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Multi-Color Corporation (LABL) F3Q08 Earnings Call  January 25, 2008 11:00 AM ET

Executives 

Francis D. Gerace – President & CEO

Dawn H. Bertsche – Senior Vice President, Finance & Chief Financial Officer

James H. Reynolds – Corporate Controller & Chief Accounting Officer 

Analysts 

Casey Flavin – CJS Securities, Inc.

Stephen O’Neil – Hilliard Lyons Inc.

Jonathan Lecture - Feroda and Company 

Presentation 

Operator 

Good day ladies and gentlemen and welcome to the Multi-Color Corporation third quarter 2008 earnings conference call.  My name is [Jahidi] and I will be your coordinator for today.  At this time, all participants are in listen only mode.  We will be facilitating a question and answer session towards the end of this conference.  (Operator Instructions)  As a reminder, this conference is being recorded for replay purposes.  I would now like to turn the presentation over to your host for today’s call, Mr. Frank Gerace, President and CEO.  Please proceed. 

Francis D. Gerace 

I would like to welcome everyone today to Multi-Color’s fiscal 2008 third quarter conference call and webcast for the period ending December 31, 2007.  We are also broadcasting this live over the internet accessible through our Multi-Color website at www.MulticolorCorp.com on our investor relations page. 

Good morning.  I’m Frank Gerace, President and CEO of Multi-Color and I’m joined here today with Dawn Bertsche our CFO and Jim Reynolds our Corporate Controller.  We are pleased to report to you on another successful quarter and to use this as an opportunity to communicate with you in a direct and open forum.  But before we begin, Jim, would you please redo our Safe Harbor statement with the participants. 

James H. Reynolds 

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

I also want to call your attention to the special charges that were included in our financial results for both 2007 and 2006 as reported in our earnings release this morning.  During the quarter ended December 31, 2007 we recorded a non-cash charge of $957,000 in other expenses to reflect the change in fair value of foreign currency for contracts associated with our pending Australian acquisition.  In order to protect ourselves from a weakening dollar, we entered into forward contracts to purchase Australian dollars.  The contracts will be settled when the transaction is completed and any further gain or loss will be recorded at that time.  Also during the quarter, we recorded $292,000 of expenses related to our previously announced manufacturing expansion plan.  Combined, these charges total $0.08 per diluted share in the current year.  During the prior year quarter ended December 31, 2006, we recorded charges of $3 million related to two acquisitions that were terminated.  These charges reduced diluted earnings per share by $0.19 in the prior year. 

Lastly, and as previously announced, I want to remind you that we sold our packaging services business, Quick Pak on July 2, 2007.  As a result, the operations of Quick Pak are presented as discontinued operations in our consolidated financial statements for all periods and we no longer report any segment results. 

Francis D. Gerace 

Today’s conference call will follow the same format as in the past.  I’m going to begin with a brief description and overview of how our company performed this quarter and then Dawn is going to follow up with some detailed analyses of our financial results and then I’ll conclude with some final comments.  Then we’ll be prepared to take your questions. 

We had another strong third quarter.  Our earnings per share from continuing operations adjusted for the special charges were up 23% in spite of a modest revenue gain of 3%.  During our last conference call, I indicated that finished goods inventories that we had built during the second quarter, that we expected them to be shipped during our third quarter and, in fact, that did happen.  However, new orders to replace that inventory were not at the levels that we expected.   

Also during our last conference call, I stated that a number of cost reduction measures had been implemented to mitigate the earnings loss that we expected from the divestiture of Quick Pak and to leverage our sales growth.  On a normalized basis, these measures saved us $450,000 during the period and had a wonderful and a very positive impact on our results. 

Our gross profit margins remain steady at 18% and we incurred approximately $292,000 of expenses related to our manufacturing expansion plan that we talked about in the last quarter.  However, I believe that the significant investments we are undertaking in acquiring three new presses in this new state of the art manufacturing facility, along with the consolidation of our current Batavia and Troy facilities, will result in improved manufacturing efficiencies while providing the needed capacity for long-term growth.  To provide more details of our third quarter, I will now turn the call over to our CFO, Dawn Bertsche. 

Dawn H. Bertsche 

Thank you all for joining us today.  For those of you who are listening and viewing our webcast via the Internet, please take a look at slide number one, Net Revenues.  For the third quarter, net revenues increased to $48.3 million or 3% over the prior year.  The sales increase was entirely organic as no new acquisitions were consummated during the period.  In addition, year-to-date net revenues increased to $152.6 million representing a 7% organic growth rate. 

Now advance to slide number 2, Operating Income.  Operating income for the third quarter was $3.8 million compared to $456,000 in the prior year.  As the magenta bars reflect, excluding the special charges, adjusted operating income increased 17% to $4.1 million from $3.5 million in the prior year.  Although gross margins were flat year-over-year, SG&A expenses were reduced from 11% of sales to 10% of sales.  As a result, adjusted operating income margins increased to 8% from 7% in the prior year.  On the right side of the page is the year-to-date numbers and year-to-date ending December 31, 2007 operating income increased to $12.8 million from $9.9 million as reflected in the orange bars.  In the magenta bars, excluding the special charges, adjusted operating income increased 7% to $13.1 million from $12.2 million due to the year-to-date 7% organic sales growth. 

Now advance to slide number three, Net Income.  This next slide shows both income from continuing operations and total net income for the third quarter and year-to-date for fiscal 2008 and 2007.  Now, I realize this slides looks very busy; however, due to the special charges and the divestiture of Quick Pak, we have presented adjusted numbers in order for you to better understand our results.  So, starting with continuing operations on the left-hand side in the orange bars, income from continuing operations increased to $2 million from $300,000 last quarter.  Excluding the special items from both periods, income from operations increased 27% to $2.8 million from $2.2 million in the prior year.  In addition to the SG&A expense reduction we talked about, income from continuing operations was positively impacted for the quarter by a 70% reduction in interest expense or $174,000 as compared to the prior year as we had no outstanding debt during the quarter.  Also, our effective tax rate for the quarter from continuing operations decreased to 33% from 37.5% in the prior year due to lower state tax expense and our expected annual tax rate for fiscal 2008 is now 37%.  Total net income for the quarter increased to $2.1 million as we recorded the reduction in state taxes related to Quick Pak divestiture which resulted in income of $152,000 for the quarter.  On an adjusted basis, total net income decreased from $3.4 million last year to $3 million in the current year as a result of the divestiture of Quick Pak. 

Next, we look at the year-to-date ended December 31, 2007 in the graph on the right-hand side. Income from continuing operations increased to $7.8 million.  Excluding the special charges, income from continuing operations increased 18% to $8.6 million from $7.3 million due to sales growth and the reduction in interest expense.  And then finally on this page, the year-to-date total adjusted net income increased from $9 million to $15.6 million due to the gain on the divestiture of Quick Pak. 

So now we move to slide number four and it’s a little busy too, but let me just review the earnings per share numbers with you.  Excluding the special charges, which are reflected again in the magenta bars, earnings per share from continuing operations increased 23% to $0.27 per diluted share for the third quarter and 17% to $0.83 per diluted share for the nine months ended December 31, 2007.  Now moving to the right-hand graph, adjusted earnings per share for the quarter decreased from $0.34 to $0.29 due to the divestiture of Quick Pak and adjusted earnings per share for the year-to-date period increased to $1.51 from $0.88 due to the gain on the sale of Quick Pak recorded in the second quarter. 

And finally slide number five, shareholders’ equity on the next slide, a lot simpler shows the growth in shareholders’ equity which increased by $15.6 million from March 31, 2007 primarily due to our increased operating earnings and the gain on the divestiture or sale of Quick Pak. 

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

Francis D. Gerace 

Before I open up the conference call for questions, I’d like to comment on a few other items.  Our manufacturing expansion plan is progressing well and the first of our new presses began producing commercial product last week.  We expect our Troy, Ohio facility to close by the end of this month with all of their business having been transferred to the new plant.  The new digital press installed in our Green Bay, Wisconsin location began producing commercial product during the quarter and we are very pleased with the results.  We expect to take delivery on our third recently purchased press in early March and the transfer of business from our original Batavia facility will proceed through this quarter.  We expect this phase of the project to be completed by the end of June. 

We are all delighted with the signing of a definitive agreement to acquire Collotype International headquartered in Adelaide, Australia and expect to close on or about January 31st.  This is the first large step in achieving our long-range global strategy and provides a second growth engine for our company.  We welcome the entire Collotype organization to Multi-Color and look forward to the significant opportunities this combination provides.  Collotype will increase our revenue base in excess of 60%, significantly expanding our customer base into new markets and regions across the globe.  With revenues of approximately $130 million and operating margins similar to ours, we expect the acquisition to be accretive to earnings immediately upon completion. 

Lastly, we mentioned in both our earnings release and during this conference call today the positive impact of our cost reduction measures have made on our earnings.  I want to thank all of our associates for helping us to tighten our belts this year as we proceed through the transformational year for Multi-Color.  This concludes the formal presentation and I will now open up the discussion and entertain your questions. 

Question-and-Answer Session  

Operator 

(Operator Instructions)  Please stand by for your question.  The first question comes from the line of Casey Flavin.  Please proceed. 

Casey Flavin – CJS Securities 

Before we get to specific questions on Collotype, I’d like to better understand the revenue shortfall in the quarter.  Can you help us understand how much of it was due manufacturing turnover, or is it more of a demand issue? 

Francis D. Gerace 

It had nothing to do with any manufacturing turnover or any manufacturing inefficiencies or problems operationally and what we experienced in the third quarter were just a general pullback, predominantly with a couple of customers, and moderately with others, it was a general pullback in the third quarter and our assessment of that is that there was some inventory adjustments going on at those customers at year end.  Now since that time, over the last two weeks, we’ve seen a significant increase in new orders entered in our system.  As a matter of fact, I think last week the number of orders entered in our system hit an all time record high since I’ve been here.  So, I expect that we’re going to see a solid fourth quarter. 

Casey Flavin – CJS Securities 

Okay, and given the current environment, it is obviously soft, you spoke a little bit about the customer demand.  Looking forward a little bit more, the increase in orders, do you think that’s more due to their adjustment? Or what is your expectation looking out over the balance of the year and, more importantly, into fiscal 09? 

Francis D. Gerace 

We don’t get complete transparency into our customers’ business, so it’s kind of a judgment call and assessment on our part having – trying to get as much information in discussions with them.  I don’t think that the surge in orders that we saw over the last couple of weeks is because now, they’re filling the pipeline with new orders as a result of their year-end inventory adjustments.  I think the inventory adjustments they made, they want to keep and from a cash flow perspective and all that, I think it’s just – again, we’re in the consumer products, fast-moving consumer products business, and a lot of the brands that we support are what we call kind of staple consumer products and I think it’s just ongoing new business and ongoing business.  As a matter of fact, our new business by the way, our sales organization have done a great job this year.  A lot of these increases that we’re seeing in organic growth and in sales revenue is coming from new customers. 

Casey Flavin – CJS Securities 

Then regarding the manufacturing expansion plan charges, can you help us understand why that was considered a one time charge?  And just verify if that did impact gross margins in the quarter, too. 

Francis D. Gerace 

I think that’s an excellent question.  I guess we didn’t call them one time, we called them special charges.  Hopefully as we continue to grow, we’re going to continue to make investments from time to time and, of course, associated with those projects, there are going to be expenses.  But the reason why we called them out this time is because this is a major transformational project, consolidation, manufacturing consolidation move on our part.  We openly discussed this project and announced this project in the previous quarter and we want to keep our investor base fully aware of how that project is proceeding and the non-capitalized costs, or the expenses that are associated with that, and how it’s impacting income.  Now, when you look at that $292,000, in fact, I think it may have had maybe .03 or .04% on our gross margin, so it wasn’t a huge impact, but it’s still $292,000 that impacted operating earnings. 

James H. Reynolds 

One other item I wanted to point out is about two thirds of that total cost related to severance and those types of things from our Troy, Ohio facility.  So, they are truly a one time non-recurring type items. 

Casey Flavin – CJS Securities 

Okay, that was helpful. Great.  And then on to Collotype, I’m sure you’d like to provide maximum transparency for your shareholders.  If I can ask you to sort of discuss the revenue growth of the business over the last few years and give us a sense of how much of that was organic.  And what are your future growth expectations for the business? 

Francis D. Gerace 

When we look at Collotype and their business over the last 10 or 15 years, it’s very similar to what you would see at Multi-color in terms of their organic growth and their growth through acquisition.  It’s very similar.  They have carved out a very commanding position in the wine and spirits market in Australia, in South Africa and here even on the West Coast, the Napa Valley.  They are the market leaders, both globally and in those specific wine regions, that I just mentioned.  Going forward, as we did our modeling with Collotype, we expect their growth rates to be similar to ours, as I’ve mentioned time and time again over the years taking a long-term view of Multi-Color, we set as a target for ourselves, long term, not for the quarter, but long term in the 8% growth range and that’s exactly what I expect them to do and I fully believe that they’re capable of doing that. 

From a margin standpoint, they’re margins are – They are a very well managed and, I consider them to be, a very profitable business.  Their margins are very similar to ours.  We don’t expect there to be any radical or significant capital requirements.  They’ve kept that business very well equipped, up to date, very well capitalized with equipment.  Dawn and I visited every single one of their facilities in every location, met and visited with and presented management reports and updates from every management team in every location.  It’s just very, very well managed.  They’re on top of their business.  What I experienced and saw in all of those locations is what I experience and see when I go to Multi-Color locations, very dedicated, very qualified experienced associates that take a tremendous amount of pride in their work.  They’re the acknowledged market leader.  Collotype, by the way, wins more international print quality awards than any other company on the globe.  So, they are like a high-class, top-flight company and we are extremely happy and pleased to be able to welcome them into our company.  Again, it creates now two growth engines.  We’ve seen great growth in North America, there is still significant opportunities in North America from an organic growth rate and acquisition wise, and it’s the exact same thing with Collotype in the different regions where they’re located. 

Casey Flavin – CJS Securities 

That’s very helpful.  I guess just one last question and I’ll hope back in the queue.  Can you give us a bit of a sense for, again the EBITDA margin of the business and the synergies that you expect to potentially realize from the deal?  If the margins are similar to Multi-Color in sort of the nine range it suggests a much higher multiple than you’ve talked about having taken place in the market before.  So could you talk a little bit more about that? 

Francis D. Gerace 

Quite frankly, what I find when we do these acquisitions, I always seem to pay a little bit more than I want to and the sellers always seem to get a little less than they want to.  But, I believe it’s a very fair multiple for the business, the EBITDA margins are similar to ours, I will say this – I guess what I can say is they won’t be less than ours but they’re similar to ours.  It’s a very well managed business and what was – There was another point to your question?  I’m sorry.  Oh, the synergies.  We’ve already started working on synergies, as a matter of fact.  A number of  Collotype people visited our headquarters here last month, they were the people in their purchasing department and in their technology department and they met with our leadership and our technology and purchasing people and we’ve already got a schedule of purchasing synergies that we expect to achieve at the get-go.  I’m not at liberty or prepared to say what those purchasing synergies are and how much, but I can assure you that I personally reviewed the schedule just this week and will be moving forward with those immediately and I expect those synergies to be beneficial immediately upon completion of the deal. 

Operator 

Your next question comes from the line of Steve O’Neil of Hilliard Lyons.  Please proceed. 

Stephen O’Neil – Hilliard Lyons, Inc. 

Just a couple of quick follow ups, Casey covered most of my questions.  The $292,000 in expenses incurred with the expansion that was in cost of goods sold? 

Francis D. Gerace 

That’s right, Steve.  Those costs are in cost of goods sold and therefore, are impacting the margin. 

Stephen O’Neil – Hilliard Lyons, Inc. 

In fact, that makes me wonder about something else which is you have indicated in the past that your level of business was so high and required such a high rate of capacity utilization that it was actually hurting your efficiencies and hurting your margins and I wondered if a little bit of fall off in their organic growth this quarter had eased some of those problems and allowed you to catch up?  And possibly your margins may have even been a little bit higher if you adjust for the charge, but then also would you feel if that had happened in this quarter? 

Francis D. Gerace 

I think that our margins, if it weren’t for the charge, and if it weren’t for a little bit of a pullback in the orders, then I think our gross margins would have been better in the third quarter. 

Stephen O’Neil – Hilliard Lyons, Inc. 

I’ll ask just a couple of quick questions about Collotype.  Do you have a handle on how much of your existing cash you will use in the transaction?  Or will you keep that and just borrow the amount? 

Francis D. Gerace 

We’re going to use all of our cash in the transaction.  This is actually a great question, I appreciate it, Steve, because it gives me a segway to mention a few other, I think important, things about this deal.  We will use all of our cash on hand in the deal and then approximately 30% of the remainder of the purchase price is going to be through the issuance of stock.  That’s significant for me, and I think it’s important for our shareholders because at the end of this transaction, the Collotype owners are going to be owning a little less than 20% of Multi-Color’s stock going forward.  I think that is just a significant indication of the commitment and the view that they have on what the value of this combined entity is going forward and they’re committed to it.  As a matter of fact, like I said, they’re going to end up with a little less than 20% and a large percent of that stock is going to be locked up for over a year.  So, they’re putting it on the line, so to speak and again, I met with all of their management team and they’ve got extremely talented and very good managers who now, as a result of the way the transaction has been structured, are very committed to it personally. 

Stephen O’Neil – Hilliard Lyons, Inc. 

What’s your rough cost of borrowing? 

Dawn H. Bertsche 

Right now, we have no borrowing so when we get into the transaction, based on our new credit agreement which I believe we mentioned in the – yeah we did – in the announcement on Monday, we talked about the fact that we are going to be executing a five year $200 million credit facility with an option to increase an additional $50 million with Bank of America.  That facility will give us not only the ability to consummate this transaction, but also to do future acquisitions and capital investments.  And based on that agreement, we are looking at about a 7% effective cost of borrowing rate. 

Francis D. Gerace 

And let me add onto that, I guess this is a great opportunity for me to acknowledge and recognize Mary Fetch, our Treasurer and our treasury team.  What a wonderful time to borrow money.  There’s been, as everyone knows, a flight to quality.  Our offering was over-subscribed.  We ended up getting offers well in excess of what we needed to borrow and now, as we see what’s happening with the capital markets in the economy and the pressure on interest rates and interest rate reductions, and the way Mary has structured the deal, this is just a great opportunity and a great time for us to put this new credit agreement together.  We’re very, very optimistic at the speed at which we’re going to be able to reduce that debt over the next three to five years. 

Stephen O’Neil – Hilliard Lyons, Inc. 

Just a couple of quick things for modeling purposes; if you do complete the deal by the end of January, you may have around two months of sales in your 2008 fiscal year. 

Francis D. Gerace 

Correct. 

Stephen O’Neil – Hilliard Lyons, Inc. 

And I don’t how this business runs from quarter-to-quarter and how much seasonality there is.  If you just annualize it, you’re looking at about $20 million in revenue for a couple of months, but I don’t know about the seasonality of their business.  Can you comment what you might get towards the end of the year?  And then, actually let me kind of lead into what is the seasonality of their business?  Do they have some quarters that are much larger than others?  Do they tend to be fairly evenly spaced through the year?  Can you comment on that please? 

Francis D. Gerace 

There’s not a huge amount of seasonality in the business.  Okay?  There’s not what I would call where I see a huge seasonality in the business and simply because the way the wine industry is structured and working today, wine gets bottled every day, every month all over the world.  Now, having said that and setting that aside, when I look at their numbers, there appears that they get a little bit of a bump in business from March through September, but it’s not significant.  Well, I don’t want to – it’s minimal.  But March through September are their strongest months.  That help you? 

Operator 

(Operator Instructions)  Your next question comes from the line of [Jonathan Lecture with Feroda and Company].  Please proceed. 

[Jonathan Lecture - Feroda and Company] 

Can you talk a little bit about the industries where you saw the pullback during this past quarter? 

Francis D. Gerace 

It was general, honest.  We saw it in beverage and we saw it in – I don’t think it’s an industry specific issue.  I think it was honestly a – we saw this a few years ago, we had a third quarter three or four years ago, we were experiencing the same thing and there was just this general contraction order to try to adjust inventories.  I’m wondering, quite frankly, I’m wondering if there was some psychological impact to some of the economic news that came out during the third quarter and people just wanted to get a little conservative and get their ducks in a row and reduce their inventory levels.  I’m wondering if it was that kind of an impact, but it wasn’t industry specific.  It was very general and broad. 

[Jonathan Lecture - Feroda and Company] 

And was it throughout the quarter or was it primarily in December? 

Francis D. Gerace 

It was November and December.  Actually, October was a very, very strong month.  We had a very strong October and we were damn excited at what we thought was going to happen the rest of the quarter and then we got into November and it just kind of dried up and pulled back and the same thing happened in December, but as I said, over the last two weeks we’ve seen record orders entered into our system. 

[Jonathan Lecture - Feroda and Company] 

And are those record orders also across the board, in terms of industries, as well? 

Francis D. Gerace 

Yes, they are. 

[Jonathan Lecture - Feroda and Company] 

When will the - I may have missed some of that but when will the new machines be at full production? 

Francis D. Gerace 

Well, actually I don’t expect them to be at full production for two years and let me explain that to you.  As we talked before, what you see in this industry is you start bouncing up to capacity so you’ve got to go out and make some capital investments in new equipment and you bring in a new press and that press has $10 to $15 million in new capacity and you just don’t fill that capacity overnight.  So, we’ve got three new presses coming in and I expect that it will take two years to be at full capacity on all three presses and I expect that we’ll be at full capacity on one and a half of them over the next year. 

[Jonathan Lecture - Feroda and Company] 

I guess I should have rephrased, that wasn’t exactly what I was asking, but thanks for the answer.  I appreciate it.  Really, when will they, or are they at capable of full production?  Are there any startup issues?  That sort of thing. 

Francis D. Gerace 

The digital press that we installed in Green Bay was up and running and producing saleable commercial product within a week.  And the press, the new 20-inch [Ohmet] press that we just installed in our new Batavia facility is up and running and producing.  As a matter of fact, we sold product off of it last week, so it’s ready to go.  Those two presses are ready to go.  As a matter of fact, I had a meeting just a couple of days ago with our sales leadership and they are very aware of the fact that, so to speak, the worm has turned here and no longer do we have capacity issues and we expect to get those presses full and filled as soon as possible. 

[Jonathan Lecture - Feroda and Company] 

Just looking at the one area on that other expense line, if you back out the currency loss I guess there was some other gain there.  Can you just talk about what that was? 

James H. Reynolds 

Jonathan, that’s a combination of a couple of things.  In the current year, it’s primarily interest income.  As you recall, we sold Quick Pak and had a high level cash proceeds that were invested this year.  Compared to the prior year, there was little interest income in the prior year as well, even though it turned up with the proceeds higher in the present year.  There was also an interest rate swap termination in the prior year that was about $180,000 that did not repeat.  So those are the components, the significant components when you strip out that foreign currency loss. 

[Jonathan Lecture - Feroda and Company] 

And just lastly, one question on Collotype, you mentioned that the margins will be similar.  Was that operating margins you were referring to or gross margins? 

Francis D. Gerace 

Yes, both. 

[Jonathan Lecture - Feroda and Company] 

Both.  Okay, so the SG&A levels would be roughly the same as well then? 

Francis D. Gerace 

Yes. 

Operator 

The next question comes as a follow up from the line of Casey Flavin.  Please proceed. 

Casey Flavin – CJS Securities, Inc. 

A couple of follow ups here.  Is there some percentage of the Collotype deal that’s driven by an earn-out?  And if so, what is the benchmark that has to be met? 

Francis D. Gerace 

Yes, there is.  As we indicated in our release, there is an additional, I think, $8.6 million earn out.  I think the release said $10 million, but that is actually $10 million Australian.  If you convert it, it’s about $8.6 in US dollars of an earn out and it’s based on them meeting some additional earnings goals between now and the end of June.  It’s based on earnings. 

Casey Flavin – CJS Securities, Inc. 

And then the breakdown of Collotype International versus US, how does that break out?  And will it be marketed through your existing sales force? 

Francis D. Gerace 

First of all, it will not be directly marketed through our US sales force.  However, just in the last week I’m beginning to see a lot of exciting emails going back and forth between their sales group and our sales group on some interesting customer relationships that we’re immediately leveraging.  So, although both sales forces will remain separate, as you know they’re very, very focused on the wine and spirits business.  But what we are going to do is we’re going to create cross border, cross oceanic relationships so that we can leverage the global customer base that they have and we have. 

Casey Flavin – CJS Securities, Inc. 

Now as far as the production expenses in this quarter that you’ve highlighted, do you expect to have additional expenses in Q4 and are those expected to carry over over the next couple quarters? 

James H. Reynolds 

Casey, we do expect some additional expenses in Q4?  I would say that, based upon the forecast, I’d just generally say they’ll be about a third of what we saw this quarter. 

Casey Flavin – CJS Securities, Inc. 

Also looking at Q4, as far as the startup expenses related to your plants, those probably should be relative offset by some additional productivity improvements.  How should we sort of think of that as far as margins are concerned? 

James H. Reynolds 

How should we think of it relative? 

Casey Flavin – CJS Securities, Inc.

How is that going to impact the margins in the next quarter? 

James H. Reynolds 

We’re making significant investments in that facility.  I don’t think it’s – I think that you’ve got to expect the margins to be right about where they were, I’d say in the 18% range.  I wouldn’t expect, even though as you stated – you don’t get the efficiencies until you fill the presses.   That’s what drives efficiencies is volume and until we get the new presses really filled up I don’t expect to see any major shifts or improvements in margins over where they are right now.  Looking forward, after these presses filled to capacity, a lot of goodness happens on the bottom line. 

Casey Flavin – CJS Securities, Inc. 

Just a couple more questions, Frank.  The SG&A was down again this quarter compared to last.  Can you give us a little bit of color on that?  And, more importantly, how should we think about that going forward for the balance of the year in 09? 

Francis D. Gerace 

I expect to see the same type of results in the fourth quarter with regards to reducing our fixed costs in our SG&A.  And as far as color on it, I have to tell you, no matter who you speak with, there’s a tremendous amount of focus that our people and our management are putting on fixed costs, both at the plant level and at the corporate level and what we’re seeing is significant reductions in discretionary travel, let’s say.  The only travel that’s allowed – A memo was circulated just about a month or two ago, the only travel that’s allowed has got to be specific to a customer requirement.  Travel entertainment.  So we’re putting a lot of downward pressure on that.  In the training area, if there’s some training that we have scheduled to do, we’re either delaying it or eliminating it.  There’s just a variety – anything that you can think of that’s in the fixed cost area is being scrutinized.  As a matter of fact, in the past we were a little flexible in terms of people making their own decisions in terms of discretionary spending, many of those requests now have to be approved by a manager or a supervisor before it’s allowed.   

You don’t save your way to profitability and you don’t save your way to success, but a couple of months ago when we knew we were going to go through this transformational period with the new Batavia facility and the consolidation, we knew that we were going to be experiencing some additional expenses relative to that.  We knew that we were going to take an earnings hit as a result of our divestiture of Quick Pak and that some of the fixed cost that was allocated to them, we were going to be burdened with in the North American business.  And so we all pulled together and said we’re not going to just sit here willy nilly and let these things happen to us and be victims by it and we’re going to do what’s prudent and what our investors pay us to do and take actions to mitigate all this until we get through this transformational year and then we’ll get back on course relative to the training and all of the nice, so to speak, things that you would do in an ongoing business. 

Casey Flavin – CJS Securities, Inc. 

That SG&A that you had in the quarter, should we consider that a good run rate going forward a little more specifically?  Or, are you looking at that more as a percent of sales below 10%? 

Francis D. Gerace 

I think you can look at it pretty much as a run rate. 

Casey Flavin – CJS Securities, Inc. 

Tax rate looking forward?  What are your expectations there? 

Dawn H. Bertsche 

37%. 

Casey Flavin – CJS Securities, Inc. 

And for 09 as well, Dawn? 

 

Dawn H. Bertsche 

I would say yes.  It’s going to be in that range, 37 to 38%. 

Casey Flavin – CJS Securities, Inc. 

How much cash do you have at the end of the quarter that’s going to go into the equity part of the deal? 

Dawn H. Bertsche 

It’s a little less than $10 million. 

Francis D. Gerace 

It’s probably around $8 to $8.5 million I think.  Just flipping through this balance sheet here.  

James H. Reynolds 

It’s about $7.5 million at the end of the quarter. 

Casey Flavin – CJS Securities, Inc. 

And on your revised bank lines, are there any restrictions on additional acquisitions? 

James H. Reynolds 

No. 

Operator 

You have a follow-up question from the line of Steve O’Neil with Hilliard Lyon.  Please proceed. 

Stephen O’Neil – Hilliard Lyons, Inc. 

Just one quick follow up and I’m not sure you can answer it at this time.  If 30% of the deal is going to be in stock, I just wondered are you going to use an average price for the last five days prior to the transaction, the last month?  I just wondered if you had any idea of what stock price we might use for our estimates? 

Francis D. Gerace 

The way the deal is structured, listen very closely.  It’s a 30-day average close prior to the date of close.  However, however, there’s a collar on that, so I don’t think I can disclose at this time exactly what the price is.  

Dawn H. Bertsche 

I would just use the current price, Steve. 

Stephen O’Neil – Hilliard Lyons, Inc. 

That’s close enough. 

Operator 

At this time, you do not have any more questions in queue and I will turn the call back over to Mr. Gerace for any closing remarks. 

Francis D. Gerace 

I want to thank all the participants on the call and our supporters.  As you could probably tell by the tone of my voice, I am very, very excited about this coming year.  No doubt, that with this transformation - we’ve got a dual transformation going on here in terms of consolidating some of our operations in North America to reduce fixed costs, to take us to the next level in terms of cost and capacity and there’s challenges around that project.  But I will tell you, in 25 years of business and having done many, many of these transformational projects, this is one of the best managed and most effective that I’ve ever experienced.  To have three presses in that new facility within a course of a week or two producing sellable product is nothing less than spectacular.   

Then on the international front finally, as you all know, it’s been our stated mission from day one to some day become a premier global supplier to our customer base and now with the acquisition of Collotype, I couldn’t ask for a more quality partner in our global strategy.  So, I’m very, very excited.  As I said, no doubt there will be challenges around some of these things, but I believe that we have the people in place and the talent in place to take Multi-Color to the next level.  I look very much forward to communicating to you on our next conference call and to bring you many more good news and exciting things happening at Multi-Color.  Have a good day, a good weekend and we’ll be talking to you the next quarter.  Thank you. 

Operator 

Thank you for your participation in today’s conference.  This concludes the presentation.  You may now disconnect.

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Source: Multi-Color F3Q08 (Qtr End 12/31/07) Earnings Call Transcript 
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