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Checkpoint Systems Inc. (NYSE:CKP)

Q1 2014 Earnings Conference Call

May 6, 2014 8:30 AM ET

Executives

James Lucania - VP, Finance

George Babich, Jr. - President and CEO

Jeff Richard - EVP and CFO

Analysts

Chris Kapsch - Topeka Capital Markets

Jeffrey Kessler - Imperial Capital

Chris McGinnis - Sidoti and Company

Chris Kapsch - Topeka Capital Markets

Glenn Primack - PEAK6

Operator

Greetings and welcome to the Checkpoint Systems First Quarter 2014 Earnings Conference 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 Mr. Jim Lucania, Vice President of Finance and Treasure for Checkpoint Systems. Thank you, sir, you may begin.

James Lucania

Thanks Melissa. Good morning. Welcome to Checkpoint Systems' first 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 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 the 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.

Thanks Jim. Good morning and thank you for joining us today. We appreciate you being with us, and trust that you had an opportunity to read our first quarter earnings release issued yesterday, late afternoon.

This morning, I will give an overview of our first quarter performance and our growth initiatives, and then I will turn the call over to Jeff to walk through the financial statements. We will then open the call up to your questions.

So we are up to a solid start in 2014 and are beginning to realize some early benefits of what we call phase two of our three year turnaround, process improvements and to drive margin enhancement.

Constant currency basis, net revenues were effectively flat, but when normalizing for the divestiture of Sri Lanka, moving them at [ph] Nordic countries to indirect and other business rationalizations.

On a comparable business basis, revenues in the first quarter were up 2.1%. Gross profit margins improved by over 640 basis points versus 2013. This improvement in gross profit, coupled with modest SG&A reductions from our global restructuring plan, drove a $10.7 million year-over-year increase in non-GAAP operating income. Non-GAAP earnings per share were $0.04 versus a loss of $0.23 in the first quarter of 2013.

Turning to the businesses, MAS delivered a solid quarter, essentially flat on the top line on a constant currency basis, after absorbing the planned wind down of our library and Asia-Pac CCTV businesses; as well as a tough comparison for EAS hardware, due to the two large European rollouts completed last year. Continued growth in EAS Consumables and Alpha reflect our recent market share wins, and a continued turnaround in the performance of those two important product lines.

Gross profit margins for MAS increased by over 740 basis points to 47%. Margins were up across all product categories, reflecting manufacturing cost reductions, favorable manufacturing variances, freight efficiencies, better field service utilization, improved product mix, and the impact of new pricing policies.

Moving on to our Apparel Labeling solutions, ALS also reported a solid start to the year, with revenue increasing 4.1% on a constant currency basis. Strong growth in RFID label sales, reflect a recurring portion of our recent RFID system rollouts in the U.S. and Europe.

Growth in RFID more than offset a decline in legacy tickets and tag business and the impact of the exit of the Sri Lanka joint venture. ALS gross profit margins increased by over 660 basis points to 33.5%, driven by our continued lean initiatives, manufacturing efficiencies, and favorable customer mix.

Now to retail merchandising solutions; RMS revenues decreased 10.7% on a constant currency basis, primarily due to the transition of a portion of the European Nordic businesses to the distributor model. Segment gross profits declined by 190 basis points for the same reason.

At this time, I will turn the call over to Jeff, and after Jeff is done, we will open the call up -- or back to me and then we will open the call to some questions. Thanks.

Jeff Richard

Thanks George and good morning everybody. As a reminder, all my references today will relate to first quarter activity from continuing operations, unless I state otherwise. Continuing operations exclude the results of the U.S. and Canada based CheckView business sold on April 29, 2013.

First quarter revenue was $147.4 million, a decrease of 0.5% over last year. Foreign currency translation effects resulted in a 0.6% decrease in net revenues, offsetting a 0.1% organic revenue growth. Gross profit was $62.3 million, $9 million more than last year's first quarter. The gross profit margin was 42.3% compared with 35.9% last year.

Strong margin performance across the board, together with continued tight expense control, helped to deliver non-GAAP operating income of $4.1 million, compared with a loss of $6.6 million in the first quarter of 2013. Adjusted EBITDA in the quarter was $11.8 million, $9.5 million greater than the first quarter of 2013.

Now I will break you the results down into more detail by segment; MAS revenues declined 28% to $93.5 million, down 0.1% on a constant currency basis. EAS label revenues increased nearly 14% year-over-year, as we continue to benefit from the recurring component of our recent market share wins. Our tagging source and Alpha continue to grow more modestly at 3.1% and 1.3% respectively. Our merchandise visibility revenue more than doubled, though from a small base in the first quarter 2013.

Offsetting these gains, was a 10% decline in EAS systems revenue in the quarter. This was a difficult comparison with last year's first quarter, when large rollouts were taking place in Europe. The wind down of our library EAS business and our remaining Asia-Pac CheckView business contributed $0.8 million towards the decline in MAS revenues.

Gross profit margins for the segment increased from 39.6% to 47%. We achieved higher margins in all core product lines, and our core product mix shifted toward a higher margin product. Margins improved through manufacturing cost reductions, favorable manufacturing variances, favorable freight variances, lower pilot costs and better field service utilization, many of which can be attributed to the second phase projects that focused on process improvement.

Now to ALS; revenues increased 3.1% to $42.1 million or 4.1% on a constant currency basis. Strong sales growth in RFID labels was partially offset by declines in our legacy business and the exit of our Sri Lanka joint venture. Segment gross profit margins improved from 26.9% to 33.5% as ALS continues to benefit from our lean initiatives and profit improvement initiatives. A greater performance of our RFID labels put pressure on overall ALS margins.

Now to RMS; revenues decreased 9.4% to $11.9 million, principally due to the transition of a portion of the European business to a distributor model during the first quarter of 2013. Segment gross profit margin declined for the same reason, from 37.8% to 35.9%. This decline was partially offset by favorable manufacturing variances during the first quarter 2014.

Now on to SG&A, expenses for the first quarter declined $1.2 million from $55.5 million in 2013, to $54.3 million in 2014, reflecting further progress in our cost reduction efforts. Our restructuring plan lowered costs in the first quarter by an additional $2.2 million. $1.6 million of the reduction was attributed to SG&A. Cost reduction since the plan -- the inception totaled $98 million was $69.2 million attributed to SG&A. We expect that the plan will generate $108 million in reduction by the end of the third quarter 2015.

As we have discussed for several quarters now, we continue to develop 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 an annualized benefit of $15 million to $20 million.

Now regarding EPS non-GAAP diluted earnings per share was $0.04 compared with a loss of $0.23 in 2013 first quarter. Cash flow provided by operations was $8.6 million compared with $13 million in the same period last year. We invested in inventory during the first quarter of 2014 to support our current rollout schedule, and continue to make strategic inventory investments and high demand SKUs to reduce reliance on air freight.

We have kept our inventory turns flat, despite absorbing this new [indiscernible] and the new inventory requirements to manage our growth, growing RFID label programs. Capital expenditures in the quarter were $3.3 million and free cash flow was $5.3 million.

Now regarding guidance; we are reaffirming our 2014 guidance previously issued on March 31. We still expect net revenues in the range of $675 million to $715 million. EBITDA in the range of $68 million to $78 million, and non-GAAP diluted net earnings per share in the range of $0.60 to $0.70.

Now I will turn the call back over to George.

George Babich, Jr.

All right. Thanks Jeff. I am extremely proud to announce the completion of our expanded global restructuring plan, including Project LEAN. As Jeff said, we expect to realize the full benefit of the $108 million in program savings by the end of the third quarter of 2015. This is a tremendous milestone in Checkpoint's turnaround.

Nearly two years ago, I announced a three year plan to transform Checkpoint. You may recall, that there were three distinct phases to the plan. Year one was focused on substantial and sustainable reductions in SG&A and working capital. Year two was focused on further process improvements to drive further margin improvements. And year three was about then leveraging the new infrastructure of Checkpoint, with growth initiatives driving further margin improvements.

With phase one complete and phase two well underway, we are now beginning to focus on phase three, driving profitable and sustainable growth, both organically through innovation and inorganically through acquisition. Yesterday, we announced the reorganization of our global leadership team, with a heightened focus on growth.

First, Farrokh Abadi, President and Chief Operating Officer of MAS, has been given the expanded role to lead strategy and corporate business development. Farrokh has 10 years of experience at Checkpoint and a variety of roles, and he will lead our efforts to identify, select and execute new partnerships, joint ventures and acquisitions to drive inorganic growth.

Second, we announced that Uwe Sydon will be joining us on May 27 as Senior Vice President of Innovation. This is a new role within Checkpoint, moving innovation to the senior leadership level, reporting directly to me. Uwe most recently, served as VP of Product Management at BlackBerry. Prior to that, he held a variety of innovation and product management leadership positions with Siemens AG and Nokia-Siemens Networks. He will lead internal product development and R&D to drive organic growth. Refocusing Farrokh and adding Uwe to the team are exciting appointments directed at launching the growth phase of our turnaround plan.

With that operator, Melissa, I will turn it back over to you to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Chris Kapsch with Topeka Capital Markets. Please proceed with your question.

Chris Kapsch - Topeka Capital Markets

Good morning. Couple of questions. Just on the EAS business, the strong year-over-year margin performance called out a laundry list of contributors there. Just wondering if you could talk about the sustainability of the benefits from those different contributors, and also within the top line mix that there is a notable shift obviously from a way from -- with EAS Systems being down and EAS consumables benefiting being up strong. I am wondering how much of a positive mix contribution did that shift also contribute, if you can delineate?

George Babich, Jr.

Yeah Chris, George here. I will start and if Jeff wants to add something to that, clearly year-over-year there was a mix shift. If you recall last year, we had the hardware rollouts at Tesco and a hard discount retailer in Europe, and our margins were lower as a result of that; we talked about it at the time, and we talked about how that would be followed up with the higher margin consumable business. So that's clearly playing out in the first quarter of this year.

If you notice, our hardware sales are down, so that we have a lower mix of that lower margin business. So it is clearly -- its two things though, it's not just the mix in the products because of that roll out last year and the consumables this year, it's also improvements in our pricing model and our pricing approach. Its improvements in our manufacturing variances that are just being managed more effectively. It’s the lower freight costs versus last year. So that's a little bit of a one-off, but this is just year-over-year, but it is something that is some -- we can maintain that, now that we have better processes and controls around freight.

So I think that a portion of this is attributable to -- an unusual comparison. But as far as whether it can be sustained or not, we will see. We will continue to try to manage the processes effectively and efficiently as we possibly can. Control what we can control, and look for ways to move customers through higher margin products. Look for ways to improve the profitability of lower margin customers, and we will do all of those things Really, it is the beginning, I think of what we have been talking about, with process improvements, a Six Sigma lean type approach, much more disciplined and the way we do business, and we have been talking about that, I guess, for about a year now, since Jeff joined us.

So we will see, this one quarter does not necessarily make a trend. So we will see how it goes.

Chris Kapsch - Topeka Capital Markets

Yes. That's definitely encouraging, and could you just provide a little more color on the pricing initiative. Is that targeted more by customer, or is it focused on say, consumables versus hardware, or is it really across the board?

George Babich, Jr.

It really is across the board. We have initiated pricing, training for the sales and product management organization. We have changed, if you will, the pricing up and down the product offering, being much more disciplined in getting it out in the field, so they are following in a much more disciplined way. We implemented controls here for the bigger deals, to ensure that we are getting the value that we should be, from what we are offering. So there is a whole slew of initiatives -- again, process improvement to help us with managing pricing.

So I think we are -- again, I think we are at the beginning of this, but it's always difficult to tell, whether it can be sustained. So we will stay focused on it and see where we are at the end of next quarter when we talk to you in August.

Chris Kapsch - Topeka Capital Markets

Okay. And then I had a question on the ALS segment as well. Growth there, also encouraging, you mentioned that a lot of that was attributable to strong growth in RFID labels, but you also mentioned that the RFID sales were a drag on margins. So I am just wondering if RFID sales could contribute favorably to margins, once that product line is scaled up more dramatically, or how do you see that playing out over time?

George Babich, Jr.

We are really proud of a lot of things, that we have done. One of them is clearly how fast we have been able to ramp up and deliver hundreds of million -- probably 200 million labels now in the past year, from basically starting at zero. And we have done that, like any other business, the startup process is a little bit inefficient. So we haven't achieved the kinds of margins that we hoped to, longer term. We have some -- a couple of initiatives, specifically targeted at ALS margins, that I believe will have a very positive impact and driving those margins to what I feel is an acceptable level. Clearly right now, they are not at an acceptable level. We are addressing that. We will be making some capital expenditure, investments to accomplish that, and I am hopeful that we will see a big improvement in our operating margins in the future.

Chris Kapsch - Topeka Capital Markets

George, one last one on ALS, one of the things that you did when you first came on board was, focused on rationalizing some of that segment in terms of the lower margin business. I am just wondering if, basically it ceded share by either rationalizing low margin business or firing customers. I am just wondering if that market share cessation has sort of run its course and so what we are looking at now, might be kind of a more normalized base business from which you can hopefully grow?

George Babich, Jr.

Clearly, we did go through all the rationalization initiatives that you just mentioned. So we are anniversarying some of those, as we speak, and at this point to the best of my knowledge, we have accomplished probably 95% of what we want to do with respect to rationalizing that business, both from a product standpoint and a customer standpoint. So I think we will probably have pressure there throughout 2014, as we anniversary some of those initiatives that we put in place last year. But we at this point, are done, for the most part, initiating any new rationalization.

Chris Kapsch - Topeka Capital Markets

Thank you.

George Babich, Jr.

Thanks Chris.

Operator

Thank you. Our next question comes from the line of Jeffrey Kessler with Imperial Capital. Please proceed with your question.

Jeffrey Kessler - Imperial Capital

Thank you. Most of my questions were just asked, so I will be creative here. With regard to the Sri Lanka venture, when we try to focus that in on trying to pro forming [ph]; about how much revenue hit was there from the loss of that?

George Babich, Jr.

Well we really haven't disclosed that, but its not a massive amount. It had an impact, but not a massive amount. Roughly about $1 million or a little under $1 million.

Jeffrey Kessler - Imperial Capital

All right. As you move into phase three, because clearly, at least in the first quarter, either by good fortune or by the fact that you have -- and most of it is the fact that you worked on it, you have gotten margins and you've gotten your discipline and your processes in place. The question is now, can you morph that discipline at the same time to removing into a higher revenue mode? I noticed that you have made some interesting acquisitions in terms of people to do this. How do you start improving the revenue flow at the same time that you are continuing to be very-very disciplined on your margins? Its kind of hard to do both at the same time?

George Babich, Jr.

It's a great question. As I mentioned, Farrokh Abadi who has had in the past, responsibility for innovation, both R&D and product management, will now hand that over to Uwe Sydon, and that will free up a good portion of Farrokh's time to be focused on the -- kind of the inquisitive opportunities to grow the business.

While at the same time, Uwe is utilizing his deep knowledge and experience in managing the whole operation side of the business, manufacturing and supply chain and marketing, working extremely closely with Per Levin, who runs the front end of our business for MAS and RFID. So I don't believe, we will lose any of the discipline that we put in place, but it's a great question Jeff. I am not from Missouri, but I will be from Missouri on this one and I will be watching it carefully and something -- and it has got to be proved obviously. But I believe we have segregated it, in such a way that we can maintain the momentum, number one.

Number two, a lot of what's taking place for process improvement, margin enhancements, all of these initiatives are being driven by the worldwide finance organization who are not being distracted by the growth initiative for the most part. So I think that discipline in the finance organization will help ensure that it continues, and then the better reporting that is being put in place, so that we can watch it, monitor on a real time basis. We will make certain that we don't -- that we aren't surprised at the end of the quarter, that we had some slippage.

With respect to internal growth, Uwe will be joining us at the end of May, and that's going to bring a real senior level person, focusing on product innovation. I want to see much more come out of our R&D group. Our product managers are being trained, not only on pricing as I mentioned, but we saw the customer, kind of philosophy and initiatives, and how to really understand what the customer needs and to bring those ideas to the R&D group, so that we can commercialize them.

So I am not at all pleased with -- obviously our growth, organically, and we are going to be focusing on driving that organic growth and inorganic growth. And I think we will be able to do it, it was clearly just phase three for a reason. We had to walk before we could run, and I think we are in a position now that we can do that.

Jeffrey Kessler - Imperial Capital

Okay. Now speaking of that, can you give us some type of update on the status of -- you are not going to tell the status of who you are bidding with and bidding against. But a general status of what's being spec'ed out there, what's being asked out there. What type of business, you think you're going to be seeing to be bidding on, over the course of the next six months; given that there was a lot of, obviously acceleration last year, than there was some slippage at the end of last year. So if you could give us an idea of where the state of the customers are at, in terms of their willing to start putting out capital projects?

And the second part of that, kind of directly related to that, is the status of the -- if you want to call it the rebid or the reinitiation of the U.S. government business?

George Babich, Jr.

Okay. Well that one is -- I'd settle the last part first. That business is teed up again and with the government, and we continue to move forward, that was a delay and we expect to be able to fully execute that this year.

With respect to what we might be looking at, I think the way we have approached to adjust this, we stepped back and said okay, what are our core competencies, kind of the traditional way of looking at things. We don't want to step too far outside of our core competencies. We want a bolt-on and add towards synergistic acquisitions that can drive value for our customers. We can do that a number of ways.

Today, retailers more than ever, you read it all the time. They are thinking about the customer experience. So what can Checkpoint do, to help retailers with the customer experience, and it really is focused around having the right inventory in the right place at the right time and at the right price. So I think, with that pretty basic approach, we can help them with inventory management beyond passive RFID and active RFID. We can help them with inventory management and other verticals and other categories within the verticals that we are currently in. So we could be looking at technologies that are -- we are looking at technologies that are different than those that we have today.

We could also leverage our worldwide field service footprint that we have out there. We have a tremendously skilled group that is -- potentially can be leveraged even more through external opportunities. So there are a number of things we could do within our current business, and we can also leverage our technologies outside of retail. We do it with the government business that you just referred to. I think there is potentially opportunities that we are looking at, that are outside of retail. It wouldn't be a distraction, but would leverage the technology.

So there is a number of facets to this strategy. We have engaged consultants to help us through this process, and it should be -- we will see what happens when we get through the process, and hopefully we come out of the other side with some opportunities, that are compelling that retailers won't have an issue spending money, because the ROI will be there and because it will enhance the customer experience.

So you have to be determined, but stay tuned, we will keep you posted, as we move through this.

Jeffrey Kessler - Imperial Capital

Okay. Finally, and just as a follow-up to the last question that was asked previously. With regard to the -- particularly with regard to the gross margin which is somewhat, in some cases less controllable. What in that gross margin increase that you saw in the first quarter, granted the first quarter is the smallest and most volatile. But what do you see in that quarter, that is most controllable, and what's least controllable, when we come to take a look at your gross margin again in the second and third and fourth quarter this year?

Jeff Richard

Hi Jeff, this is Jeff. So you're right to think about our first quarter as you are thinking about it. We think about it the same way. We are excited, but we need to see this again and again every quarter. So yet some of the things that -- I mean, you think about the things we talked about in the past. We have several projects that we are working on and some of it is that - the profit, all of our profit improvement programs. But I'd say the disciplines that George talked about earlier, about pricing, I think that's a real thing.

At the beginning of the year, we told you guys that we not only put the disciplines in place, but we also tied incentive compensation to profitability, rather than just revenue. That drives things sustainably I think. So if you were in the company here, two years ago, a year ago, the work profitability wasn't spoken of as much throughout the company. Now its pervasive. So that's something that we lead in most of our conference calls and we talk about a lot of projects that are wrapped around that. So I think that's real.

Manufacturing cost savings, that's something that we have always focused on, we are still focused on that, we have got projects there that are real. And so we are always looking to be more efficient, and so I think that's real. We did have big ramp and still are -- from a Family Dollar in volume running through our plan, so we have been in kind of maximum capacity. I think you called it out last quarter. So we are seeing variances, the positive variances come through the first quarter, so that depends on the volume sustainability. So we got to keep winning, the 45% of our business that's not recurring, that we have to go keep winning every year. As long as we keep winning that 45%, that will keep the volume through the plan and those variances would still come through.

Then we do have a project in the field service, that we are doing some good work there, and I feel that that's probably something that we are seeing. But we got to -- its hard to dig now and see, as you said in margins, we need to -- we see it at a consolidated level. We just need to see that consistently through the quarters, before we get ecstatic.

George Babich, Jr.

And I'd add Jeff that, while we have made good progress, I am not happy with -- certainly wasn't happy with what you reminded us of with the fourth quarter where we had a pull back. And so, we have a plan. We have a plan that we had laid out and with objectives on where we want to be on operating margins, and we took a step back in the fourth quarter, but that doesn't change our ultimate goal. So we have got to recover from that and continue to grow margins. And I think these are sustainable type programs, but everyone will be hyper focused on it, and we will be faced with other issues. Like we still are a small company that faces all of the vagaries of those large retailers, and we will see what happens, as we progress through the year. But we certainly are focused on driving margins, even higher than they were in the quarter.

Keep in mind also, we are at a point now where some of the -- this consumable business that we have been able to drive as a result of the new hardware rollouts. While it has been very positive and that we have turned around of what was a four year decline in our labels business and now for the past year, have been on a real -- more than a year on our uptick. That's the good news.

The flipside is, we are having to add capacity now, because we have kind of -- we are bulging at the scenes and we will be doing that, and there is always a risk when we do that, now that you have a blip. So we will be watching that very-very carefully late in the second half of the year, to make sure that's as seamless as possible. We have baked into our forecast, and therefore our guidance, what we think could happen. Ultimately, it will be better for margins, but there is always that transitional period.

Jeffrey Kessler - Imperial Capital

Okay. Thank you very much.

Jeff Richard

Thanks Jeff.

George Babich, Jr.

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Chris McGinnis with Sidoti and Company. Please proceed with your question.

Chris McGinnis - Sidoti and Company

Good morning. Thanks for taking my questions guys.

George Babich, Jr.

Good morning.

Chris McGinnis - Sidoti and Company

I just have two questions. Just on the revenue itself, you need to talk about obviously the positive mix shift. I am just wondering, was there may be a outlier in terms of orders for the consumable tags, like may be just to -- maybe you see a little bit more demand, or do you see that playing out consistently throughout the year, maybe at the level that you saw this quarter?

George Babich, Jr.

Well two things, I am assuming you are talking about kind of the EAS business, but I think it applies to the ALS business as well. I will start with what's happened with ALS. The RFID program is just continuing to gain momentum and are a little bit beyond our expectations, to be honest with you. But we just, again, don't know you're dealing with retailers and we don't know for sure. But right now ewe feel pretty good about that momentum building, and the issue there is us improving the margins, as that business grows, with the RFID labels.

The EAS labels, it’s a function of those rollouts, it’s a function of us adding Family Dollar most recently, and prior to that their European retailers last year, driving this uptick. But its also a function of our guys, day in and day out, grinding it out with the customers, and to the extent you can improve the pricing with existing customers, but moving to a different product or whatever it might be, you're driving obviously higher revenue and higher margins.

So we think that -- we have just begun that process, so that margin initiative through pricing is obviously very valuable on the top line and on gross profit margins. So they are just glowing [ph] right through.

So I don't see it necessarily as an anomaly. But again, I sat here in October, November, and explained how we are dealing with retailers and the economy and all of that. We got slammed in the fourth quarter, okay. In all, this is a very lumpy business. So there is nothing unusual that took place this quarter, as far as pulling in revenue in or having revenue drift over from the fourth quarter of last year.

Nothing unusual like that, if you recall last year in the first quarter, I did report that we had some revenue that spilled over from the fourth quarter that we didn't anticipate and pulled up from the second quarter that we didn't anticipate. So we actually -- on the first quarter of last year said, just a little bit better than expected. I don't have that this year. This is just kind of a normal business, more disciplined. We are a long away from running the business optimally. We are a long way away. So we are making progress, but we are still years away from getting the -- where we need to be, to continue to drive this improvement.

We won't make our goals in getting EBIT margins that are acceptable, unless we continue to run the business more efficiently. And the good news is, there is still a lot of juice left in that opportunity.

Chris McGinnis - Sidoti and Company

Thanks. I meant more or less pulling forward or pulling back, that's all I was trying to get at; because that's the last time we saw, I guess, profitability in the first quarter in 2010. So thanks for that, I appreciate that. I think, digging a little bit more into EAS, how many -- I guess, when does the Tesco program end or to comp against the end, and what's driving through right now? FDO is I believe in -- also in for your past calls, is that right? Maybe just give us a little bit of the larger announcements you had and at what stages they are at?

George Babich, Jr.

Well we began actually Tesco in the end of 2012 and the same thing with the other retailer in Europe. We are getting -- and then we had Family Dollar, it was the major opportunity that was launched last year. So those were the three biggest that we have gone public with, I guess from an EAS standpoint. Obviously net income addition, Kohl's and Oxylane on the RFID side or launch. The beauty of that -- there is a comping of that, that some point in time. What the beauty of those arrangements are, that we are continuing to build more and more and the way the relationship with them, and hopefully, expanding those -- the sales of those EAS tags.

So its -- I can't give you exact dates right now, I don't know if -- off the top of my head, one we actually launched and how fast they ramped up and when we will actually anniversary that. I just couldn't do that. But -- we actually have underperformed in some areas and on the EAS side versus what we expected, and we have overperformed a little bit on the ALS side with RFID tags. But I can't answer that specifically.

Chris McGinnis - Sidoti and Company

And then the Family Dollar, that is going through that -- as we said before, that will be a project that we are going to be working on all year. So that would go all the way through this year? That's hardware installation?

George Babich, Jr.

That's a good point. Last year, we installed out of the 8,000 stores, we probably had already done close to 2,000, but 6,000 new ones this year will be added. Less the 400 that they decided to close. But hopefully, they are still on target. There is a lot of that movement taking place.

Chris McGinnis - Sidoti and Company

Understood. I am just trying to get a feel for, maybe when you get to that positive on the top line, and maybe, can you speak a little bit about the RFID kind of portfolio, in terms of your pilots and do you expect any more to come out of the pilot stage this year. If you would just talk about that may be a little bit?

George Babich, Jr.

We are moving along with the pilots. Retailers are torrentially very slow, and they are inching along. They go from one store, proof-of-concept five store test. 25 store retest on a broader basis, so on and so forth. So they are moving along. The pace isn't -- I am not happy with the pace, quite frankly. We have a number of them, that we are moving, and I expect to see us continue to have substantial growth year-over-year, but I'd like to see us moving along, even a little bit more quickly. But we are kind of dealing with their pace, with the retailers, and some of them had difficult 2013s, and they did pull back on CapEx and on timing of some of the investments like this, whether its even the OpEx.

So we are challenged. It varies by geography, it varies by the vertical that we are dealing with. But I'd say overall, no one has it really accelerated their RFID plans, other than the customers, the two that we have talked about, they have done better than what we had initially thought. But none of them that are in test -- really has accelerated their programs. I think they slowed down more than accelerated.

But we still think that on balance, there is a great opportunity here for us. The elimination or the virtual elimination of the Round Rock patent license issue, I think is going to help in North America. The ROI is there. So it is a function of when retail is going to kind of open up the books or their check book with respect to CapEx. But the ROI remains very-very attractive.

Chris McGinnis - Sidoti and Company

Sure. And then just two last real quick questions. One, just on the -- you talked about acquisitions. Maybe just give a little bit of a scope of what you're looking at, and maybe -- what do you need in the portfolio now, that maybe you don't have, that may be interesting?

George Babich, Jr.

Yeah, I think, as I mentioned earlier, a number of things that could help us with our core business, EAS business and helping retailers manage them until we are a -- much more effectively. So that they can -- from dealing with the omni-channel issues that they have, they can feel comfortable that inventory is accurate in every store. And so we will be looking at both hardware and software to accomplish that.

Then also, on the RFID side, we think that there are opportunities, again from a hardware and software standpoint. Within retail, that might be real value drivers for us, and then outside of retail, we think there may be an opportunity for us to leverage RFID, even more than we already have with our government asset tracking business.

And then, as I said, our field service organization around the world, is a real asset. And there are some opportunities there where we could help retailers as well, with some new product opportunities that might help them with better managing their inventory.

So its really -- its focused on improving the customer experience through merchandise availability and visibility, so that they -- its available and they have a real time inventory accuracy, so that they complete [indiscernible] the customer. So its going to be focused on a number of different facets.

I think more importantly than anything else, is that there will be a very disciplined approach, and that we will have an end game in mind, as far as what our return of investment expectations are. Therefore, what we believe we can afford to pay for something, and we will be very-very disciplined about. And that we will be very disciplined, like we have been over the past two years in project management and making certain that in the cases where there are -- we buy the business from the synergies, or an opportunity that we deliver on both synergies.

So we are excited, because the balance sheet is with our new bank deal that we had in place last December, that's very strong, and we are in a net cash positive position. We probably have $250 million to $300 million of drypowder, and we will spend it wisely.

Chris McGinnis - Sidoti and Company

Got you. And then just lastly, just looking at the guidance. I guess when you get to the bottom line of the guidance, it may seem conservative. But I guess, what's holding you back from having -- you just had one best quarter in four years to -- is it more about the top line demand, or is the margin profile, as that changes throughout the -- kind of the rest of the year?

George Babich, Jr.

I think its -- again it’s the lumpiness of this business. You just never know, one customer, big customer, shutting down a program can have a significant impact, as we saw on the government shutdown in Q4. So obviously, our year-over-year EBITDA improvement in Q1 is kind of more than the midpoint of our guidance for the full year. So it does beg the question.

But at this point, we are just too early in the year, to be able to -- with confidence, with the bulk of our profitability coming in Q4 and Q3, to think any differently about it. We are very excited, obviously, but cautious about it as well. We will stay very focused on it. I don't know, Jeff, you had any thoughts on that?

Jeff Richard

I would .I mean, if you look at this business, and as you said its just very seasonal. We have achieved one-tenth of the EBITDA or one-ninth of the EBITDA for the year. So its real early. The project that I kind of walked through earlier are still in the embryotic stage, so its just hard to declare victory yet. So yeah, we just -- we want to make sure that we monitor the business closely, and see how it performs this next quarter, and then third quarter. We don't want to get overly excited.

Chris McGinnis - Sidoti and Company

Understood. All right. Well thanks again, I appreciate the time and congrats on a great quarter.

George Babich, Jr.

Thanks Chris.

Jeff Richard

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Kapsch with Topeka Capital Markets. Please proceed with your question.

Chris Kapsch - Topeka Capital Markets

Yeah. I wanted to follow-up on the discussion focused on the acquisition scope. And I appreciate your comments about wanting to build out some capabilities focused on enhancing the customer experience and merchandise disability in particular. And the question I guess is really -- is it the way to think about this, considering your existing product offering and strategic positioning. Is it right to think about, in the context of what you suggest that EAS is really evolving into more than just theft prevention. But its really -- its EAS that's evolving into merchandise availability and management, and -- is that a right position longer term, and if that's the way you are looking at things, the type of deals that you would look to add to your capability; are they more like nice to have opportunities, or really more need to have opportunities, given your current sort of offering?

George Babich, Jr.

Chris, we are early into this process. But thinking about it obviously for -- since the middle of last year, as we started to pull out of the dips that we encountered. So [indiscernible]. But it's yet to be determined. We are going to [indiscernible] our discipline, the way we have hired a consultant to help us understand the market size, the customers, the competitors, and so on and so forth. But the biggest issue when you read about now, that the internet accounts for 20% of all sales. So the biggest issue for brick and mortar retailers, where we have a really deep and long relationships with them, is how do they compete wit the Amazons of the world? So there is whole omni-channel initiative that you hear about. It’s the one that we are focused on.

Brick and mortar is not going to go away. What's going to happen, I think is, there will be fewer customers coming in the store, and they will want to make sure that they are getting a bigger portion of their wallet, when they do come in the store, and they make -- how do they get them into their stores opposed to someone else's store.

We think that there are opportunities for us to help retailers, ensure that -- like used to products not stolen, that's helping them with inventory management and increasing sales. That's the upside of EAS. But as EAS evolves with our Alpha products, which I am not happy with -- I think there is plenty of opportunities for us to add to that product portfolio, that could help retailers. In particular, in Europe, and in Asia.

I think, those will be a piece of the customer experience, but RFID still requires compliance, somebody walking around with a gun, that sort of thing. So making it more real-time, 24/7 inventory accurate. Giving them the capability to manage their prices on the products electronically. So in store and online, so that it would sink at any point, and any time of any day. Products, they can pick the SKUs to go on sale and go off a sale without having to have someone put it up for sale, stick around a product, and then remove it.

There is a lot of things, we can do, to help retailers with the omni-channel imitative. We have the hardware today that probably gets us 75% of the way there. There is software capabilities that we need to acquire, I think to help flush this whole thing out. We have invested in the capability internally, to put all of our solutions on one platform, which is very-very important to retailers. There was a former retailer, I can attest to that. And so we can put our -- use our old platform to put our EAS software, our Alpha, RF, everything and anything we add in addition to that, on to this one platform.

So there is a lot we can do to help retailers in that regard. And internal development and external acquisition, we will look at each, build versus buy situation, and we will make a decision, what makes more sense. How do we get to market more quickly and commercialize it much more quickly.

Chris Kapsch - Topeka Capital Markets

I appreciate the color. I did have one, just sort of housekeeping follow-up. The -- just the CapEx expectations for the full year, I think you mentioned the need to add some capacity. I think RFID, labels obviously, but may be even ALS. Just wondering, what the expectations are for CapEx for the full year based on your current visibility?

Jeff Richard

Yeah, I think -- it remains the same. I think we are going to be around $20 million, is what we are talking about internally.

Chris Kapsch - Topeka Capital Markets

Thank you.

George Babich, Jr.

I think we have time for one more call.

Operator

Thank you. Our next question comes from the line of Glenn Primack with PEAK6. Please proceed with your question.

Glenn Primack - PEAK6

Yeah. You've done a nice job on refocusing the business and improving the profitability. My question is just going to the acquisition front. I look at that -- your business, there is this scarcity value that [indiscernible]. So you know, it seems like any transaction that you're going to do, tech wise, those are going for like -- north of 50% higher than your current multiple. So is the bigger opportunity being able to address other industries and leveraging your technology?

George Babich, Jr.

Again we will -- Glenn, we will look at -- as I mentioned, all of those opportunities. Some will be internal development, some will be external acquisitions. And yeah you're right, these 50, 60, 70 multiples on software be pretty difficult to swallow. We are developing, as I mentioned software capabilities, adding for software capabilities internally as well.

Glenn Primack - PEAK6

Then on the software front, it seems like obviously you're learning how to price that better, relative to the -- there are these other companies that all have a good mix of software and hardware and it gets priced like hardware?

George Babich, Jr.

Yeah. That's something that we are very focused on as well. Getting the value out of the software and then ensuring we are pricing it properly, opportunities to bundle things together, and there is opportunities to sell more of a -- a menu, of [indiscernible] basis. So we are in the beginning, this is something that we have begun working on over the past three to four months. So its really on, and we are going to continue to work on how we manage every aspect of our business with more discipline.

Jeff Richard

I would say more than just software; obviously software is a piece of our offering that -- the discipline flows through really every product. We are teaching our guys how to sell value, and when you are a market leader, that's what you do and we are certainly a market leader.

Glenn Primack - PEAK6

Okay. Great looking forward to what comes next.

George Babich, Jr.

Perfect. Glenn, thanks.

Jeff Richard

Thanks for your call.

George Babich, Jr.

Okay, with that in closing, let me add that -- it has now been two years, since I stepped in as, actually as the interim CEO at that time. And while we have had some bumps along the way, I believe Checkpoint is no doubt stronger, leaner, more nimble and more focused than ever. And as always, I'd like to thank all of my Checkpoint colleagues around the world, for their continued dedication to create a new Checkpoint.

Thank you and have a great day everyone.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Checkpoint Systems' (CKP) CEO George Babich On Q1 2014 Results - Earnings Call Transcript
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