks, Ray. In a recent study amongst loss prevention specialists across the US you will recall that we talked about the conclusions of the survey a few months ago. It is clear from what they concluded that shrink typically increases during recessionary times. Secondly, these specialists tell us that when loss prevention budgets are cut shrink increases as a result as well. I expect an increase in shrink levels in the months ahead and this should help us through the turbulent times we face. Also, I fully expect that despite the economic slowdown we will continue to take market share in the apparel labelling business and that the Alpha business will continue to benefit from new product introductions where payback periods are very attractive to our customers.

On the cost front, as I said, we are working on ways to accelerate the benefits from the already announced restructuring program and we are accelerating efforts to reduce discretionary spending and to free up more cash from working capital, as Ray mentioned.

On November the 19th, which is coming up shortly, we will be sharing our long-term vision, our financial goals and strategies for the next three to five-year period in more detail with you at an analyst day that will be hosted in New York City. We will also present product and solution demonstrations which we believe you will find very interesting. We look forward to seeing you that day for a unique opportunity to learn more about Checkpoint, its exciting prospects going forward, and of course to meet some members of management. Please contact Bob Powers for more information and to RSVP, please.

Nikisha, we will now open up the call for questions. Nikisha? Nikisha?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Bob Labick - CJS Securities.

Robert Labick – CJS Securities

Good morning. First question, the last time we saw a rapid decline in organic growth I think was in 2006 and that was related to your big sales to GAAP and [CDS] in 2005. Obviously that impacts the company’s sales margins in 2006. What are you doing differently this time around to maintain margin and to grow given the potential, obviously the change in the economic climate and the potential organic declines you expect to see?

Robert van der Merwe

Bob, this is Rob. First of all there were also some huge deals moving through at the back end of 2007, so on a comp basis that would come into play. Mix, cost reduction, all play into how we’re managing gross margin. I don’t know if you want to comment further on that, Ray, around gross margins.

Ray Andrews

Well, just as we mentioned, we have a restructuring program in place and other initiatives that are focused on improving our cost base and that’s one method of improving gross margins. Also, where the value drivers are there we take the opportunity to price products accordingly and these added the vehicle to improve our margins as well.

Robert van der Merwe

Bob, the only other thing that might be contributing in there that you see in 2008 and it will carry into 2009 is an improvement in the Checknet labelling area where we’d previously made acquisitions and we had some operational issues there. Those are cleaning up fairly quickly with the commensurate improvement in gross margin that’s flying through.

Robert Labick – CJS Securities

Okay. And then could you, this is a difficult question I understand, but maybe try to put some context around how do you think about the variability of organic sales given your diverse product mix, the recurring nature of a lot of your business? Obviously going into a recession versus not. How do you think about the variability around organic sales? Obviously effects is hard to predict and everything else.

Ray Andrews

I guess we see variability from our, as I mentioned, previous I think from the retailers to control that side of it. They reduce and impact our capital spending. Our action has been to look for new customer accounts, get folks interested in our new solutions, and limit the variability for the new solutions and increases in market share.

Robert Labick – CJS Securities

Okay. That’s a great segue into the next question. In terms of, you know, you highlighted Evolve, obviously you had some good traction there and 1,000 in sales. Could you give us some context around that? How big do you think this ultimately could be? I mean, 1,000 out of what, I guess. How should we think about Evolve over the next few years?

Robert van der Merwe

Rob, I think we’re going to come back to you on that. I mean, there’s still a long way to go. As I mentioned on previous calls, it’s an 18-month turn that occurs. We’re picking up more market share. Most of what we’ve layered into the market is in the form of pilots which, within a reasonably short period of time, start converting to rollouts and we’re starting to see that benefit. Over time the impact is significant not only from the point of view of picking up market shares but also from a defensive action standpoint. Because you tend to block the competition, particularly as you’re migrating to RF and from RF to RFID. You’ve got a great story to tell. But I’d like to keep the powder dry on my response until we have a little more data.

Robert Labick – CJS Securities

Okay. Great. And then last question and I’ll get back in cue. Could you just give us an update on the stages of integration for various acquisitions? For example, on Alpha have you integrated it fully with the European sales distribution or is there still opportunity next year to grow Alpha sales just by expanding its distribution footprint. And then without stealing too much from the analysts day coming up, just give us another update on OATSystems’ integration and where that stands.

Robert van der Merwe

Well, the Alpha integration is proceeding extremely well. The distribution, the hardcore logistic/distribution aspects are complete. As far as the sales integration is concerned, it is complete. But to the other question you asked, we are expanding our reach geographically, not only in Latin America, but also in Europe. So the sales force which has now been trained in Europe and is starting to gain traction, I expect that the benefits of that work will be reflected in the fourth quarter and going into early next year. There is some learning we’re transferring from the US to Europe as we speak because, as you recall, this was largely a North American company at the time of acquisition.

As far as the systems are concerned, the enterprise wide systems behind the scenes, Europe has now been integrated and there’s some systems related integration that’s still required here in North America and we’ll attend to that during 2009 once the peak is off.

Robert Labick – CJS Securities

Okay. I’ll get back in cue. Thank you very much.

Operator

Your next question is from Ajit Pai – Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Good morning. A couple of quick questions. I think the first one is that you’ve recorded a gain on a sale of a subsidiary I think in the Czech republic. Can you give us some colour as to what revenues were there and what drove that sale?

Ray Andrews

Key thing, I won’t get into the revenue detail, but the key thing about the sale is we believe we can be more effective in that country going to an indirect model. So we pulled, basically franchised the business. we sold it to a person who’s had a long relationship with Checkpoint.

Ajit Pai – Thomas Weisel Partners

But you don’t expect any revenue loss because of selling that business other than the margin that you’re giving up? You won’t expect a drop off in Czech business?

Ray Andrews

Yeah, basically we gave up some revenue, but we also get the opportunity to reduce our operating expenses.

Ajit Pai – Thomas Weisel Partners

Got it. And then when you’re looking at the guidance that you’re providing, it’s bucking the sort of regular seasonality you see for the fourth quarter. Given how things are slowing down in end markets one would assume that it’s primarily driven by the labelling services business. But on the securities side also are you seeing some kind of market weakness out there? What exactly are you seeing there?

Robert van der Merwe

Ajit, this is a press comment. There’s some labelling services in there and Europe is soft. Although, as you’ve seen, year to date we’re doing very well in the US. So we expect that to continue and we expect Alpha to continue. I think for the same reasons that we’ve seen creeping into the third quarter as we approach year end, there is clearly nervousness on the part of our customers given the seasonality concerns they have. Although we’re not seeing them cancel orders on the widespread basis, we are still seeing new store openings affect our business and we’re responding to their cautiousness. There’s a distinct possibility that as they get towards year end they may push a number of their orders into the first quarter. We just don’t know what that reaction is going to look like given the disproportionate projection that we typically have in the fourth quarter. So it’s cautiousness on our part. I don’t think there’s anything new underlying our projection that you’re not aware of. We have, however, as Ray mentioned earlier, taken the current EAS label run rate, as well as the current projection on currencies, and run those through the fourth quarter as well. So that has a dampening effect.

Ajit Pai – Thomas Weisel Partners

Right. So then there’s one other comment that you made towards the end of your prepared remarks and that was that even Checkpoint is facing some liquidity concerns as the rest of the market is. Could you tell us what those concerns are right now and what Checkpoint is doing to deal with them?

Robert van der Merwe

On the contrary, I think we’re very pleased with our current situation. I’ll let Ray provide more detail on that.

Ray Andrews

Ajit, given the times we just felt we should mention the fact that we think we’re in a solid position. We have looked at it like everyone else has. We have looked at our key banking relationships because they could be affected by weakness of the individual banks. So we’ve been really on top of the situation and we feel we’re in a solid position here.

Robert van der Merwe

I’ll tell you, Ajit, we’ll share more on the 19th when we share our strategies and financial goals. From a liquidity standpoint there’s nothing from where we can see today, even with some conservative currency projections and so on that will stop us from executing our growth strategy going forward.

Ajit Pai – Thomas Weisel Partners

Right. So then just in terms of cash flows. I think you’ve updated your outlook for 2008 expecting free cash flows in the range of $40 million to $45 million for this year. Is there any reason, especially since you’ve made additional acquisitions and you’ve got greater contributions in terms of cash flows, based on what you’re seeing right now in the guidance you’re giving for the fourth quarter, extrapolating further, not asking for overall guidance for next year, but any reason why 2009 free cash flow should fall below that of 2008? Especially given some of the additional streamlining actions you’re proposing.

Ray Andrews

I think in general they shouldn’t, but obviously economic conditions and currencies, the unforeseen risks could be a factor here, Ajit.

Robert van der Merwe

Ajit, if you just assume all things being equal and you assume no acquisitions and so on and so forth, current levels of capital expenditure, we should do better next year. And we’ll share more detail with you on this. Our receivables and inventory levels, when you benchmark them against other companies, present some significant opportunities for the company. We’ll provide more colour on that.

Ajit Pai – Thomas Weisel Partners

Got it. And then just your balance sheet. Because if you only have access to a few line items right now for your September balance sheet, are you seeing any deterioration in your quality of receivables? Have your doubtful accounts gone up with some of that new earnings or are you seeing any change in your customers’ paying patterns to you?

Ray Andrews

I think it’s really specific. We have recorded bad debt charge for the quarter of a total of $1.8 million, up $1.1 million over last year. I mentioned the two bankruptcies we had a deal with. But also receivables is an area we’re focused on and we’re really looking at that on a customer-by-customer basis. I think everybody’s aware, particularly in the US, of retailers that are considered to be at risk and we monitor that very carefully.

Ajit Pai – Thomas Weisel Partners

In terms of the charges that you’ve taken and the issues you’re dealing with, have you increased the reserve? Has that impacted your earnings in this quarter as all?

Ray Andrews

As I mentioned, we took a charge of $1.7 million in the quarter. So that has affected earnings.

Ajit Pai – Thomas Weisel Partners

Okay. That’s the only one. Okay.

Ray Andrews

I’m sorry. That’s $1.8 million, not $1.7 million.

Ajit Pai – Thomas Weisel Partners

Yes, $1.8 million. But that’s a charge that you’ve actually written off. In terms of any ongoing kind of reserve you’re building over there or nothing of that sort as yet?

Ray Andrews

Well, no, that’s a charge, that’s a bill to the reserve.

Ajit Pai – Thomas Weisel Partners

That’s a bill to the reserve. Okay. Got it. And in terms of aging of receivables, all of that, there isn’t any trend that’s alarming? Just a gradual kind of slowing?

Ray Andrews

As I said, it’s a customer-specific issue. I think that’s consistent with, we still continue to see body reaction in retail. Some customers are still doing well and others are not.

Ajit Pai – Thomas Weisel Partners

Okay. And then in terms of the competitor dynamics, just looking at the two sort of large competitors you have on the labelling side of things coming together and you’ve talked about gaining share over there. Is there any change in the folks in that business that are closer to Checkpoint size or smaller than Checkpoint? Do you think that they’re facing greater pressure and the opportunity to gain share is not just from the two larger players but also tremendously from the smaller players that won’t be able to compete as volumes fall?

Robert van der Merwe

Ajit, that’s interesting. I mean, there’s different layers of answer there. I think that particularly in the apparel labelling business there’s a fairly fragmented game. I think a lot of players are going to fall out. They’re not going to be able to sustain this economic downturn and that in the end will benefit us. I don’t see any additional and desperate pricing actions or behaviours from them that is going to drive a margin dynamic that we can’t cope with. The competition on the other side, on the core business side, I see not much change. If anything from the label, the low quality label, the low price label business there was some activity during the year. I don’t see that escalating to any degree. Again, I think those low end players are likely to struggle to keep their businesses funded, if anything.

More broadly though, just to build on that, symptomatic are core ADT Tyco acquired Vue very shortly after we acquired the OAT business, which is confirmation that there is traction in our industry for that type of technology and I think the two major players coming together developing more products is likely to accelerate that traction. So in some respects we’re very pleased with that.

On the apparel labelling side, no major change to the overall dynamic. I mean, the other company released its results recently and they’re obviously struggling with integration and time. No new news on that front.

Ajit Pai – Thomas Weisel Partners

Got it. Okay. Thank you. I’ll get back in cue.

Operator

(Operator Instructions). You do have a follow up question from Ajit Pai – Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

Just on the cash front, could you give us, could you prioritize the users of your cash and cash flow on a go-forward basis between potential share buybacks, paying down debt, further potential acquisitions, and investment in the business?

Ray Andrews

We don’t really have it laid down in that kind of detail. I can tell you that there is no share buyback approved for Checkpoint at this time.

Ajit Pai – Thomas Weisel Partners

Okay. Thank you.

Operator

(Operator Instructions). There are no further questions, Mr. Power.

Bob Powers

Okay, Nikisha. Thank you very much. Let me hand it over to Rob for some final comments.

Robert van der Merwe

Thank you very much to all of you. Clearly the economic situation is affecting our business as well, but I’m very excited about our prospects going forward. I really would encourage you to attend the analyst day on the 19th and, if not, to listen to that and follow up with us. We have a great growth story to tell regardless of the tough times we’re going through. As Ray mentioned, the work that we’re doing to cut costs, which is significant, will not in any way hamper our ability to continue increasing market share and to be there when the upturn occurs. So we look forward to seeing you on the 19th. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Checkpoint Systems, Inc., Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts