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Executives

James H. Reynolds –Chief Accounting Officer and Corporate Controller

Francis D. Gerace – President & CEO

Dawn H. Bertsche –Chief Financial Officer

Analysts

Jonathan Lichter – Sidoti

Stephen O'Neil - Hilliard Lyons

Meggan Friedman - William Blair & Company, L.L.C.

Kevin Sonich – RK Capital

Timothy Burns -Cranial Capital

Multi-Color Corp. (LABL) F3Q09 Earnings Call January 30, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Multi-Color Corporation fiscal year 2009 third quarter conference call and webcast. My name is Stacy and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jim Reynolds, Chief Accounting Officer of Multi-Color Corporation.

James H. Reynolds

Thank you, Stacy. Welcome to Multi-Color Corporation’s fiscal 2009 third quarter conference call and webcast for the period ending December 31, 2008. We are also broadcasting this live over the internet, accessible through the Multi-Color website at www.multicolorcorp.com on our Investor Relations page.

I am Jim Reynolds, Corporate Controller and Chief Accounting Officer of Multi-Color. Today's call will be led by Frank Gerace, our President and CEO, who is joined by Dawn Bertsche, our CFO.

Before we discuss our results, I want to call your attention to the Safe Harbor Statement that was displayed on the registration page you viewed right after you logged onto our webcast and remind you that in accordance with the Private Securities Litigation Reform Act of 1995, this presentation may contain some forward-looking statements that involve both known and unknown risks that may affect the outcome of our results.

This Safe Harbor Statement is also included in our earnings release and in our filings with the SEC. In order to analyze our results on a comparable basis, I also want to call your attention to the special items that were included in our quarterly financial results for 2008 and 2007 as reported in our earnings release this morning.

During the quarter ended December 31, 2008, we incurred $193,000 of acquisition related expenses which reduced diluted earnings per share by $0.01. During the quarter ended December 31, 2007, we recorded a non-cash charge of $957,000 to reflect the change in fair value of foreign currency for our contracts associated with our acquisition of Collotype.

Also during the quarter we incurred $292,000 of expenses related to our manufacturing expansion plan. Combined, these charges totaled $0.08 per diluted share in the prior year.

I will now turn the call over to our President and CEO, Frank Gerace.

Francis D. Gerace

Thanks, Jim. Today’s conference call will follow the same format as in the past. I will begin with a brief overview of how our company performed this quarter and then Dawn will follow with a detailed analysis of our financial results, then I’ll conclude with some final comments and then take your questions.

As stated in our earning release, we had a very challenging third quarter. During the period our international business unit experienced its normal seasonal slowdown which along with the strengthening US dollar caused a 31% reduction in revenue as compared to the second quarter. We expect seasonal improvement in our volume toward the end of this fiscal year.

Regarding our North American business unit, our customers are feeling the impact of a dramatic inventory adjustment at the retail and household levels and as a result, we experienced a 16% reduction in organic sales for the quarter. Ordering patterns have become irregular and when analyzing sales volumes with our largest customers, we realized increases with 16 of our top 25 customers; however, these increases were not enough to offset the decreases.

In summary, the third quarter results were all about volume. Although as we said in the past our business has always been resilient to general economic declines, we are by no means immune to the type of dramatic decline in consumer spending that we are all experiencing.

To provide more details on third quarter results I will now turn the call over to our CFO, Dawn Bertsche.

Dawn H. Bertsche

Thank you, Frank, and thank you all for joining us today. For those of you who are listening and viewing our webcast via the internet, please take a look at Slide 1, net revenue. For the third quarter, net revenues increased to $62.6 million or 30% over the prior year quarter. Collotype revenues were $21.9 million which were partially offset by a $7.5 million or 16% reduction in organic revenue.

When comparing third quarter Collotype revenues to their first and second quarter revenues, approximately half of the reduction is due to the strengthening US dollar while the remaining half is due to seasonality and lower volume.

In addition, and as illustrated on the right of the slide, year-to-date net revenues increased to $222.7 million or 46% over the prior year. The revenue increase attributable to Collotype was $84.4 million which was partially offset by a $14.3 million or 9% reduction in organic revenue.

Now please turn to Slide 2, gross profit and margin. Gross profit for the third quarter increased 20% over the prior year to $10.3 million primarily due to the Collotype acquisition. Gross margin was negatively impacted due to lower sales volumes and reduced plant fixed cost leverage. For the nine month period, gross profit increased 43% to $39.9 million and gross margins were maintained at 18% year-to-date.

Now look at Slide 3, operating income. Operating income for the third quarter increased 15% over the prior year to $4.3 million and included in operating income was a $1.2 million increase in SG&A expenses over the prior year due to comparable expenses from Collotype.

SG&A expenses were reduced by 40 basis points as a percentage of sales as a result of our aggressive cost reduction measures. In fact, over the last several months, we have reduced head count in our international unit by 7% and in our North American unit by 15%. Head count in our North American unit is now below 2005 levels.

For the nine months ended December 31, 2008, operating income increased 45% to $18.6 million and operating margins have held steady at 8% of sales.

Now turn to Slide 4, net income. This slide shows both income from continuing operations in the gold bars and total net income in the teal bars for the third quarter and year-to-date for fiscal 2009 and 2008. Income from continuing operations decreased to $1.6 million from $2 million for the quarter.

Also, our effective tax rate from continuing operations increased to 42% from 33% in the prior year due to an income mix and higher tax jurisdiction. Our expected annual tax rate for fiscal 2009 is now 36%.

Total net income decreased to $1.6 million for the quarter compared to $2.1 million in the prior year which included Quick Pak. Looking at the nine months ended December 31, income from continuing operations increased to $8.6 million from $7.8 million. Total net income for the nine months ended December 31, 2008 decreased from $14.8 million to $8.4 million due to the $6.9 million gain on the divestiture of Quick Pak in the prior year.

Now please advance to earnings per share. Earnings per share from continuing operations decreased from $0.19 to $0.13 for the quarter. On the right side of the graph, EPS from continuing operations for the nine months ended December 31 decreased from $0.75 to $0.69 and total EPS for the year-to-date period decreased to $0.68 from $1.43 again due to the gain on the sale of Quick Pak that was recorded in the prior year.

Now let’s look at free cash flow on the next slide. Free cash flow consists of cash provided by continuing operating activities less capital expenditures and increased $14.7 million to $3.7 million from a negative $11 million last year due to increased cash from operations and lower capital expenditures.

Free cash flow for the nine month period increased $24.8 million to $11.5 million from a negative $13.3 million last year. Approximately 75% of the increase was due to increased cash from operations and the remaining 25% is due to capital expenditures.

Advance to the next slide which shows the capital expenditures on the left for the quarter and year-to-date and the depreciation and amortization on the right side for the same period. Capital spending for fiscal 2009 is weighted towards the first half of the year due to the carryover spending from our North American expansion and the addition of Collotype. We expect total capital expenditures of approximately $11 million for the year. The increase that you see in depreciation and amortization on the right side of the slide are incremental to the Collotype acquisition.

Lastly, let’s take a look at debt. During the quarter we repaid a net of $5.9 million or 5% of debt resulting in an outstanding balance of $108.6 million. For the nine month period we have repaid a net of $19.2 million or 15% of outstanding debt as we continue to focus on increasing cash from operations through aggressive working capital management.

Now I’d like to turn the presentation back over to Frank.

Francis D. Gerace

Thanks Dawn. Before we open up the conference call for your questions, I’d like to comment on a few other important items. As announced in early January, we have begun transitioning business from our Framingham heat transfer label facility which will be closed within the next several months. This action will serve to reduce our fixed costs and improved manufacturing efficiencies and was a necessary step to align our manufacturing capacity and cost structure with current market conditions.

I would like to thank all of our Framingham associates for their past hard work and commitment to our company and customers and also for assisting us through this transition period.

Operating efficiencies in our Batavia plant, our new Batavia, Ohio facility, continue to improve, compared to the first two quarters despite reduced sales volumes. Although current economic conditions are extremely challenging, we will continue to focus on elements of our business that we can control in order to emerge from the present cycle with a lower cost structure, broader customer base, and improved asset utilization and as a stronger company.

In closing, I would like to thank all of our associates in North America, Australia, and South Africa for their commitment and contributions to our company and for helping to tighten our belts during this turbulent economic period.

This concludes our formal presentation and now I’d like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Lichter with Sidoti and Company.

Jonathan Lichter – Sidoti

Could you quantify the benefit from closing the Massachusetts facility?

Francis D. Gerace

As we stated I believe in the announcement, we expect to take a charge in our fourth quarter of about $2.6 million, part of it is to... Many of the associates in Framingham have been with the company for many, many, many years and we want to make sure, especially in these difficult times, that they are treated as equitably and fairly as possible so I think about half of it is in severance related type benefits and then the remainder is for some asset write offs and some equipment write offs that we have at the facility.

Relative to the savings going forward, I will go so far as to say that we expect to get a pay back or a return on that $2.6 million in closing within the first year of it being completely closed.

Jonathan Lichter – Sidoti

It will be completely closed by the end of March?

Francis D. Gerace

I think we’ve said it will be closing over the next several months and of course when you’re going through these types of transitions you’re working very closely with customers to make sure that their business is transferred in a very organized manner and that we’re continuing to achieve the type of quality standards that are expected so I think March might be a little aggressive but we do expect that it should be closed by the end of our first quarter our next fiscal year.

Jonathan Lichter – Sidoti

Where was that $192,000 in expenses, is that in SG&A or cost of goods?

Dawn H. Bertsche

Yes, that is in SG&A.

Jonathan Lichter – Sidoti

Does this mean that you're polling back on looking at acquisitions or is it just an acquisition that didn’t work out?

Francis D. Gerace

It doesn’t mean that we’re pulling back on looking at acquisitions. What it means is that we are going to be much more... our standards relative to hurdles and returns and accretion are going to be heightened and this particular case if I recall, I think on the last conference call we said there were three or four acquisitions that we were looking at.

Let me just bring you up to date on all of them. In this particular one where we took $192,000 charge, as we were going through due diligence, we began to see things relative to the quality of their earnings that weren’t consistent with what we would like to see in order to make that investment feasible, so we’ve disengaged and terminated that particular acquisition.

One of the other acquisitions that we were working at that I had mentioned to you, we never spent any money on it, there was no due diligence that was performed, we didn’t spend a dollar on it, we were still in kind of the negotiation stage around establishing value and the seller wasn’t of the same mind as we were relative to the multiple based on current economic conditions that we were willing to pay and so we disengaged on that.

The third one, we did come to an agreement on the multiple and the price; however, in order to let’s say protect ourselves from any decline in earnings as a result of current economic conditions, we were proposing an earn out, a portion of the proceeds to be done in the form of an earn out over a two year period and the seller was unable to accept that proposal and so essentially we disengaged on that acquisition. Now in all three cases, communication and dialogue is still good and ongoing. There may be some potential in us doing something down the road, but we’re going to be sticking very, very fast and hard to the parameters by which we’re going to be looking at any future acquisitions.

Operator

Your next question comes from Steve O’Neil with Hilliard Lyons.

Stephen O'Neil - Hilliard Lyons

Can you describe the Collotype seasonality?

Francis D. Gerace

I think we have somewhat gone through this in the past. Obviously when you look at Collotype, we have a facility in South Africa, we have several facilities in Australia, and then we have a large plant in Napa, and so the seasons relative to all of these different locations somewhat overlap from time to time but generally speaking, they’re strongest quarter is usually our second fiscal quarter. Their next strongest is usually our first fiscal quarter. Their weakest is normally our third quarter. The fourth quarter in the past has been somewhat in between the high and the low, kind of in the middle.

Stephen O'Neil - Hilliard Lyons

Is that referring to just the wine business?

Francis D. Gerace

Yes. As far as their consumer products business, it’s very, very even throughout the year. As a matter of fact, their consumer products business is performing well.

Stephen O'Neil - Hilliard Lyons

You have indicated year-to-date Collotype sales were $84.4 million. You did say half of the decline from second and third quarter was currency so let’s say $90 million adjusted for currency, just to simplify. What do you think the annual run rate then will be for Collotype for the year and is it in line with your expectations?

Francis D. Gerace

Are you saying excluding currency, the effect of currency?

Stephen O'Neil - Hilliard Lyons

I guess I’m just trying to get an idea... It seems like a number of $130 million or so was used when the acquisition was made and I’m just wondering what type of figure you might be expecting this year and is it in line with your expectations or how do you feel about the revenue you’re getting from Collotype?

Francis D. Gerace

If I exclude the impact of currency, they’re sales are running about as expected, near as expected. Some of their international wine customers were impacted by when the US dollar had weakened and so we did see a slight fall out from some of their international wineries in Australia, but in general, excluding the impact of currency, it’s about as expected.

Stephen O'Neil - Hilliard Lyons

Moving to the US, I don’t know if it’s possible to quantify this, but with the 16% decline in North American sales, are you able to quantify what might have been the result of the inventory reduction?

Francis D. Gerace

It’s almost all inventory reduction. We haven’t lost virtually.... Our churn rate is no different than it’s been in the past in terms of customers coming in and out of the mix. We’re still, as a matter of fact, as I said earlier, with 16 of our top 25, we actually saw very strong growth, good growth in our third quarter. There’s very little pricing impact on any of these declines, so there’s two things that have gone on here, Steve. Last year we had a very, very strong pipeline build when the XX laundry detergent was being introduced that hasn’t been repeated this year. There’s a one time inventory build on that new item, and on top of it because of the reduction in consumer spending and the reduction in inventories both at the retail and household level, those two items are almost 100% of what the decline is.

Stephen O'Neil - Hilliard Lyons

Frank, I don’t know if you can tell me, where sales to P&G and Miller are in the quarter.

Francis D. Gerace

Sales to P&G during the quarter were lower than they were in the second quarter and lower than they were a year ago. Actually our sales with Miller are doing very well. We’re about even in terms of volume with Miller year-over-year in spite of the economy.

Stephen O'Neil - Hilliard Lyons

They did report Miller’s volume was down about 8% and premium lite were down about 2% in third quarter.

Francis D. Gerace

What’s happened with us at Miller is that as a result of the merger between Millers and Coors, there is some Coors business that we are now getting that we hadn’t gotten in the past so I believe that the increase in that Coors business and some other international business that we’ve been receiving has made up for those declines. We’re even with Miller. We’re in good shape. I’m very pleased with where we are with Miller.

P&G’s volume, the two things that have happened with P&G, again, as we’ve stated in the past, we had a huge inventory build on the XX laundry detergent with them last year that didn’t repeat and as you can see in their earnings release this morning, they are in fact seeing an erosion in demand.

Stephen O'Neil - Hilliard Lyons

I was going to ask you, in fact you did hit on it some there, fabric and home care business experienced a 6% volume decline. I was going to ask you, looking across their product line, I would assume you’re pretty heavily exposed to the fabric and home care business. Any other businesses of theirs that are of particular importance to you? I would imagine that Charmin and Pampers don’t use much in the way of your labels but there may be other areas that do.

Francis D. Gerace

The two primary areas of their business that we support are what they call the heavy duty laundry detergent and then the light duty liquids which is more of your hand and dishwashing type materials for dishwashing and utensils. We have seen a much smaller decline if any with regards to the dishwashing and the light detergent liquids, which is your Dawn, Ivory, Joy, those brands, Cascade, we’ve seen very little decline if any with those brands. Most of the decline has been with their heavy liquid laundry detergent, heavy duty laundry detergent.

Stephen O'Neil - Hilliard Lyons

So your main area with them is the fabric and home care business which was down in the quarter.

Francis D. Gerace

Yes, and that’s the area that we’ve been the biggest support to them on for the last 30 years.

Stephen O'Neil - Hilliard Lyons

Frank if the December decline was largely where it was almost entirely inventory reduction and I think the fourth quarter was really awful for many, many companies. Do you feel it has run its course at this point, that we might see a bounce back in January, do you think it has further to go, are you getting any sense of where you might be in the inventory adjustment?

Francis D. Gerace

I think that’s a great question and I’m going to give you one man’s opinion. Based on everything... and I’m reading all the reports more closely than I’ve ever read them in the past and the fact is that sales declines on a macro level are still ahead of inventory declines which means to me that there’s more inventory yet that’s got to be reduced out there, and so quite frankly, and with all candor, I really don’t expect to see much of an improvement in our fourth quarter and I usually don’t give you this kind of information but I will tell you that if February and March sales continue to be anything like what we’re experiencing in January, then I don’t expect to see any improvement over our third quarter.

Stephen O'Neil - Hilliard Lyons

Other than maybe some seasonal improvement.

Francis D. Gerace

But that’s with regard to our international wine business. I’m talking strictly in North America, I’m talking North America relative to I’m not seeing much sales improvement in the fourth quarter. I don’t expect it. So I think this thing hasn’t entirely run its course yet.

Stephen O'Neil - Hilliard Lyons

A few housekeeping items. Your current assets were down I guess. Have you been reducing inventories or what’s the focus of your working capital management?

Dawn H. Bertsche

It is in the primarily inventory and accounts receivable reduction and that’s part of it. Another part of it is that it’s foreign currency exchange, those assets in the prior period were valued at a higher Australian dollar than it is today, but the largest part of that decrease is actual cash generated from reducing our working capital.

Stephen O'Neil - Hilliard Lyons

Why was your shareholders equity down versus the previous quarter?

Dawn H. Bertsche

Same thing, the foreign currency exchange.

Stephen O'Neil - Hilliard Lyons

And Dawn, finally, your comment on the tax rate was almost the opposite of your comment in the second quarter. You said you had increased income in high tax jurisdictions which is I guess the opposite of what was mentioned in the second quarter. What’s changed since the first half of the year?

Dawn H. Bertsche

I think what’s changed is the accounting rules. It used to be that you forecasted what your rate was going to be for the year and you recorded that rate in the first quarter, second quarter, third quarter, fourth quarter, and you smoothed out all kinds of changes, and today they want discrete items recorded in the period that they occur. So for example in this period we actually filed many of our income tax returns with the Federal and State jurisdictions and so when we started doing that, you go away from an estimate to actual numbers, so this quarter is going to be higher. We do expect that to continue into the year, and it strictly represents the change in income that we’re experiencing state to state.

Operator

Your next question comes from Meggan Freidman with William Blair.

Meggan Friedman - William Blair & Company, L.L.C.

Just as a follow up to the prior line of questioning, can you give us any thoughts or any guidance on what P&G and Miller were as a percentage of revenue during the quarter?

Dawn H. Bertsche

Those figures will be in the 10-Q that we file here coming up in the next week. P&G was at 20% for the quarter and I think that was pretty consistent with where they have been and Miller was --

James H. Reynolds

-- Miller was for the quarter about 13%.

Meggan Friedman - William Blair & Company, L.L.C.

Does P&G still include Folgers in that?

Dawn H. Bertsche

That’s a good question. As of November 1, they excluded it, so they had two months with Folgers is now sold to our customer Smuckers and Smuckers bought the Folgers brand.

Francis D. Gerace

Which by the way we do a fair amount of business, besides Folgers, with Smuckers,

Meggan Friedman - William Blair & Company, L.L.C.

That was going to be my follow up question. So you’re still working with Folgers now they’re a part of Smuckers?

Francis D. Gerace

Yes. But not only on Folgers, there are a number of other brands that we’ve been supporting Smuckers on for many years. They’re a great customer and we continue to grow very well with them beyond Folgers.

Dawn H. Bertsche

Including other brands that they have purchased in the past from P&G like Crisco and some other products.

Meggan Friedman - William Blair & Company, L.L.C.

Last quarter you had sounded a note of concern about specialty beverage. How has performance been there and how has performance of beverage been as a whole? It sounds like the addition of Coors has helped the Miller business but if you can provide a little more color than that.

Francis D. Gerace

We actually saw kind of the same type of activity with... now we don’t consider the beer business as part of the specialty beverage. When I had mentioned that in a previous quarter, we’re talking about these high energy juices and we’re talking about these exotic tea type items when I talk about specialty beverage, but we didn’t see much change with regards to their sales volume in the third quarter was still very sluggish and I am expecting that to remain the same in the fourth quarter also. There’s no question that the consumer is being a lot more frugal with regards to type of things that they are spending money on and even the things that we consider to be staples, they’re reducing their inventories on them.

Meggan Friedman - William Blair & Company, L.L.C.

Maybe I missed this but did you talk about the phasing of order flow over the course of the quarter? Was it primarily a December weakness?

Francis D. Gerace

I think when things really fell off the cliff so to speak was in November and December. December really fell off the cliff. I mean, it was just unbelievable.

Meggan Friedman - William Blair & Company, L.L.C.

How does January compare to December if you can comment on that?

Francis D. Gerace

I think January is a little bit better than December but as the quarter goes I don’t expect it to be much better than the third quarter.

Meggan Friedman - William Blair & Company, L.L.C.

Avery Dennison on their call was talking about how their customers are seeing average order sizes drop pretty significantly. Have you seen that and if so, how does that affect your business? They said that order size dropped but the re-order frequency increases.

Francis D. Gerace

We have seen that, definitely, no question about it, and in many cases, the type of arrangements that we have with our customers is... Our pricing is scaled pricing so as volumes go up, the prices decrease. As volumes on a run go down, the prices increase, and so we tend to make up for those type of fluctuations relative to scale pricing. But it does have an impact on capacity in that you have to put on more make readies, more set ups during the course of a day or during the course of a month, but again, what we attempt to do is to make up for that loss in capacity or those increases in set ups through scaled up pricing.

Now while this is all happening, let me tell you the good things that happens as a result of that is that it forces your operations people to get very, very innovative and very creative on reducing set up time and make rate time and what I have actually seen, we’ve experienced over the last several months, is that the time it takes to make a make ready or set up a press has significantly been reduced in many of our facilities. It’s one of the ways that you try to maintain your margins.

Operator

Your next question comes from Kevin Sonich with RK Capital.

Kevin Sonich – RK Capital

Appreciate the disclosure on what you’re seeing currently and the outlook for the fourth quarter, that’s very helpful. Can you talk a little bit about the competitive environment and just remind us what the industry landscape looks like, especially as it relates to your sense of capacity out there?

Francis D. Gerace

I think that there’s plenty of capacity out there, especially with the erosion and demand that is occurring or has occurred and I think that what is going to happen is because there’s a lack of growth, that isn’t going to stop people from trying to grow their business, and so I expect that the competitive landscape to become more intense relative to volume and trying to bring in new business and more business, and I think that’s going to be done through pricing more than anything else and so that’s something that is in the forefront of our mind is how are we going to deal with this new dynamic or emerging dynamic.

As we’ve stated and disclosed to you, having to close the Framingham plant, let me tell you what, that was a very, very difficult decision because you’re dealing with 65 or 70 families and it just aches us to have to have that kind of an impact on them especially in this particular economic time but we have got to continue to find ways to reduce our costs and one of the things that I’ve committed to my board and what I am challenging all of my operations focus is we are going to be the low cost producer in the United States and if things get to a point where competitors want to get down and dirty, we’re going to be putting ourselves in the position from a cost standpoint where we can engage them on that level if they so choose.

We’re continuing to find ways to flatten the organization. I have a much flatter organization today than I had just six months ago as a result of some of the organizational changes that were made, and so we tried to get up in front of these things, to be prepared for them, we do a lot of what if type scenarios to make sure that we’re continuing to have a lean organization and no matter what the economic conditions are or what’s created the demand in the industry or in the market that we’re able to engage that.

Kevin Sonich – RK Capital

Frank, you mentioned earlier that you weren’t seeing pricing affected yet. Is that pure guesswork just based on your view of the landscape out there and what you’ve seen in the past as far as it getting more price competitive or have you started to see that from some of your competitors already?

Francis D. Gerace

I haven’t seen it. I’m going to characterize it that I haven’t seen it on a serious basis yet. There’s been some chatter from customers that they are hearing different things from different competitors but I do believe that the chatter will become reality over the coming year. Let me tell you, just to be very clear in case I have competitors on the phone, we intend to ferociously defend our business.

Kevin Sonich – RK Capital

Up until the Collotype acquisition, you really didn’t have much leverage to speak of. Remind me if you will that if I recall there’s a handful of competitors that are of significant size, maybe not too different than multicolor, and then beyond that it starts getting pretty fragmented. What’s your understanding of the financial leverage out there in the industry? Are the decent sized competitors, the size of Multi-Color, over levered, under levered, and as you get to those more marginal, almost Mom and Pop type competitors, are they levered? What I’m getting at I guess is do they have the balance sheets to actually get price competitive and the staying power to go to that battle or with the weakness that you’ve seen and it seems like you’re doing a great job holding margins to a good level despite the weakness, if they’re seeing that same weakness, if they’re weaker operators, maybe they have to start taking capacity offline too.

Francis D. Gerace

That’s an excellent question and I get a number of different surveys quarterly and annual surveys from our industry associations, and for the first time in 10 years that I’ve been in the industry, over 10 years, the last two quarters I’ve seen as an industry whether it’s small, large, or medium sized producers go negative in terms of growth and in terms of earnings relative to previous quarters and previous years.

Now I think that there are less than a handful of large players that are not heavily leveraged, ourselves being one of them. Then there are several.. I don’t really want to mention names on the call, and then there are several that I know for a fact are very heavily leveraged that I think are probably having a difficult time right now.

Relative to the smaller players, the Mom and Pops, with them, I don’t think it’s as much of a situation of leverage as it is around risk and profitability and continuing to have to pour capital into businesses that may become less growth and less profitable in the future, so I really do think that over the next year, as this thing continues to settle in, that you’re going to continue to see consolidation in the industry as a result of it and I also think the multiples are going to be much like they were 4, 5, and 6 years ago and not like they’ve been over the last two.

Kevin Sonich – RK Capital

Just a couple quick more housekeeping questions. What are we thinking for CapEx as we look forward to fiscal ‘10 and ’11?

Francis D. Gerace

We’re going to hold it down to bare bones minimum. I love the fact that we’ve paid off almost $20 million of our debt this year and hands up and kudos to our treasury department and accounting and operations people, they are just doing a phenomenal job on achieving the targets that we set out in the beginning of the year, and we’re in the process by the way right now of finalizing our fiscal ’10 budget and so there is some capital that the plants have got in that budget but it’s minimal and as a matter of fact, a lot of it doesn’t even have to be done, so you want a number though don’t you? It’ll be low.

Dawn H. Bertsche

Directionally it’s going to be low like this year. I think one of the things we have to recognize is really related to your prior question, there’s still a lot of capacity. We spent a lot on machinery last year. We still have open capacity and we’re working on filling that as Frank’s noted, so there’s not a lot of reason to have a high CapEx year when you have a lot of open capacity.

Kevin Sonich – RK Capital

I think your maintenance CapEx before Collotype was about $5 million a year, $4 million, $5 million, $6 million a year. Is that accurate and what’s the number for Collotype in a similar way of thinking, just maintenance CapEx --

Dawn H. Bertsche

Maintenance CapEx before Collotype was more like $2 million or $3 million so the $5 million or $6 million is really more the maintenance CapEx with Collotype. I think the year before last when we spent a lot, we only spent like $2 million or $3 million in CapEx, so I think $5 million or $6 million is a good maintenance. Now I would expect it to be north of that because there are things that come up, new customers that need new tooling and that type of thing, but I think it’ll be in that range to where it is this year.

Francis D. Gerace

$5 million to $10 million to put a wide range out there.

Kevin Sonich – RK Capital

Then with your debt, if you could just remind us of some of the issues around the debt. Are you able to pay off as much of that as you can and are there any covies that you’re debt to EBITDA and your leverage seems very reasonable, but I haven’t gone back and checked the covies. Where are we related to any issues there?

Dawn H. Bertsche

We really don’t have any issues right now with our covenants. We have kind of the standard ones on interest coverage ratio, we’re extremely good there. Our leverage ratio is extremely good right now and does step down into next year and obviously we’re looking at that but we expect to pay down a lot of debt by then. Your first question was about the payoff. We have no fee penalties for payoff loans and paying off these loans and we’ve been very aggressive at doing that.

Kevin Sonich – RK Capital

What does it step down to next year, the leverage ratio?

Dawn H. Bertsche

3.25 and right now it’s at 3.75.

Kevin Sonich – RK Capital

Is that net debt to trailing four quarter EBITDA or?

Dawn H. Bertsche

Exactly. Trailing four quarter adjusted EBITDA.

Kevin Sonich – RK Capital

And adjusted takes out what, any option expense or?

Dawn H. Bertsche

Yes, option expense, any unusual non-recurring items, that type of thing.

Kevin Sonich – RK Capital

So like the severance and the other non-cash costs for closing the plant in Massachusetts, that would be excluded.

Dawn H. Bertsche

The non-cash portion will be.

Kevin Sonich – RK Capital

The non cash will be excluded but the cash portion, like the severance, even though that’s one time, that’s included.

Dawn H. Bertsche

Yes, we’re going to have to check that out once we get into all the details but as of right now I think it would be included.

Kevin Sonich – RK Capital

So if the business continues near the current level... oh, just one more question if I could on the subject of cash. I guess we’ll get a better look when we see the balance sheet and cash flow statement, but from what you’ve said, you’re obviously doing a good job in reducing working cap. From this point forward, is there still an opportunity to improve that cash cycle, reduce inventory, better job collecting, etc.?

Dawn H. Bertsche

Yes. I don’t think we’ll see as big of an improvement as we’ve seen this year but there’s still room.

Operator

Your next question comes from Timothy Burns with Cranial Capital.

Timothy Burns -Cranial Capital

Frank, you guys sort of wrote a blog and it was entitled “There’s a Garage Sale On Crystal Balls.” As you know, historically when the human brain couldn’t figure out what was going to happen they relied on these clairvoyant structures but let’s face it, the consumer doesn’t know, your customer doesn’t know, you don’t know, and I’ve heard a lot of managements kind of get beat up over the last two weeks because they weren’t able to provide precise guidance and I’m in the campus of those that don’t give any guidance at all because it’s only going to hurt you, but that’s an aside.

Do you all think that there’s any way for the customer to economize his or her label costs by switching label types?

Francis D. Gerace

Under normal circumstances my answer would be yes, but what I’m seeing more of is a hesitancy on the parts of customers to do anything. They don’t want to spend the R&D money, the trial money, the qualification money. We’re seeing a cancellation and delay in new product development, in brand extensions. I think everybody’s just going to hunker down. I’m seeing more of a hunkering down type of a thing than anything else. Now still in all, if a customer... that’s not to say that it’s completely gone away because I just yesterday got approached by one of our salespeople about a customer who wants to move their product from pressure sensitive to heat transfer, and of course we’re going to participate in that and do all we can to help them achieve their goals, but on a macro general basis, I’m seeing less of that kind of activity as people just more or less not wanting to add to any more variability to what’s going on in the system.

Timothy Burns -Cranial Capital

So generally speaking, any change would be part of a long term strategic plan by the customer.

Francis D. Gerace

Exactly.

Timothy Burns -Cranial Capital

What do you think is the biggest opportunity, irregardless of what’s going on, is Batavia the place that is really going to make things happen or is it Batavia plus incremental product sales through the Collotype operation. I know these things are probably not in your crystal ball nor mine, but are these things where if you fill up Batavia now, and longer term pricing improves, you’ll get a huge bang for the buck in two to three years time?

Francis D. Gerace

I think our move although we stumbled a little bit regarding the start of Batavia, I think moving into the new Batavia facility was an absolutely great smart move on our part. The plant has really begun to perform from an operational level, 180 degrees improvement from where it was six months ago, and it’s nothing now but getting more volume in there and we’ve got plenty of room and plenty of capacity. Batavia will provide Multi-Color with significant growth opportunities incrementally going forward.

The same goes for Collotype. We have not all of our Collotype operations are at capacity. There’s still more room there for growth and it’s just a question of us continuing to knock on doors and bring in new business and new customers.

One of the other things I want to add again is as difficult of a decision as it was to close our Framingham facility, Framingham, this is absolutely not about the Framingham folks. They are very skilled, quality, hardworking, dependable associates. As a matter of fact, we’re hoping that perhaps there’s a possibility that some of them can be willing to transfer to other of our locations. But the issue there is there was nothing they could do about the fact that facility in and of itself was a high cost manufacturing facility. The energy costs there and just the infrastructure there was high cost, so my point is that by closing that facility and moving that volume into our other facilities, I think that’s going to provide us with some very good upside potential next year.

Timothy Burns -Cranial Capital

It just seems with so much uncertainty and the crystal ball cracked, you’ve got to be looking beyond the next six months to build value for your company, analysts and investors may not like that, but they will like it and I think it’s the best thing you all can do. Did the Framingham operations get split up and put into multiple locations or did it go into just one?

Francis D. Gerace

Great question. When we look at the heat transfer business in the Framingham business, we looked at it in terms of large quantity long run type brands versus short run low quantify type runs and as a result of that, we’re again one of the wonderful things about Multi-Color is we have all these capabilities from a technology standpoint to be able to address all of those different requirements and needs. So our long run business is all being transferred to Scottsburg and that’s a process that actually has been going on for about a month or so now and we expect to have all of the long run heat transfer business transferred into Scottsburg by the end of March.

The low short run business is a little bit more complex, there’s a lot more SKUs, a lot more colors and inks and families and customers, and that business at this point is being, we’re preparing it to go into our new Batavia facility using actually new technology that heretofore has not been available to the market.

Timothy Burns -Cranial Capital

Is it okay to ask Dawn a question?

Dawn H. Bertsche

Sure.

Timothy Burns -Cranial Capital

I was just curious, I should know this, I don’t know this, but everybody’s worried about debt maturities and are you guys in pretty good shape along those lines?

Dawn H. Bertsche

At the beginning of ’08, we entered into a 5 year agreement that goes to 2013.

Timothy Burns -Cranial Capital

So nothing material along those lines.

Dawn H. Bertsche

Right. I answered a question earlier of one of our shareholders about covenants and we’re in good shape there.

Francis D. Gerace

I just want to follow up on your earlier question. Obviously in times like these it’s very, very difficult to see into the future, but I am just 100% confident that coming out of this I am positive that Multi-Color is going to come out of this with a significantly lower cost structure as a result of some of the organizational changes we made earlier in the year and the Batavia facility is much more productive and much more efficient than the old Batavia and Troy facilities. The transfer of the heat transfer business and getting rid of a lot of the high cost associated with the Framingham plant, we’re going to be coming out of this in a much stronger position and then adding on Collotype in terms of the opportunities from a wine and spirits market, from a regional and global perspective, I am certain that once we get through this economic crisis we will be stronger and better than we’ve ever been as a company.

Timothy Burns -Cranial Capital

It’s one of these things is when the tide rises, all ships will rise but at different rates and I still believe, I wrote a piece that basically said the real thing right now is adding value in a recession, creating value when the world is kind of very uncertain and it sounds like you guys are on your way so I appreciate the time and the questions and we’ll talk to you soon.

Francis D. Gerace

I’m not pleased and happy about where the world is today but I am pleased and happy about where Multi-Color is today.

Operator

Your final question comes from Steve O’Neil with Hilliard Lyons.

Stephen O'Neil - Hilliard Lyons

I have one follow up question, Frank. Last quarter you talked about some I guess regional customers that made up I guess about 30% of your business and these included specialty beverages, home improvement, industrial products, and that kind of thing, and I wondered if you could assess those a bit.

Francis D. Gerace

That’s a great question and we did take a look and analyze that and we saw the same type of activity in the third quarter from those customers as we saw in the second quarter so there’s no question that they continue to also be impacted by this reduction in consumer spending and lower demand. It hasn’t gotten any worse and it isn’t getting better. It’s stable.

Operator

At this time with no further questions in the queue I’d like to turn the call back over to Mr. Gerace for closing remarks.

Francis D. Gerace

Thank you, Stacy, and I want to thank all of the participants on the call today. Obviously all of us are experiencing an environment that few of us or any of us have ever seen in the pat or even dreamed of and so we keep reminding ourselves internally and what we keep talking about internally is the best thing that we can do right now is to focus and pay attention on the things that are within our control and that’s what we’re doing and that’s why we’re seeing good things around cash flow and asset management. We’re going to see a very successful transition from Framingham into our other facilities. We still have a solid pipeline of new business opportunities that we’re going to continue to work on and we’re going to continue to keep finding ways to bring values to our customers.

With that, I am still very, very confident that coming out of this Multi-Color is going to be a much stronger competitor in the marketplace, so I thank you for today’s call and we look forward to speaking with you at the end of our next quarter.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect, and have a great day.

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Source: Multi-Color Corp. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
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