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Checkpoint Systems, Inc. (NYSE:CKP)

Q4 2013 Earnings Conference Call

April 1, 2014 08:30 AM ET

Executives

Jim Lucania - IR and VP, Finance

George Babich, Jr. - President and CEO

Jeff Richard - EVP and CFO

Analysts

Jeff Kessler - Imperial Capital

Chris McGinnis - Sidoti & Company

Chris Kapsch - Topeka Capital Markets

Operator

Greetings and welcome to the Checkpoint Systems Fourth Quarter and Full Year 2013 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Jim Lucania, Vice President, Finance for Checkpoint Systems. Mr. Lucania you may begin.

Jim Lucania

Thanks Kevin. Good morning, and welcome to Checkpoint Systems' fourth quarter 2013 conference call. With me today are George Babich, President and Chief Executive Officer; and Jeff Richard, Executive Vice President and Chief Financial Officer. Please note that unless otherwise stated, today’s discussion will be on Checkpoint’s continuing operations. Additionally, non-GAAP measures discussed on this call are defined and reconciled with GAAP on statements attached to our earnings release. The release is available on our Investor Relations website.

We remind you that during this call, we may make certain forward-looking statements. These are subject to the caution regarding forward-looking statements included in yesterday’s earnings release. A replay of this call and written transcripts will be made available on our website following the call.

Now I will turn the call over to George.

George Babich, Jr.

Thank you Jim, good morning and thank you for joining us today. We appreciate you being with us and trust you had the opportunity to read our fourth quarter and full year 2013 earnings release issued last night. Before we begin the call, I’d like to first of all formally introduce Jim Lucania who will be leading the Investor Relations function going forward. Jim has been with the company since 2012 and is also Checkpoint’s Vice President of Finance and Treasurer. Format for this morning’s call will be an overview of the fourth quarter and full year performance given by me and then I’ll turn the call over to Jeff to walk through the financials as well as our guidance for 2014. We’ll then open the call up for questions.

As you know we filed restated financials for 2011, 2012 and the first three quarters of 2013, details of which are outlined in Note 1 of our 10-K filed with the SEC yesterday. Any comments made today referencing prior periods reflect our restated financial results for those periods.

First I’d like to start with a few comments on our fourth quarter and full year results. We’re pleased to report fourth quarter and full year results in line with our revised guidance given in November. For the year as a whole market share gains and EAS, Merchandise Visibility, Hard Tag @ Source and Alpha helped drive a 2.1% increase in our MAS revenues. Our Merchandise Visibility business which includes the RFID labels reported in ALS grew by over 80% from 2013 as we continue the deployment of our RFID based EAS solutions to global sports retailer and producer Oxylane. This rollout took place across 18 countries in more than 400 stores and while carrying out an extensive RFID source tagging program to CheckNet's strategically located print shops. Coupled with that rollout, we completed the 1,100 store RFID rollout at Kohl’s. Clearly, 2013 marks a tremendous year of accomplishment in our Merchandise Visibility business.

These successes were partially offset by anticipated decreased revenues in our legacy ALS business, due to exiting of our Sri Lanka joint venture and the impact of project LEAN initiatives. In addition, our RMS business continued to face a difficult retail environment in Europe throughout the year. As a result we’re pleased to report significant improvement in 2013 operating income, which nearly quadrupled year-over-year, driven by tight expense control and execution of our restructuring initiatives. For the years, selling, general and administrative expenses were down over $29 million or approximately 12%.

Turning now to the quarter beginning with segment revenues, MAS revenue decreased 0.9%, to $132.6 million. Fewer EAS hardware rollouts and the wind down of our library business were partially offset by growth on Hard Tag @ Source, Alpha, EAS labels and Merchandise Visibility. In Alpha we benefited both from new product introductions and several new customer wins in North America. In Hard Tag @ Source we saw significantly increased volumes with key apparel retailers in North America and also benefited from new customer wins in Europe.

Revenue in EAS System has faced a tough comparison with last year’s fourth quarter due to a large European rollout that took place in 2012 but the decline was offset in part by the rollout taking place at U.S. retailer’ Family Dollar. On the other hand EAS Labels revenue in North America was up significantly, benefiting from the recurring component of recent market share wins.

ALS revenue was down $4.4 million due to exiting our Sri Lankan joint venture, the impact of our lean initiatives, one less selling week as well as reduced sales volumes in North America. The decline was partially offset by significant growth in worldwide RFID label sales as we ramped up our capacity and capability to produce more than five times as many labels versus the prior year. We continued to struggle in the RMS business, due to the difficult retail environment in Europe beating the weaker demand for our handheld labeling products especially in our indirect channel.

Turning to segment margins, MAS gross profit margin decreased 20 basis points, primarily due to the mix of revenue among product lines. This decline was favorably impacted by higher margins year-over-year in EAS systems, EAS labels and Alpha, primarily due to manufacturing cost reductions and more favorable customer mix, more than offsetting inherent ASP pressures.

ALS margins increased by 120 basis points, primarily due to contingent execution of LEAN initiatives, the improvement however was somewhat muted by the mix of sales towards lower margin RFID labels. RMS gross profit was well below last year due to higher pension cost, overhead under absorption and increased inventory cost as a result of lower volumes.

Turning to pro forma operating income and EPS, our selling and general administrative expenses declined nearly 11% in the quarter due to our continued focus on streamlining costs. Pro forma operating income was nearly $17 million, $2.2 million or 15% above prior year and EPS was $0.30 compared with $0.13 in the fourth quarter last year.

Before turning the call over to Jeff, I would like to just take a quick look back at fiscal 2013. As you may recall, we completed two key components of our strategic realignment with the divestiture of our North American CheckView business and our Sri Lanka joint venture in ALS. We continue to executing project LEAN, reducing 420 positions worldwide and the majority of the initiatives under project LEAN significantly improved year-over-year gross profit and operating margins in ALS. As a result we nearly quadrupled our operating income and we significantly improved our working capital position, which enabled investment into a growing pipeline of new customer projects. We completed a new favorable financing agreement, which lifted all restrictions from the prior agreement and has reduced our cost of debt from approximately 6% to 2%.

Importantly we have created talent on every continent including transitions in senior management throughout the business. Also importantly, our continuous focus on cost and working capital management drove much improved profitability and cash flow for the Company and has positioned us well for 2014.

At this time I'll turn the call over to Jeff.

Jeff Richard

Thanks, George. Good morning everyone. As a reminder, all of my references today will be related to fourth quarter activity from continuing operations, unless I state otherwise. Continuing operations exclude the results of the U.S. and Canada-based CheckView business, which was sold on April 29, 2013.

Fourth quarter revenue was $194.4 million, a decrease of 3% over last year. Foreign currency translation effects resulted in 0.3% decrease in net revenues. Gross profit was $75.4 million, $3.6 million less than last year’s fourth quarter. The gross profit margin was 38.8%, compared to 39.4% last year. Despite this shortfall in gross margin, a strong showing from RFID, Hard Tag @ Source and Alpha business, together with continued tight expense controls helped deliver non-GAAP operating income of $16.9 million or 8.7% of revenue compared with $14.7 million or 7.3% of revenues in the fourth quarter of 2012. Adjusted EBITDA in the quarter was $24.4 million, 8.2% greater than in the fourth quarter of 2012.

Now I will break these results down in more detail by segment. MAS revenues declined 0.9% to $132.6 million, down 0.1% on constant currently basis. Hard Tag @ Source, Alpha and Merchandising Visibility performed well during the quarter. Hard Tag @ Source sales grew over 36% year-over-year driven by significantly higher volumes with key partners in the U.S. and some new customer wins in Europe. Alpha's more modest 4.1% growth came from new product introductions and new customers in North America and Merchandise Visibility which grew 3.5% as a result of the market share gains, George just discussed. Offsetting these gains was a 3.3% decline in EAS systems during the quarter. This was a difficult comparison with last year’s fourth quarter when large roll-outs were taking place in Europe.

Conversely EAS Labels in the U.S. performed well, benefiting from the recurring component derived from recent market share wins such as Family Dollar. The wind down of our library EAS business and our remaining Asia-Pac CheckView business contributed $3.1 million towards the decline in MAS revenues. Gross profit margin for the segment decreased from 42.3% to 42.1%, primarily due to the mix of revenue among the product lines. We achieved higher margins EAS systems, Labels and Alpha through remanufacturing cost reductions and favorable customer mix offset by ASP erosion.

Now to ALS, revenues declined 8.4% to $47.5 million due to exiting our Sri Lanka joint venture, the impact of our LEAN initiatives and one less selling week compared with 2012 fourth quarter. The decline was partially offset by a sizeable increase in RFID labels as a result of recent market share gain. Segment gross margins improved from 29.1% to 30.3% as ALS continues to benefit from our lean initiatives. A greater portion of lower margin RFID labels put pressure on the margins.

Now to RMS. Revenues decreased 3.8% to $14.2 million principally due to weaker demand in our indirect channel in Europe. A series of factors including higher pension cost, under absorption of overhead and lower volumes resulted in increased inventory costs, led to lower margins quarter-over-quarter down from 50% to 36.3%. On to SG&A, expenses for the fourth quarter declined $6.5 million from $61.1 million in 2012 to $54.7 million in 2013, reflecting further progress in our cost reduction efforts. Foreign currency translation unfavorably impacted SG&A by $0.3 million in the quarter.

Now I’m going to give you an update on our restructuring plan. Our restructuring plan lowered cost in the fourth quarter by an additional $7.8 million. $5.2 million of the reduction was attributable to SG&A. Cost reduction since the plan's inception total $95.8 million with $67.6 million attributable to SG&A. We expect that the plan will generate $108 million in reductions by the end of the third quarter of 2015. As we reported last year, we are developing additional margin enhancement initiatives over and above those in the restructuring plan. The value of these is still expected to be $10 million to $15 million by the end of 2014 with the annualized benefit of $15 million to $20 million. These initiatives primarily consist of Lean Six Sigma type process improvements and enhancements as opposed to reductions in force.

Now regarding EPS. Non-GAAP diluted earnings per share was $0.30 compared to $0.13 in 2012’s fourth quarter. Foreign currency transaction losses in the quarter were $0.4 million, reducing our EPS by approximately a penny. Now moving on to cash flow and debt, cash flow provided by operations was $25.3 million, compared with $41.0 million in the same period last year. Negatively impacting cash flow in the 2013 fourth quarter was incremental interest expense in connection with refinancing agreement entered into December, inventory buildup to support our large North American rollout and strategic inventory investments to reduce reliance on airfreight. In addition, the 2012 fourth quarter benefited from a significant reduction in working capital.

Capital expenditures in the quarter were $3 million and free cash flow was $22.3 million compared to $39 million in 2012’s fourth quarter. In December we entered into a new $200 million revolving credit facility with a group of new and existing lenders. The new facility will reduce our cost of debt by 4 percentage point to approximately 2%. The new bank deal gives Checkpoint increased flexibility to execute short and long term operational and strategic plans.

Now to 2014 guidance. We expect retail markets to continue to face headwinds, leading them to take cautious approach to capital expenditures. We will be providing guidance going forward on those metrics which we manage our business by. Looking at 2014 net revenues are expected to be in the range of $675 million to $715 million. EBITDA is expected to be in the range of $68 million to $78 million and non-GAAP diluted net earnings per share attributable to Checkpoint Systems are expected to be in the range of $0.60 to $0.70.

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

George Babich, Jr.

Thanks Jeff. With that Kevin, I’d now like to open the call up for questions.

Question-And-Answer Session

Operator

Sure. At this time, we’re conducting a question and answer session. (Operator Instructions). Our first question today is coming from Jeff Kessler from Imperial Capital. Please proceed with your question.

Jeff Kessler - Imperial Capital

As you go -- as you look at 2014 with what you have as somewhat of let’s call it a toned down view of retail particularly over in Europe, the headwinds that you face over there, what do you see in terms of momentum for improving margins in RFID and EAS combination sales as the year goes on? In other words, what I’m trying to get to is, as we get to the end of 2014, if you look in your crystal ball, what are we looking at toward 2015 with what you are putting in place this year, in terms of both your cost structure but also in terms of where you see your product being sold, because clearly Europe has still some pressure on retail side, but it does seem to me that you are being a little bit conservative, given that there is some momentum on the U.S. side?

George Babich, Jr.

Jeff, this is George. Let me first start with just a broad comment on kind of our guidance and then turn it over to Jeff to talk about some of the initiatives and where it’s going to position our margins going forward. But with respect to guidance, you’re right, somewhat conservative. I think lesson learned last year in the fourth quarter where we were somewhat surprised by what took place, in particular in our government contract business. So as we look to putting together the guidance for this year, recognizing that the vast majority, this year three quarters, most usually two-thirds of our profitability comes in the fourth quarter and it’s a long way off to get clear visibility and we thought we'd take somewhat, what we think is a realistic view, but it on balance it’s got upside potential and that always has downside possibility. So that’s kind of our -- it’s our approach this year on guidance. So with that let me turn it over to Jeff and he can talk a little bit about some of the things we’re putting in place to impact our margins going forward.

Jeff Richard

Hi, Jeff. Also I would like to jump on George’s comment there too. As we did in fourth quarter last year, our process internally here to look at the business from a forecasting perspective and it just rolled into the budget perspective. We look deep because it rolled up from the bottom up and then we look at the probability of some upsides, probability of some downside. So we do feel that this is a very balanced approach and achievable. So some of things that we’re working on that you know -- we’re running several projects and under the kind of Lean Six Sigma umbrella just looking at really, the way we go to business, or go to our customers and go to new customers, just getting full valuation, selling value. So that whole process I think is going well.

The way we’re looking at profitability in the Company, before we didn’t have as much visibility, we launched a project back many months ago and it’s getting close to an end here. And so we’re able to see a lot more from a business line perspective, product perspective, customer perspective, the profitability of each one of those and so those are driving different actionable items within the Company, even to the point that we’re focusing coming up here in 2014, many of our management team layers down are now incentivized on profitability for the first time. So we think that will drive positive outcomes as well as everybody is focusing on that.

And then we do have, I wouldn’t call cost out but we’re always looking at every dime and every penny that we’re looking at from the supply chain perspective. As I said earlier, one that, I said in my comments earlier about airfreight, so we’ve purposefully looked at inventory and that relationship to airfreight and we’ve allowed safety stock levels to come up a bit because we’re saving millions of dollars on airfreight. So we have a lot of these type projects going on and more to come.

Jeff Kessler - Imperial Capital

One of the things that you didn’t get too specific on, probably because there is quite a bit of noise going back and forth is your cash flow or your cash flow from operations in 2014. What are if you can -- can you give us a really wide range, so you can jump through? Or can you give us at least the factors that will determine what type of range we as analysts should be trying to get to as far as your cash flows go in 2014?

George Babich, Jr.

In the press release, we did give guidance on the EBITDA.

Jeff Kessler - Imperial Capital

I know that but what I'm asking more specifically is what are the factors that are going to drive -- that will drive cash flow from operations one way or the other that we should be focusing on?

George Babich, Jr.

Yes, so the other major component there Jeff is, as you know, CapEx. In the 10-K that we just published I believe we put CapEx expectations somewhere around $20 million. That’s above this year substantially but we are investing in a new facility. So it could be as much as $20 million.

Jeff Kessler - Imperial Capital

Okay.

Jeff Richard

The other driver Jeff, it’s going to be in the working capital. As we said before, as we have these big rollouts it’s just hard, we’re running our plants full [bore] [ph]. It depends on when we ship them, when we don’t ship them and those are big lumps that it’s just really hard to predict timing on that.

Jeff Kessler - Imperial Capital

Okay, one final question that is, and that is essentially the harvesting of these current rollouts. Some people counted four or five, some people are counting more. It’s hard when you’re not giving out all the names, but the bottom line is, what we as investors are expecting are the recurring revenues coming off of these rollouts. When can we begin -- when do you think we’re going to start seeing, assuming that you don’t have some major spike in the second half of the year in new types of sales but they continue to ramp over the year. Do we start to see the margins from the rollouts because of the recurring revenue on the tags and increase in source tagging begin to affect latter 2014 into 2015?

George Babich, Jr.

I think that’s a fair assumption Jeff, absolutely. We’re still in the process -- for instance, one of the major rollout is Family Dollar so you’ve got a majority of that taking place in 2014, which includes all of the hardware installation and that sort of thing. At the same time we are shipping the tags. But that ship will take place in the latter half of the year where the tags begin to outweigh the hardware installations. And clearly into 2015 is where we’ll see the full effect of it, when the hardware is -- on that particular rollout is completely behind us and then we’re looking at strictly the labels and other types of products that we could potentially be selling as well.

Jeff Kessler - Imperial Capital

Okay, source tagging is going to be about what by the end of this year, if indeed Family Dollars and some of these other rollouts end up with a large percentage of their business coming from source tagging?

George Babich, Jr.

At this point we haven’t quantified and communicated what we think source tagging will be. It’s a moving target obviously as you might expect but we haven’t done that at this point.

Operator

Thank you, (Operator Instructions) our next question is coming from Chris McGinnis from Sidoti & Company. Please proceed with your question.

Chris McGinnis - Sidoti & Company

Maybe just talk a little bit about the restatement, maybe what caused it and maybe what highlighted it to come up on your radar?

Jeff Richard

Sure, I’ll take that. We entered in -- back in 2011 it's a transaction where we extended multiple sale type lease products from a customer in Europe. When we did that we sold that receivable to the bank, and the accounting at the time, we both did the we thought was the right way of booking it. I’d say subsequently here as we’re reviewing that entry, as we were in the middle of reviewing the close for 2013, we recognize that was not according to GAAP. We needed to change the accounting for it and so we spent the time to do that. We worked with our other outside accountants as well. So we were all huddled here making sure that those entries were made. But basically, we reversed the income of this transaction back in 2011. So the entries -- we’re taking income out of 2011 and really booking the income in the future when these leases expire. So this will be well out to the future. And so these amounts, -- so these are basically just journal entries, nothing to do with the operations of the business and so most of these entries in the future also will be pro forma-d out for your modeling exercises. So you’ll those pro forma-d out. Real detailed information, we put in note one in the 10-K so you can take a look at it there, but in general that’s kind of what happened. That’s probably too detailed for you anyway, but.

Chris McGinnis - Sidoti & Company

I guess just touching on the RMS business that declined in profitability. Do you see that changing with some of the cost-saving initiatives or if you’re at this level, do you think about maybe exiting that business?

George Babich, Jr.

Chris, I'll take that one. We just - we ran into a couple of significant issues last year. I don’t expect that to repeat itself in 2014. We’ve put in place cost-reduction initiatives, margin enhancement initiatives and revenue enhancement initiatives for that business. I think more than half have been put in place in the past. So I think that for 2014 that business will stabilize and we’re certainly expecting it to grow in 2014.

Chris McGinnis - Sidoti & Company

And then just lastly, in relation to your guidance, are there new project wins already put in there, maybe on the RFID side or maybe even on the just the core EAS business that you are close to assigning or is it just what you have on the books today?

George Babich, Jr.

What I'll let Jeff do is explain how we've approached what we put into the budget and then what we look at in the way of the upsides and downsides to the budget. It's all probability based, much more granular, more detailed than we had in the past. So not relying just on the sales input to say that we expect to have this customer begin rollout in September. We're actually pushing back on that and putting a probability on that and against every other project, trying to come up with a weighted, if you will, balanced budget and upsides and downsides to the budget that change in real time. Jeff, you might want to add little more to what you are doing.

Jeff Richard

Yes, sure. It’s a good process. I think it's a good change where we have much more visibility into the business even at the sales level. To answer your question specifically, there is more -- it’s not everything that is landed and that we are forecasting for, what our sales guys are putting in, what they think they can win as a - things that are in their pipeline. So they are analyzing their sales pipeline. That’s where the probability is coming intact and we say what’s the probability of you winning that this year. That’s where it comes really to the balanced approach. Because we are going to win some or we are not going to win some and so we’re approaching it that way and I think it’s pretty balanced.

George Babich, Jr.

Chris, obviously you are familiar with what took place last fall where customers at the last minute pulled the TOs right off -- right out of our hands. And that continues to happen. So what Jeff's talking about is extremely important to improve our forecast accuracy. And I'll give you another example. We were within one day earlier in 2014 from having a pretty significant contract signed. That was going to the last signature of the customer, and they got their results for the fourth quarter and decided to put it on hold.

So we have -- these things keep coming in and coming out of our forecast in real time, every month -- every week, every month and again we’re trying to balance it and not assume that they’re all going to hit and by applying some probabilities to it, based on the strength of their business and the markets there are in, that the customer is in and the confidence level that the sales guy has, as well as where we are in the process of approving the deal internally and externally, we apply this probability -- that’s a big step forward, if you will for us as far as our forecasting goes in building the budget and then the guidance.

Operator

(Operator Instructions) Our next question is coming from Chris Kapsch from Topeka Capital Markets. Please proceed with your question.

Chris Kapsch - Topeka Capital Markets

My participation in the call was disrupted a little bit, with several pauses. I guess you've covered some of this down, but I have a follow up on the commentary about the RMS, the Retail Merchandizing Solutions business. I mean -- I know you mentioned you think it will be stabilized, maybe grow in 2014. But clearly that business is one that’s more mature. It doesn’t seem like it has -- the product line is necessarily strategic to the things you're doing either on EAS or RFID. So I'm just wondering and meanwhile I guess with some comparative dynamic kicking up, it is one of things that pressured the margins in that business pretty dramatically. So just wondering, does it makes sense strategically to have that as a piece of the portfolio and is there any cross selling that takes place with that business and some of the other more strategic businesses?

George Babich, Jr.

Chris, as we have talked in the past, it’s a business that you think about where we’re going in our merchandise availability solutions business and helping the retailers improve their inventory accuracy in order to improve sales. It’s hard to see where this plugs into that strategy clearly, and we continue to take a look at it and evaluate it economically against all of the options that are out there.

Right now the thing that we need to do is continue to adjust the cost structure. There are things that we can do from a margin enhancement standpoint that we’re working on. And we have some new sales initiatives that we’re working on, but it is a challenge. It’s a challenge in that market. It’s a challenge with the product itself and we continue to stay focused on it.

Chris Kapsch - Topeka Capital Markets

Okay. Understood. And then just a follow up on this commentary about improving your forecast accuracy and the efforts there. There was confluence of issues that sort of up ended, we’re not upended but caused the business to come in below -- in 2013 below expectations. One of those that you highlighted was this meaningful government project. So I'm just wondering, is there, I know you talked about assigning probabilities but in the guidance for 2014 is there any visibility or any sort of penciling in for that large government project to resurface in 2014 or is there just not visibility there?

George Babich, Jr.

We do have visibility. We believe that those projects will be completed in 2014.

Chris Kapsch - Topeka Capital Markets

Okay. So that is contemplated in the guidance then, I assume?

Jeff Richard

Absolutely. And there is several -- there's not one large one. Those were several that you can group together. So we look at each one of those. Our sales guys looked at each one of those and we did the same process and said, to your same question we had to them is are these coming back in 2014 and so we talked about each one of them and gave probability of them hitting and when they would hit throughout the year.

Chris Kapsch - Topeka Capital Markets

Got you. And then sort of more bigger picture, on the RFID adoption that’s taking place across the retail and apparel industry in particular, in the situations where you guys have won and whether adopting your solution, I'm just wondering if you can speak now that you’re up the learning curve a little bit more as you have kind of come at this with a turnkey solution. And I'm just wondering, the wins that have taken place, what exactly is helping you win? Is it the turnkey solutions itself? Is it the fact that your system is based on -- can be tied in with EAS with being based on your EAS systems being RF based versus acousto-magnetic. Is it just something that varies customer by customer? Just wondering what is contributing to your success there? And then ultimately what are you excited about in terms of the market? Is it still more the solutions, the software, the equipment or is there any merit to being more meaningfully involved in selling the consumables as well?

George Babich, Jr.

That’s a mouthful. Let me try to respond to that. But clearly, we have had two very successful rollouts, one in Europe and one here in the States. And they took on a completely different complexion if you will, each of them. And some customers like what we've experienced and we’re experiencing, look to us for exactly what you’re talking about. It’s that -- it’s the RFID EAS transition so that we can -- they can move to one solution to handle inventory management and loss prevention, Shrink Management objectives.

So that’s a big part of the transition for these retailers. And I’d say the other thing that, when we talked to the retailers that it tends to resonate with them is our ability to manage the entire project, the end to end solution with industry leading software, with industry leading hardware, relationships with partners were needed and the ability ourselves to produce the consumable product, the consumable tickets and tags.

So it’s a combination of the products and adding to that our ability to work with any retailer worldwide because we have a worldwide field service organization that can install and service their stores and that’s another big factor in the decision making.

So it’s a combination of things. I’d say it’s led by technology and our ability to install and service. And then kind of the ability to oversee -- be the integrator of the entire project is important to them as well. They have one person -- one person by name that they go to address the installation.

As far as getting more involved in the consumables piece, absolutely it’s something that was a real success force in 2013. As I mentioned in my comments, we’ve increased the number of RFID labels by more than fivefold versus what we have done quite frankly all of 2013 and 2012 combined. So we have the capability. We’ve built it on each of the -- all three continents around the world to serve our customers with different forms as well. So we are very confident and continue to grow that business and we’ll continue to grow.

Chris Kapsch - Topeka Capital Markets

Okay just as a follow-up, I'm just wondering if any of these projects that you’ve won or that you’re bidding for, is there any instances where the rollout that you see taking place assuming you win the business somehow cannibalizes or is a threat to existing EAS business or is it always a case where the RFID project and any related consumables would augment or complement your incumbent EAS business. So in other words is there a risk -- any instances where what the customer is considering and adopting is somehow cannibalizing the legacy technology of loss prevention or is it really the migration to LP plus Merchandize Visibility?

George Babich, Jr.

It does happen. And the good news is that when it happens -- is we’re upgrading if you will from a dominant EAS tag to an intelligent RFID tag. So we are tripling at least the revenue that comes from the tickets, the tag itself. So that’s a piece of it. The hardware again is -- if it does replace EAS hardware, there is cannibalization, our existing accounts is a more capable, more high-tech and more expensive hardware to be able to provide those solutions. So in our business, that clearly does happen, number one. Number two is, because it is as you said being adapted in apparel more so than other of the retail verticals, every time we win an apparel account that we don’t currently have EAS, that it’s a 100% incremental. The cannibalization is against our competitors' business. So we continue to push and push into those accounts as best as we can because there is a real opportunity there to not only swap out the EAS side of it but add in the RFID component as well. So we’re excited about that opportunity which is a real -- that's the real ultimate objective.

Jeff Richard

And I'll also add that our technology, even if we want to enter in a new customer, whether it’s Greenfield space or our customer space, our products -- we can rollout an RF. It's more of loss prevention if they want to kind of walk before they run. But that’s convertible to RFID readers as well. So we have any product like they enjoy looking at, give us some advantage.

Operator

Thank you. Our next question is coming from Jeff Kessler from Imperial Capital. Please proceed with your question.

Jeff Kessler - Imperial Capital

With regard to looking at your product and going into apparel specifically, moving into an area where you have a competitor who has had obviously at one point a dominant position in that, head-on-head it appears that you do have advantages, both technologically and in terms of cost. However, your competitor does have a parrot who can say we can offer this, this, this, this and this if you'll just stay with us. Have you made the move to either team with -- get relationships with integrators who have the capabilities to bring greater bandwidth if you want to get caught into security programs, if your competitor begins to bring its parrot in to say we can offer a much larger security program, including lost prevention. Do you have those relationships in place where you can be part of a larger project?

George Babich, Jr.

Today Jeff we’re focused on Merchandize Availability Solutions and for us to begin to get into security, if you will, again perimeter security like CCTV or burglar that sort of fire, that’s not our strategy going forward. It certainly is something that we have to, as you said compete with out on the street, but our technology and our cost and our capability we think trump those advantages. And it’s going to be up to us to meet with the customers and where there are customers, they are competitors’ customers -- and continue to demonstrate that that’s our competitive advantage and how they can move forward with us to better manage inventory, improve their inventory accuracy, enhance their omni- channel capability and increased sales in what’s a relatively tough environment and we think we’ve got the best solution to do that.

And we have partnered with RGIS. As you know we put a press release out earlier this year to that regard and they are, as you know worldwide, very big and cycle counting solutions is one of their businesses and we’re partnering with them so that we can provide the full service solution to any retailer on whether they want to count their inventory manually or certain categories of inventory to be counted manually, they’ve got a system, they’ve got a service provider to do that. Or if they want to use passive RFID, we provide that. We now are providing what I call an active RFID solution, which is a zonal solution, which is for whole another category of merchandize, primarily high end merchandize where you want to understand where the inventory is at all times, which is beginning to get some real good traction with us and obviously we have our EAS solution which prevents inventory from being stolen. So we think that as we go -- as we move forward -- it’s going to be more along the lines of how do we be the one stop shop for inventory management for a retailer, regardless of how they want to do it, the entire store RFID, the entire store manual, or as a transition from manual cycle counting into various forms and functions of RFID. We think that that’s our play, that’s a better play strategically for us.

Operator

Thank you. We have reached the end of our question & answer session, now let’s turn the call over to Mr. Babich for further or closing comments.

George Babich, Jr.

Okay Kevin, thank you very much and thank you everyone for taking the time today. In closing, with regard to 2014 I just want to reemphasize that we remain focused on our core strategy, as I just finished explaining, to provide retailers with merchandize availability solutions to improve their inventory accuracy and to increase sales. We believe we have the best products and service in the industry to accomplish that partnership with retailers throughout the world. We’ll continue to ramp up the talent and cultural changes that are already underway over the past two years. We’ll accelerate the profit improvement initiatives by a line of business, geography and customer to drive our margins higher and SG&A lower and we’ll take advantage of our strong balance sheet to examine growth opportunities that are synergistic to our existing strategy.

So as always, I’d like to thank my Checkpoint colleagues worldwide for their continued efforts this past quarter and throughout 2013 and a special thanks for the accounting group over the past six weeks, who've really struggled through this restatement to get it behind us. Thank you everyone and have a great day.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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