Checkpoint Systems Inc. Q1 2010 Conference Call Transcript

May. 4.10 | About: Checkpoint Systems (CKP)

Checkpoint Systems Inc. (NYSE:CKP)

Q1 2010 Earnings Call

May 05, 2010, 10:00 am ET

Executives

Robert Van Der Merwe - Chairman, President & Chief Executive Officer

Ray Andrews - Senior Vice President & Chief Financial Officer

Robert Powers - Vice President of Investor Relations

Analyst

Reik Read - Robert W. Baird & Co.

Jeff Kessler - Imperial Capital

Robert Labick - CJS Securities

Ajith Pai - Thomas Weisel Partners

Chistopher Mcginnis - Sidoti & Co

Operator

Greeting and welcome to the Checkpoint Systems first quarter 2010 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation (Operator Instructions)

It is now my pleasure to introduce your host Mr. Bob Powers, Vice President of Investor Relations for Checkpoint Systems. Thank you Mr. Powers; you may now begin.

Robert Powers

Thank you, Christian. Good morning and welcome to Checkpoint System’s first quarter 2010 results conference call. On the call from the company are Robert Van Der Merwe, Chairman, President and Chief Executive Officer; and Ray Andrews, Senior Vice President and Chief Financial Officer.

If you have not yet received a copy of this morning’s first quarter 2010 results release, its available on the company’s website; click on the Investors tab. Additionally, an archived version of this conference call will be available on our website.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 plans.

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, and changes in the legal environment, as well as those factors discussed in the earnings release, and in our filings with the Securities and Exchange Commission.

Please be aware that all information disclosed and discussed in this conference call is as of May 04, 2010. Checkpoint undertakes no duty to update any forward-looking statements to conform the 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.

Rob Van Der Merwe

Thanks Bob. Good morning everyone. Thanks for joining us today. I’ll briefly discuss our first quarter 2010 results, and Ray will then share a more detailed financial summary. At the completion of Ray’s comments I will make some closing remarks and then we will be happy to take your questions.

I have three main points to make today, firstly our team delivered a solid top and bottom line performance compared to last year, and we continued to execute according to our plan. Secondly, some U.S markets who have not fully recovered have stabilized and appeared to be improving. We anticipate that these favorable trends will continue through the year.

Now the UK and European markets however remain mixed, and are still somewhat volatile. With the importance of the European market to check point, it should be noted that the dollar-euro exchange rate has recently moved from our initial estimates for 2010.

Thirdly and concurrently, we are in the process of litigating the potential impact of commodity price increases on our businesses in 2010. Let me expand briefly on these points.

First quarter revenues versus last year were up almost 18%, to a combination of solid organic growth, acquisitions and currency tail wins. Gross margins for the third consecutive quarter were at least 43% due to mix, but also a continued focus on cost reduction, and with the continued strong control measures over discretionary spending, we delivered an acceptable operating margin this quarter, our traditionally weakest quarter.

EAS consumable volumes continued to recover, and our Alpha business was particularly strong in the U.S this quarter. Global apparel label volumes were up organically again this past quarter, and the integration of brilliant label remains on track to meet expectations.

However, two businesses within our Shrink Management Solutions segments, the EAS systems i.e. gates or antenna business, and CheckView are monitoring burglar and fire alarm business in the U.S, and still have not fully bottomed out and started to recover. These businesses are highly dependent on retail capital spending, and the pace of new store openings, which remain sluggish. We expect this to continue for the balance of 2010 and our forecasts reflect it.

While we had a respectable first quarter, we are currently pursuing some notable growth prospects and I remain very excited about those. We do however continue to remain cautious about the rest of the year, due in-part to the mixed economic situations across the European markets, resulting in the adverse euro-dollar currency trends which we see today, and potential impacts of rising commodity prices.

Our plans are currently in place to deal with these shifts, but it is too early to provide specifics. The current situation has been taken into account when reaffirming our guidance for the full year. We will have more detail by the time we conduct our second quarter call in a couple of months.

Ray will now take you through the numbers in more detail.

Ray Andrews

Thanks Rob. Revenue for the first quarter of 2010 was $187.5 million, compared to $159 million in the first quarter of last year, an increase of 17.9% year-over-year. Revenue included organic growth of 8.2%, driven by the strong performance of our Alpha EAS consumables and apparel labeling solutions businesses. Revenue also bended from a 4.9% foreign currency impact, primarily due to the weakened dollar versus the euro.

The August 2009 acquisition of Brilliant Label contributed 4.8% to revenue growth. Gross profit margins in the quarter were 43% compared to 41.9% in the first quarter of 2009. All business segments reported gross margin improvements for the first quarter of 2010. I will provide more detail as I review results for the segments.

Our Shrink Management solutions segment reported revenue of $129.5 million in the first quarter of 2010 or 69% of total company revenue. This represents a year-over-year increase of 10% on a constant dollar basis. The organic revenue increase in Shrink Management solutions was primarily the result of strong growth in our Alpha business in all geographies, as well as strong growth in EAS consumables, which is primarily attributable to our Tag @ Source Program sales in Europe.

These positive results were partially offset by an organic decline in our EAS systems business, and a small decline in our CheckView business, as both businesses continue to be impacted by constraints in the retail capital spending in new store openings.

Gross profit management for the Shrink Management solutions segment was 43.4%, compared to 42.1% in the same quarter of 2009. Higher gross profit margins in our Alpha and EAS consumables businesses were partially offset by lower margins in our EAS systems businesses. Alfa gross margins benefited from improved capacity utilization and manufacturing facilities. The decline in the EAS systems margins were primarily due to lower volumes.

Our power labeling solutions segment reported revenue of $40.2 million in the first quarter of 2010 or 21% of total company revenue, including $7.6 million from the recently acquired Brilliant Label business. On a constant dollar basis, the year-over-year increase in organic revenue was a 11.6%. This growth resulted from our continuing efforts to broaden our customer base, and leverage the expansion to our product line from the acquisition of Brilliant Labels. Overall Brilliant Label acquisition is meeting our expectation.

The gross profit margin for the Apparel Labeling Solutions segment was 38.3% compared to 36.3% in the first quarter of 2009. Gross margins in this segment increased primarily due to better utilization of growth costs in manufacturing facilities in Asia and reduced freight expense.

Our retail merchandizing solutions segment reported revenue of $17.8 million in the first quarter of 2010 or 10% of total company revenue. This represents the year-over-year decrease in revenue of 8.2% on a constant dollar basis.

The retail display systems business was a predominant contributor to the decline in revenue, as our primary markets in northern and central Europe continue to be impacted by weak economic conditions. Gross profit margins for the retail merchandizing solutions segment was 50.3% for the first quarter of 2010, compared to 48.9% for the same quarter in 2009.

Selling, general and administrative expenses for the first quarter of 2010 were $69.8 million or 37% of revenue, compared to $61.9 million or 39% of revenue in the first quarter of 2009. Foreign exchange effects increased SG&A expenses by approximately $2.6 million, and the Brilliant Label acquisition added $2 million.

On a constant dollar basis the remaining $3.3 million increase is primarily due to the increased commission expense resulting from the year-over-year growth in revenue, as well as expenditures to support on investments and improved information technology, including the move to common ERP platform beginning in North America in 2011, coupled with our plan on improved business processes and backlog insufficiencies.

At the beginning of this year, we ended the temporary global payroll reduction and furlough program that was implemented in April of last year. This program will not impact the comparison of year-over-year SG&A expenses for the second quarter. Our other programs and policies that we implemented last year on improved expense management remain in place.

Research and development expenses for the first quarter were over $4.7 million or 2.5% of revenue, compared to $5.2 million or 3.3% of revenue in the first quarter of 2009. We are managing our R&D portfolio which includes R&D projects with both near and longer term target dates for commercialization in the range of 2.5% to 3% of revenue.

Restructuring expenses for the first quarter of 2010 were $436,000 and were largely driven by our previously announced manufacturing restructuring plan. The expense expects the manufacturing and the apparel labeling restructuring plans will be completed in 2010, and that 2011 will be the first full year with the estimated annual savings of approximately $6 million. Some of these plans will be real hard.

Our selling, general and administrative restructuring plan is being developed, and we expect it will be firmed up later this year. This plan is targeted at consolidating certain administrative functions to improve operating efficiency and cost. Interest expense for the first quarter of 2010 was $1.6 million, and was partly offset by interest income of $668,000.

Income taxes in the first quarter of 2010 were $1.5 million or 30.6% of earnings before income taxes. Our income tax rate each quarter is impacted by the mixed taxable income among the 30 countries in which we operate, whose tax rates vary significantly. Income tax rate is also impacted by the timing of reserved releases.

The unrestricted cash balance at the end of the first quarter of 2010 was $152.6 million, and working capital was $147.1 million. Current and long-term debt held at $114.8 million. Unrestricted cash net of debt is $37.8 million. Cash flow used in operations during the first quarter of 2010 was $4.4 million compared to cash flow provided by operations of $23.7 million in the first quarter of 2009.

Cash flow in the first quarter of 2010 was in line with our typical pre-2009 first quarter cash flows, and was also in line with our expectations. As a reminder, the weakening economic conditions in 2009 resulted in a significant increase in cash flow in the first quarter of last year. The cap receivable in inventory management continues to be an area of focus throughout our organization.

Our day sales outstanding were 74 days, and our days in inventory were 104 days at the end of the first quarter. Our capital expenditures in the first quarter of 2010 were $3.1 million. We continue to forecast approximately $32 million in capital expenditures for the full year, with the increase over 2009 attributable, through the expansion and relocation of the apparel labeling solutions capacity, as well as our investment in information technology.

The weighted average number of shares outstanding on a fully diluted basis for the first quarter of 2010 was 40.1 million shares, and now are common on our outlook for 2010. our outlook for this year is based on our evaluation of country and regional market conditions that are derived from forecasts, and supporting information gathered from our operating units around the world. Our outlook is based on the assumption that current exchange rates will continue.

Over the past year, economic conditions and the impact on the retail marketplace have been highly dynamic and subject to unpredictable changes. The next could occur in 2010’s great further unpredictable changes that are not anticipated in our outlook, such as the significant increases in inflation or commodity prices with significant changes in currency exchange rates.

We are reaffirming the outlook that we provided at the time of our previous earnings release on February 23, 2010. in 2010, we expect annual revenues at current exchange rates to be in the range of $820 million to $850 million. Our outlook reflects the full year impact of the August 2009 Brilliant Label acquisition. As previously noted, we expect the Brilliant Label to generate revenues of $40 million in 2010.

In 2010, we expect our apparel labeling solutions also, and the EAS consumable businesses to realize organic revenue growth earlier than our EAS systems and CheckView business, which continue to be impacted by retail capital spending experience. In 2010 we expect non-GAAP diluted earnings per share attributable to CheckPoint Systems to be in the range of $1 to $1.17.

In 2010 we expect non-GAAP operating income margins to be in the range of 6.8% to 7.5%. We expect the leverage gain from forecast revenues, as well as continuing activities and managed costs to more than offset the impact of ending the temporary global payroll reduction and furlough program. In addition, we are striving to limit growth and operating expenses to those expenditures that support future revenue growth and improve the efficiency of our business.

Also for 2010, we expect a non-GAAP annualized tax rate in the range of 18% to 20%. The release of income tax was realized of the course of the year. It could have a significant impact on taxes recorded in each quarter, similar to what we experienced in 2009. We expect the largest portion of reserve releases to occur in the third and fourth quarter of 2010.

In 2010 we expect free cash flow to be in the range of $30 million to $40 million. Cash flow in 2010 will be impacted by the $12 million in customer payments for season 2009, for payments to be delivered in 2010, as well as expected growth and working capital for our forecast revenue growth.

Free cash flow will also be impacted by projected capital expenditures of approximately $32 million. Depreciation and amortization expense is said to be approximately $38 million for the year, with the increase over 2009 driven by the Brilliant Label acquisition.

Now, I will turn the call back over to Rob.

Rob Van Der Merwe

Thanks Ray. In summary, I was very pleased with our first quarter execution. We remain cautiously optimistic that sequential revenue improvements will continue throughout 2010, and that will lead to sequential operating margin growth. We continue to implement plans to grow the business and eliminate non-value added costs.

While we are now also dealing with some increased economic uncertainty in Europe, foreign currency trends in the prospect of rising commodity prices, we still remain on track to achieve our stated goals and I remain very excited about CheckPoint’s future. As always, we will keep you informed of progress.

Christian, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line of Reik Read of Robert W. Baird & Co. Please proceed with your question, your mic is now live.

Reik Read - Robert W. Baird & Co.

Good morning. Could you Rob just talk a little bit about, as you guys moved towards selling a complete portfolio with all of the things that you acquired here? What are the biggest opportunities that you see, and just talk a little bit about where you are in that process with respect to training, technology, organization, those types of things?

Rob Van Der Merwe

Sure Reik. Well as you know it’s a process that requires changes in the key account management structure. As far as you pointed out, in additional training we had to bring certain types of technology onboard or invent them, and progress on all fronts have been very good.

There are quite a few prospects that we are in test mode with, and we will develop further into more sophisticated pilot programs. Those prospects I’d say are meaningful, but we haven’t yet delivered end results that I’d be comfortable breaking out for you. I don’t know if that answers your question.

The interest on the part of retailers is primarily going to merchandize visibility, elimination of out of stocks; in other words, sales uplift, and there is a growing interest in the market or applying RFID technology to solve some of the problems that they have; and I think you are going to see that interest in RFID, particularly at the SKU level now, not just cases and pallets estimates.

Reik Read - Robert W. Baird & Co.

And I mean you talked about these pilots that are underway, and I assume they are still relatively small. Is the CapEx environment hurting the progression of those at this point or how do the customers look at that?

Rob Van Der Merwe

It’s on a broader base, and I think we are going to find some of the larger players will trigger their cohorts in the industry to take notes earlier than we had anticipated. I don’t know if you are listening to the drum beats behind the scenes or not, but there is growing interest on the part of some larger players to start activating certain categories with RFID.

That will have a fairly significant impact on general CEO interest, as well as how that trickles down into the supply chain. More than that I don’t want to comment. One of the other players in our state, their recent conference call mentioned that we were at a “tipping point,” and that is correct from our point of view.

Reik Read - Robert W. Baird & Co.

Okay, and then just going to a slightly different topic. You have talked about, I think it was the last conference call. A number of companies, including a very large retailer that was moving products out from behind the glass in an effort to improve sales lift. Can you talk a little bit about what that leadership has done in terms of getting other players to follow suit, and are more consumer product companies trying to push for this as well?

Rob Van Der Merwe

Well, two parts of the question. On the first one, yes, and you are seeing helpless results in the first quarter, spike as a result. There are other direct competitors that are now following suit and that will obviously flatter our numbers going forward. So if we did store visits in and around the closer competitive set, you will start to see similar solutions emerge and the roll outs are in their early stages. These are rollouts that will probably continue for the rest of the year.

Reik Read - Robert W. Baird & Co.

Okay, great. Thank you Rob.

Operator

Thank you. Our next question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question, your mic is now live.

Jeff Kessler - Imperial Capital

Okay, thank you. Rob you went through briefly some of the CapEx programs that you are engaged in this year for the increase. I am wondering if you could just elaborate on that a little bit.

Rob Van Der Merwe

Well, Ray mentioned two areas; one part of CapEx is going to grow; the other part is going to process improvements and ultimately cost reduction, productivity improvement. The apparel labeling has to do with the shifting of capacity to lower cost locations and improving our operations, and also stimulating or supporting growth. Our market shares are increasing, and so we need to support that in various countries.

The second piece is really all around the ERP and the key business process we designed, which I’ll let Ray comment on.

Ray Andrews

Yes, in that case we are working towards moving to the single instance of ERP; that’s where the capital spending comes in; at the same time reassessing our overall business process, looking for more efficiencies.

Jeff Kessler - Imperial Capital

Is that an SAP or something else?

Ray Andrews

It will be SAP, and we are going to role that out in stages starting in 2011 in North America. Only the peak capital spending will be this year and it will continue into the next two years, but at a lower rate.

Jeff Kessler - Imperial Capital

I am also wondering about; you mentioned briefly that one of the things dragging on revenues this year was one corner of your business, which was the alarm monitoring business.

Revenues, probably we are not up if it was related to retail, but are you involved in any programs to either raise prices to existing clients, or provide new types of technologies or new types of services to existing clients, to at least concentrate your existing recurring revenue base better, so that it will offset some of the lower sales that you are getting.

Rob Van Der Merwe

Jeff, yes this is Rob. The alarm monitoring business in North America is to a large extent a new store dependent refurbishing included, and again that’s primarily North America. What we call the systems business which are the antennas and the pedestals if you will, that is also included, and I think that’s more pervasive than just North America. That is still very slow, and again it comes back to CapEx spending and the mood around new store openings, which they are still in a wait and see mod. Many retailers are expanding, but not at the pace that they did historically.

I think we saw new store openings slow down dramatically last year, but many of the stores that were opened last year were commitments made prior to, in another words in 2008. I think during 2009 retailers generally never set that for 2010. So it’s softish; it doesn’t mean to say we can’t pick up new business than we are, and we are pretty excited about that.

As far as pricing is concerned, yes there are some areas where we can take price and we can build it into new programs, and we are doing that. Yes we can introduce new innovation which moves the business to a richer position, and yes, we can improve service productivity our service offering within our customer service and field service organization.

So we are doing all of those, as well as the ongoing restructuring and other things that Ray just talked about to offset that.

Jeff Kessler - Imperial Capital

Finally just one quick question; geographically within Europe, can you give us some of the weaker and some of the stronger areas right now?

Rob Van Der Merwe

Two parts of the question I guess. I mean economically I think you can read in the paper what’s happening in Greece and Iberia. Greece and Portugal are not strong positions for us. We have a relatively stronger position in Spain, although we seem to be doing extremely well under the circumstances.

We have a strong position in Germany, we have a strong position in France. The one side is what’s happening economically, and the other is what’s happening to our customers and how bullish are they feeling, and I think we are sort of in between that right now which is causing us to pause and just we’re a little cautious about going forward, but we haven’t seen anything that is a show stopper for Checkpoint at this stage anyway.

Jeff Kessler - Imperial Capital

Great, thank you very much.

Operator

Thank you. Our next question comes from the line of Rob Labick with CJS Securities. Please proceed with your question, your mic is now live.

Robert Labick - CJS Securities

Good morning. Congratulations on a good start to the year.

Rob Van Der Merwe

Thanks Rob

Robert Labick - CJS Securities

A couple of questions; first I was hopping if you can elaborate on the new Keeper Program you discussed with the major mass retail rollout. You said it helped out in the quarter; is it projected to grow out on range of 10% or 15% or how should we think of this in context, both near and long term.

Rob Van Der Merwe

Rob we don’t break out the Alpha business separately. Historically that’s a business that’s grown at 20% per annum. It’s a very innovative organization. We are also strengthening our position in Europe and other parts of the world. So I would just loosely say I would definitely expect high double digit growth from that business going forward.

We have had some good account wins that dig the traction for that kind of business, where they see not only a protection of the product from the theft stand point; they are also seeing a sales up lift by bringing things up from behind locked cabinets. It just seems to be resonating right now as we had hoped. It seems like they are coming back on track. So high single digits at the very least is my expectation.

Robert Labick - CJS Securities

Okay great, and then speaking more broadly about the acquisition market, if you could just discuss what you are seeing right now. I think obviously that’s part of your growth plans in the next two or three years. Is there anything we should expect in 2010, and how are potential acquisition candidates looking at the market now?

Rob Van Der Merwe

Rob as we stated acquisitions are important to support our growth strategy, we are not changing that. Whether we do them now or later or even later than that, it depends on so many things. Again, I am not changing anything we said historically.

To the last part of your question, there seems to be an accelerated consolidation occurring in apparel labeling. There were rumors that there are some bigger players moving in and trying to get a foothold. If that turns out to be accurate I will let you know.

I think the smaller folks are nervous, and so there is more speak, there is more talk occurring. The prospect is still there. I think some of them with a recent public offering on the part of one of the Chinese suppliers are being a little -- their appetites are growing, but I don’t think at this point that that should effect what we are working on. So I think the most important thing right now is we are seeing a lot of activity with the possibility of some further consolidation.

Robert Labick - CJS Securities

Okay great, and then last one and I will jump back in queue. You mentioned potential commodity pressures are coming forward. Can you just remind us of your biggest exposure there, and what you can do to hedge in anyway.

Rob Van Der Merwe

I think probably our biggest exposure is aluminum. As the labeling solutions business grows and paper comes into play and also hydrocarbon source product polymers for the Alpha business, we are in an opportunity where we can lock in prices and advance some, because we have a pretty good idea of our underlying base level of demand for things like our RF labels and aluminum, so we where we can lock that in and advance, we are taking advantage of that.

Robert Labick - CJS Securities

All right, thanks very much.

Operator

Thank you. Our next question comes from the line of Ajith Pai with Thomas Weisel Partners. Please proceed with your question, your mic is now live.

Ajith Pai - Thomas Weisel Partners

Yes, good morning and congratulation on a solid quarter. A couple of quick questions; I think the first one is just looking at the -- you talked about the weakness on the gate side as well as on the jet fuse side. Could you give us some color; I know you didn’t want to break out Alpha by itself, but you talked about strength in Alpha and ES reducables. Could you give us some set of numbers surrounding that, which is how much could Alpha and ES together grow in this quarter and what percentage of the shrink management business has taken place?

Rob Van Der Merwe

Great question. I mean I’d love to answer it, but for competitive reasons we don’t break it out. What I will tell you is that we have sufficiently and we have more than offset that with the growth in the other two that you mentioned; and I would expect from what we said today about the outlook, and Ray indicated we are going to hold that. The weakness is more than offset by the gains in the other two.

Ajith Pai - Thomas Weisel Partners

So, the weaknesses is more than offset, but the weakness over there, lets say we don’t expect these two areas to come back for the next couple of years. I mean is it more than half; could you give us some quantitative color as to what the mix is in this quarter for the two combine. You don’t have to break out Alpha separately, but just qualitatively.

Rob Van Der Merwe

Yes, let’s see. I mean to your first point though, it’s not a couple of years. I mean we could see this starting to recover at the second half of this year or early next. I wouldn’t expect it to take that long, Ray.

Ray Andrews

Once a year we disclose relative mix of the line of business level in the 10-K. So if you take a look there I think you’ll get at least an approximation answer to your question.

Ajith Pai - Thomas Weisel Partners

Got it, and then just retailers you talked about, and I think you also sort of supported this retail report. Right now have retailers actually recognized how much of an issue shrink has become and is there any acceleration from a tagging prospective that’s broad based; not just a few retailers being proactive, but are you seeing much greater interests.

Could you give us some qualitative data on or some qualitative color on which geographies and what kind of retailers are showing greater interest in increasing the shrink management, and the ones that have yet to show it.

Rob Van Der Merwe

The tagging side of EAS is up, and it appears trending up consistently. That is a worldwide phenomenon. I wouldn’t be able to break that out by region, or by customer, or country. I think that is a general trend and a positive one. Now there are mixed issues within that depending on the technology, but I think that’s a very good outcome compared to where we were a year ago.

On the other part of the question, we are seeing an interest on the part of consumer product companies who have high value and attractive product in retail, take a much greater interest in EAS, principally because retailers in order to deal with the theft have started to lock those product up and so on and so forth. So that is a major switch from where we were a year or two ago, particularly as the world’s leading consumer product company or two, and again I would expect them to start tagging more aggressively going forward, to deal with the problem that is now generally accepted. Some retailers are dealing with it, others aren’t.

Ajith Pai - Thomas Weisel Partners

Got it; and the last question I think is when you are looking at the Alpha business, there was a penetration right now; I think you’ve already talked about being very, very low. Are there any initiatives that you have globally. I think you talked about the global penetration being pretty low for Alpha that the US penetration. Are there any initiatives you have to sort of accelerate that?

Ray Andrews

Yes we do. We are accelerating in Europe. We have been working on it for a couple of years since we acquired the company and we are getting traction; I am very pleased with that.

We are also moving into more vertical focus. The penetration in the US is much higher, but penetration in our traditional account of Alpha products is not as high. Visa versa, penetration of our product in traditional Alpha accounts is not high. So what that leads to is cross selling opportunities to stimulate organic growth down at the sales level and we are getting some great success at doing that -- cross selling if you will into each other’s patches where there is opportunities to somewhat of a wide open opportunity.

Ajith Pai - Thomas Weisel Partners

So it is still a separate sales force for Alpha relatively to the rest of your products.

Ray Andrews

Largely speaking we are getting them closer, and we have programs down at the sales and regional level to facilitate that activity.

Ajith Pai - Thomas Weisel Partners

Got it. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Chris Mcginnis with Sidoti & Company. Please proceed with your question; your mic is now live.

Chistopher Mcginnis - Sidoti & Co

Good morning. I guess Ray maybe could you give me a break down on the geographic revenue; do you have that for me?

Ray Andrews

Yes I do, if you’d give me a second to pull it up. Yes I’ve got European operations were $89 million or 48% of revenue; the US $51 million, 33% of revenue; Asia Pacific, $29 million or 15% of revenue; and international market is the balance $8 million 4% of revenue.

Chistopher Mcginnis - Sidoti & Co

Then just looking at the increase to the SG&A; I thought there was another initiative coming out soon to reduce the SG&A and I guess just on the cost increase on a year-over-year basis. I guess looking forward the level of SG&A on a year-over-year basis next quarter should it be somewhat the same.

Ray Andrews

Year-over-year next year will be impacted by the temporary payroll reduction furlough program that we had in place last year, and we are working on ways to offset that to the extent that we can.

Then I mentioned, we are working on looking at how we can stream line our overall administrative portion of our SG&A expense area through our reviewing global business process, streamlining them and then utilizing in the single ERP system to facilitate the saving.

We got the front end part of that process; it’s a very detailed planning process. Once we get those details firmed up then we’ll be in a position to talk about what our restructuring plan is in this area.

Christopher Mcginnis - Sidoti & Company LLC

I guess that’s probably the back half of the year, when you go though ..

Rob Van Der Merwe

Yes

Christopher Mcginnis - Sidoti & Company LLC

That’s it. Thank you very much.

Rob Van Der Merwe

Okay.

Operator

Thank you. Our next question comes from the line of Reik Read with Robert W. Baird & Company. Please proceed with your question. Your mike is now live.

Reik Read - Robert W. Baird & Co.

Just a follow-up Rob on the comments that you were making before on the cross selling opportunities and bringing those sales forces together, can you give us an idea of where that is in the process and is there any way to size those opportunities?

Rob Van Der Merwe

We are at the very early stages of that Reik. We got some traction last year, we are formalizing the commissions and so on this year, and I expect momentum from that simply to build into 2011, so it’s somewhat of an untapped opportunity and its worldwide.

I can’t dimension it for you at this point because we haven’t done that internally, not really knowing how far we can get with it. So I think its material, but that I can only report once we’ve executed and if it is material I’ll tell you.

Reik Read - Robert W. Baird & Co.

I would take it tough that the integration of sales forces is a relatively slow process, simply because you could have certain guys that are overlapping in certain areas and you have to kind of work your way through plus the training issues?

Rob Van Der Merwe

Correct, but its not necessarily small. We could pick off some pretty big accounts and in short order and again we’ve seen some success, but it’s not at the level that would stand head and shoulders above all the other comments that we’ve made at this point.

Reik Read - Robert W. Baird & Co.

Okay, I’ll take it from what you are saying that process is under way, to may be target some of the bigger accounts to get that underway.

Rob Van Der Merwe

Definitely.

Reik Read - Robert W. Baird & Co.

Okay, and then just going back to the antenna and the CCTV business, is that at the point -- I mean you talked about the weakness there, but is that at the point where the seasonality is fairly normal or we see it sequentially flat and can you give us a sense for you said in your comments a minute that you could see improvements as early as the second half of this year. What maybe driving that in your view.

Ray Andrews

This is Ray. I think it’s going to be a combination of some of the market still coming out of the economic downturn and getting more confident about capital spending and new store openings; and also there is a little bit of a traditional up-tick here towards the end of the year as retail capital budgets run out.

I don’t think that will have a significant effect this year as it has in the past year, looking at the real drivers going to be in the retailers view where they stand, and their prospects and where they stand coming out of economic situation.

Reik Read - Robert W. Baird & Co.

Okay, and then just one last question; back in the RFID space Airbus has been a big supporter of OATS, which they reaffirmed recently, but it also turns out that Airbus has selected CSC to be that the project management leader. Is that positioning you guys to work with some of these big system integrators, and is that yielding anything at this point or how do you look at that?

Rob Van Der Merwe

Yes it is and to be successful in the merchandize visibility space, we are going to have work with others, bet it CSC or the other big guys, and so partnerships formal and informal will play an important role in our success going forward. This business has learnt to do it; they do it well. They are doing it not only in the industrial space, they are doing it in the retail space as well, and so we’ll build on that success going forward.

Reik Read - Robert W. Baird & Co.

But you would agree that it’s a relatively new phenomenon. With some of the bigger guys getting involved, it’s mostly going to be a bunch of smaller players. I know you’ve got relationships for those, but its not like what you’re saying is there’s some incremental relationships forming with some of the bigger players?

Rob Van Der Merwe

That’s correct. I think we are going to see more and more of that Reik.

Reik Read - Robert W. Baird & Co.

Yes, thank you very much.

Operator

Thank you. Our next question comes from the line of Chris Mcginnis with Sidoti & Company. Please proceed with your question, your mic is now live.

Christopher Mcginnis - Sidoti & Co

Sorry, just one quick question. Ray I believe you mentioned -- Rob I am sorry competition on the keepers or any. Can you just go into that a little bit, and I guess it’s the pricing competition; how quickly they came out to kind of combat I guess that growth that you guys are seeing.

Rob Van Der Merwe

I mean there is competition. We see more competition in Europe than we do in the US. I mean we have a much stronger position and more entrenched position in the US; and after we acquired that business we started to expand in Europe, but some other players had already established themselves.

I think we are working through that. There is always a question of protecting our intellectual property; some of which is strong, some not. The way we deal with that is rotating new technology through literally every year, at least every other year to stay ahead of the game, and so yes there’s competition, but at this point with the relationships we have with customers and our ability to get our hands on and execute to the customers requirement is definitely in place.

I mean some of these deals are very big and they run across thousands of stores. The smaller players are not going to be able to get out and execute. They can obviously try and settle the balance from a pricing standpoint, but the technology is moving too fast enough, and also costs are coming down fast enough that I think we could deal with it.

Christopher Mcginnis - Sidoti & Co

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Powers for any closing comments you may have.

Robert Powers

Well, once again we thank you for your interest, and we look forward to speaking with you on next quarter’s call.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time, and we thank you all for your participation. Have a wonderful day.

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!