Checkpoint Systems, Inc. Q4 2007 Earnings Call Transcript

| About: Checkpoint Systems (CKP)

Checkpoint Systems, Inc. (NYSE:CKP)

Q4 2007 Earnings Call

February 27, 2008 10:00 am ET


Bob Joyce - Investor Relations, Financial Dynamics

Robert van der Merwe - President and Chief Executive Officer

Ray Andrews - Senior Vice President, Chief Financial Officer and Treasurer


Ajit Pai - Thomas Weisel Partners

Jeff Kessler – Lehman Brothers

Bob Labick - CJS Securities

Jerome Lance


I would like to welcome everyone to the Checkpoint Systems fourth quarter 2007 earnings conference call. (Operator Instructions)

Mr. Joyce, with Financial Dynamics, you may begin your conference.

Bob Joyce

Good morning and welcome to Checkpoint Systems fourth quarter and full year 2007 results conference call. Joining us from the company are Rob van der Merwe, President and Chief Executive Officer; and Ray Andrews, Senior Vice President and Chief Financial Officer.

If you have not yet received the copy of this morning results release please call Financial Dynamics at 212-850-5600, or you can get a copy off of the Investor Relations section at Checkpoint’s website. An archived version of this conference call will also be available through that website.

Statements in this conference call reflecting our future plans and strategies are forward-looking statements that are based on current expectations and assumptions. These expectations and assumptions are subject to risk and uncertainty, which could affect our financial plans.

Checkpoint’s actual results and the timing and occurrence of expected events could differ materially from our plans and expectations due to a number of factors, such as changes in overall economic conditions, and changes in the legal environment as well as those factors disclosed in the results release and in our fillings with the Securities and Exchange Commission.

You should also be aware that all information in this discussion is as of February 27, 2008. Checkpoint undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company’s expectation.

At this time, I would like to turn the call over to Rob van der Merwe.

Robert van der Merwe

Thank you all for joining us today to review our fourth quarter and full year 2007 results. I will briefly touch on our performance overall and then Ray will provide more detail on the fourth quarter results. I’ll conclude with comments about my recent visits to Checkpoint’s international operations and the financial outlook for 2008. And then we’ll both be happy to take your questions.

First, the fourth quarter and full year results were very, very good in my opinion particularly when considering where the company has come from over the past three to five years. George Off and the management team must be complimented on their efforts, particularly to focus and strengthen the business that drove these results, which were record breaking for the quarter and the full year as measured by revenue and earnings from continuing operations.

Fourth quarter revenues were up 21% versus a year ago, continuing a strong growth trend in all businesses and consistent with the momentum we all saw during the preceding quarters. Recent acquisitions contributed 7.2%, currency 7.5% of the growth versus the fourth quarter of 2006.

Comparisons to prior year became a little more challenging with respect to organic growth rates due to a strong fourth quarter in 2006 and the fact that the fourth quarter of 2007 had 13 weeks compared to 14 weeks in 2006. The fourth quarter was characterized by similar dynamics to those we saw in earlier quarters.

Gross margins remained under some pressure as we experienced headwinds due to managing the unprecedented growth we generated most of the year.

Product mix challenged margins as the CCTV and CheckNet businesses increased disproportionately versus the core EAS labels and systems businesses and manufacturing inefficiencies plagued us during the year due to the rapid growth also impacting margins. And again, I think that’s consistent with what we said to you in prior quarters.

Revenues for the full year were up 21.3% at $834 million and pro forma EPS was up 39% at $1.39 per diluted share versus $1 in 2006. Full year revenues were driven by strong organic growth up 10.2%, acquisition growth from Alpha, SIDEP, Asialco and ADS of 5.4% and currency tailwinds of 5.7%.

Now, I just want to step back for a second, as already mentioned we have realigned our segments into three areas, shrink management, intelligent labels, and retail merchandizing. Ray will cover the new segment alignment in more detail in a few minutes. But I will talk to them now.

Shrink management or the core EAS and security systems business that represents just over half of our total company revenue was up 24.6% this year for primarily the same reasons. In other words organic growth, acquisitions and currency tailwinds.

Sales of our CCTV business in the U.S. increased 30% this past year. EAS hardware sales in Europe were also up due to a number of large roll outs in Spain and France, as previously reported. The intelligent labels business, which includes EAS labels, CheckNet and the ADS acquisition that we made at the end of 2006 now represents over 30% of our total revenue. Revenue in that segment was up 18.2% versus last year with currency contributing about a quarter of that growth.

Finally, in retail merchandising which is primarily based in Europe reported revenue up 14.1% with over two thirds of that growth due to positive foreign exchange translation. As you recall, over two-thirds of Checkpoint’s revenue is derived outside the U.S. and over half of our revenues are based in Europe.

Turning to gross margin, gross margin dollars this past year were up $54.3 million versus 2006 but were down as a percentage of sales to 41.5% in 2007 from 42.4% in the prior year. Now margins, importantly, were up in the shrink management solutions business, our core business, somewhat tempered by, in the fourth quarter by the purchase accounting inventory step-up relating to the recent acquisitions.

However margins were down in the labels and CheckNet area and also are marginally down in the retail merchandising business. CCTV installation growth as we’ve mentioned before was greater than we expected and we face some supply chain inefficiencies as a result in satisfying the strong demand for the year. Things like freight expenses, overtime in field service and so on affected margins as previously reported.

The rapid growth and resulting higher cost incurred in CheckNet, the CheckNet service bureau business generated headwinds that we expect to abate in 2008, as supply chain inefficiencies are eliminated. In addition, the ADS service bureau acquisition in the UK did not achieve the efficiencies from integration that we anticipated and incurred more cost than planned during the year. So, results temporarily fell below expectations. This will be fully corrected early in the 2008, with the action plans that are already in place.

Now the global sourcing capability that George and the team initiated last year was very successful in helping to offset inflation pressures and other costs. I expect this effort to further help offset costs and expand margins in 2008.

Excluding currency effects, one-time management transition costs and acquisitions, SG&A spending was under control, and I am very pleased with the progress that the team is making in this area. We all see continued improvement opportunities going forward for SG&A costs in 2008.

From a balance sheet perspective, we are improving our sales and supply chain forecasting accuracy and bringing inventory levels into better balance. We are presently adding planning resources to help with this and will no doubt improve with added management focus in 2008. This will help avoid some of the recurring year-end inventory adjustments that you saw in 2006 and again in 2007.

So in summary, I think 2007 was a great year for Checkpoint. We have good momentum going into 2008. We know what we need to do to improve and are very excited about 2008. Ray will now take you through some more financial details and then I will address some of my recent observations and also the outlook for 2008.

Ray Andrews

Before I review the fourth quarter results, I’d like to outline the change that we have made in segment reporting effective this quarter. We’ve realigned our segment reporting to match our global and regional line of business management structure.

Beginning with the fourth quarter results we are announcing today, our three segments are shrink management solutions, intelligent labels and retail merchandizing.

Shrink management solutions is our largest segment and includes our EAS systems business, the CCTV fire and intrusion business, the Alpha S3 secured merchandising product portfolio acquired in November 2007 and RFID systems.

EAS systems business includes EAS antennas and deactivators, software and reusable hard tags. EAS systems activity of SIDEP acquired in November 2007 is also reported in the shrink management solutions segment.

Intelligent labels is our second largest segment and includes EAS labels and one-time-use hard tags. Our CheckNet ADS service bureau business, library patron services and RFID tags and labels. The EAS tags and labels activity of SIDEP and Asialco, which we acquired in November 2007, is also reported in this segment.

EAS labels and one-time-use hard tags are part of our source-tagging program and are being sold through our CheckNet e-commerce platform at an increasing rate, which supports the alignment of EAS labels in the service bureau businesses in the same reporting segment.

The retail merchandising segment is essentially unchanged and continues to include our handheld labeling systems and retail display systems businesses. A small portion of the former retail merchandising segment was reassigned to shrink management solutions and intelligent labels.

Now I’ll review the fourth quarter results. Revenue from continuing operations for the fourth quarter was $262.7 million as compared to $216.3 million in the fourth quarter of last year, a 21.4% increase year-over-year. Foreign exchange had a positive impact on revenue of approximately $16.1 million or 7.5% of the growth in the fourth quarter of 2007.

Revenue from the Alpha, SIDEP and Asialco businesses, which were acquired in November 2007 accounted for approximately 7.2% of the overall sales growth in the quarter. Gross margins in the quarter were 40.8% compared to 43.5% in the comparable period of the prior year.

Our 2007 gross margins were impacted by a mix due to growth in our lower gross margin products, as well as manufacturing inefficiencies. On a segment basis for the fourth quarter of 2007, shrink management solutions and intelligent labels reported increases in revenue on a constant dollar basis, while retail merchandising revenues declined when compared to the fourth quarter of 2006.

Our shrink management solutions segment generated revenue of $163.1 million in the fourth quarter of 2007, or 62% of total company revenue. This represents the year-over-year increase of 20.6% on a constant dollar basis. The growth in this segment for the quarter was led by the Alpha S3 acquisition with $11.7 million in revenue as well as growth in our U.S. CCTV integration business and our European EAS business.

The November 2007 acquisition of SIDEP contributed $2.8 million to the revenue growth in this segment. The gross profit for shrink management solutions was 39% as compared to 39.8% in the same quarter in 2006. The gross profit for shrink management solutions segment declined year-over-year primarily to the significantly increased volume in our CCTV business, which resulted in installation cost and efficiencies in satisfying an anticipated demand coupled with the gross profit margin erosion due to the competitive nature of the business.

Our intelligent label segment reported revenue of $73 million for the fourth quarter or 28% of total company revenue. This represents an increase of 8.9% on a constant dollar basis, led by our European CheckNet business.

Revenue in the intelligent label segment for the fourth quarter of 2007 also includes $3.6 million of incremental revenue from the ADS Group, which was acquired in the middle of the fourth quarter in 2006, and $1.6 million in EAS label’s revenue from the November 2007 acquisition of SIDEP and Asialco.

The gross profit in intelligent label segment was 41.8% compared to 48.1% in the comparable quarter a year ago. The decline primarily attributable to the growth of our lower margin CheckNet ADS operations, coupled with manufacturing efficiencies and competitive pricing pressures in that business.

And finally our retail-merchandising segment reported revenue of $26.5 million for the fourth quarter or 10% of company revenue. This represents a decline in revenue from prior year 6.8% on a constant dollar basis. The decrease comes from our retail systems, the display systems in handheld-labeling systems businesses in the European markets.

The gross profit in the retail merchandising segment was 48.4% for the quarter compared to 50.8% reported in the same quarter of 2006. On a constant dollar basis, retail merchandising segment revenue for the full year 2007 grew 4.6% reversing the trend of declining revenue we’ve experienced over the past few years.

In our geographies, our European operations reported revenue of $134 million for the fourth quarter or 51% of total company revenue. Europe delivered solid top line results with revenue increasing 8.7% on a constant dollar basis over the prior year including the benefits of the Alpha and SIDEP acquisitions in November 2007, and the ADS acquisition, which we concluded in mid-quarter of fourth quarter of 2006.

On a constant dollar basis, Europe reported 17% growth in their shrink management solutions business, 7% growth in our intelligent labels business and a 9% decline in retail merchandising segment.

The U.S. operations reported revenue of $84 million or 32% of total company revenue. This represents a 22% increase in revenue over the fourth quarter of 2006 and is attributable to the November 2007 acquisition of Alpha, coupled with strong results from the U.S. CCTV systems integration business, which delivered 33% growth in the quarter.

The Asia-Pacific region reported revenue of $32 million or 12% of the total company revenue and generated 18% constant dollar revenue growth in the quarter. And finally the international Americas region which represents 5% of total company revenue reported 11% increase in the quarter, excluding the impact of foreign exchange.

During the fourth quarter we spend $5 million or 1.9% of revenue on R&D, which is unchanged from the $5 million we spent on R&D in the fourth quarter of 2006.

Our selling, general and administrative expenses for the fourth quarter were $79 million or 30.1% of revenue as compared to $63.4 million or 29.3% of revenue for SG&A in the prior year. Foreign exchange increased SG&A by approximately $4.2 million compared to the prior year.

Also included in SG&A in the current year’s fourth quarter is approximately $4.7 million of expenses generated by the recently acquired Alpha, SIDEP and Asialco businesses and a charge of $4.4 million related to the previously announced management changes involving George Off and Robert van der Merwe. Without the charges related to management changes, SG&A was 28.4% of revenue in the fourth quarter of 2007.

During the fourth quarter we generated $38 million of cash from operating activities compared to $37 million in the fourth quarter of 2006. Our day sales outstanding were 76 days. Our days in inventory were 75 days at the end of the fourth quarter. Capital expenditures in the fourth quarter were $3.8 million.

Interest income virtually offset interest expense for the quarter. Our income tax rate for the fourth quarter was essentially zero.

Income tax expense for the fourth quarter includes a $4.8 million differed tax benefit associated with foreign statutory tax rate changes, a $900, 000 tax benefit related to the sale of our Austrian subsidiary, a $2.4 million differed tax benefit related to the release of evaluation allowance for state, U.S. state net operating loss carry forward, and a $2.1 million net differed tax charge primarily associated with our UK operations.

The differed tax benefit of $4.8 million, I mentioned previously included $2.1 million related to prior period.

Turning to the balance sheet, as of December 30, 2007 cash and cash equivalents were $118 million, working capital was $282 million and total debt was $95 million. Weighted average number of shares outstanding on a fully diluted basis was 41 million shares for the fourth quarter of 2007.

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

Robert van der Merwe

I recently traveled with George Off to attend very successful kick-off events across the U.S. and in Europe. I’ve also have been in China, I’ve been in Japan, I’ve been in the Caribbean and I will be continuing my travels in the weeks ahead to continue meeting customers and suppliers, our teams, visiting our facilities around the world.

Last week in a planned Board meeting, I shared my initial views of Checkpoint and its ability to compete longer term with the Board. And I told them that frankly, I’ve been impressed, I’ve been impressed that the work done to start to globalize and focus the business over the past three years. And I am more optimistic now about Checkpoint’s future than I was even seven weeks ago when I became CEO and last talked to you.

The innovations that are being launched this year are truly step-up. Our focused R&D effort is already bringing a stream of new products to market this year. And I witnessed with George a tremendous amount of energy in the sales organizations around the world. They are energized by these new products, they are very excited and morale is very, very high. That’s a great way to come into 2008.

Those launches are occurring as we speak all across the major geographies. We are exhibiting at EuroShop this week, and I would draw your attention to some of the recent press releases that have gone out regarding our new products.

The Alpha Security team and the S3 products we recently acquired are definitely world class and are already opening more and more doors for us to grow share in the high end of that security market. So I have been very impressed with that team and the way it brings innovation to market is very, very meaningful set of products and customers love them. We visited many customers in Europe and those products are well received.

The processes to drive procurement costs and manufacturing costs down are also taking shape very, very nicely. Those teams delivered excellent value in 2007 and there is clearly more opportunity to improve margins and reduce costs further, through a philosophy of continuous improvement and best practice sharing around the world.

The metrics organization that went in and was implemented last year has set us in motion to become more global and this will enable more streamlining and standardizing in the back office in the years ahead. So that was very, very good.

I’ve also inherited a very talented and very supportive management team. This is an important factor for any incoming CEO, if he or she has to be successful. So I am very grateful for that.

Now looking ahead to 2008, we read the newspapers and there is clearly a need to be very mindful of the economic climate we find ourselves in. Accordingly, the management team has already started to cut non-essential costs further and we are pacing spending so that we are protected as best we can should a turndown materialize in our space later this year. The majority of our business 54%, 55% falls in the second half of the year. So we’ll take that prudent action now.

I will tell you that we have seen new store openings delayed by CCTV customers into 2009 but not dramatically so, and this is not yet manifesting in our core EAS businesses. On the contrary, I remain cautiously optimistic that our security and shrink management solutions that help retailers prevent losses will remain an important source of profit expansion for them this year despite the enormous challenges that may develop in the United States particularly.

We expect European conditions will be challenging but we have a very strong business there with significant momentum, so that marketplace should perform better in the aggregate than the U.S. in 2008. And Asia, of course, will continue to grow rapidly, but also much smaller base.

So consequently we still expect that our sales in 2008 will increase in the low double digits. We expect our categories, of course, to grow marginally on an organic basis but by introducing new products, realizing growth from the recent acquisitions, which is substantial and margin accretive. We expect to drive sales beyond category growth rates in 2008.

We have assumed exchange rates will remain consistent with what we saw in January for the full year. We expect that gross margins will expand between 100 and 200 basis points due to cost reduction initiatives that I’ve mentioned, mix and the recent acquisition of Alpha which as before we told you has margins above the company average.

SG&A expenditure will continue to remain under control and we’re still expecting operating margins of at least 10% for 2008. Ray mentioned some tax adjustments at the end of 2007. For 2008, we expect an effective tax rate for the company of 24%, which is lower than our previous guidance in large part due to a favorable country tax audit ruling received in January of this year.

Our tax rate can vary as the year progresses depending on the mix of income among lower and higher tax rates jurisdictions and we’ll keep you informed of developments there in the quarters to come. So for EPS, we again confirm guidance in the $1.65 to $1.75 range for the year. Finally, we expect free cash flow in the region of $60 to $70 million this year.

So in conclusion, a great result in 2007, which represents a significant turn around from 2006. We have excellent momentum going into 2008 with the prospect of another excellent year. I’m very excited to be here and look forward to sharing more about the company’s future with you later in the year as promised.

So Jessica, Ray and I will now take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

The first one is about the [inaudible] penetration of security tags in the pharmacy business that you have been in and, like in the U.S. I think you mentioned you are quite optimistic that security tags especially the disposable ones you expect that to continue to be robust. Can give us some idea as to what the trends are right now as the economy slows and the CVSs of the world.

And also the second one would be longer-term margin targets, I think three years or four years ago what had been shared with us is that the company would in 2008 reach an operating margin of around 15%. So how that’s changed maybe not for 2008 itself, but looking out maybe a year or two in the future. What you think the margin structure of your business would be given the current trends and growth rates you see in your business mix?

Robert van der Merwe

Well Ajit firstly, as far as Alpha is concerned, those products are probably only 60% to 70% penetrated in the U.S., less so across all the channels in Europe. So Europe also is a substantial growth opportunity.

As far as pharmacy is concerned, I’d say that they are very broadly based in the U.S., they are not specifically focused on any particular channel like pharmacy. They are into mass merchandizing, they are into electronics and broader.

So I think the growth path that they’ve enjoyed recently will continue for the next few years and they also bring innovation to market very rapidly. That company is probably one of the best innovators I’ve seen in many, many years. So I don’t expect even if there is product in certain channels for that to slow down at all.

As far as the margin targets are concerned, we are sticking with at least 10% that I shared with you. If there is any change to that later in the year, once we’ve worked through the strategy and give some guidance as to what the longer term looks like, I will update you at that point.


Your next question comes from the line of Jeff Kessler – Lehman Brothers.

Jeff Kessler – Lehman Brothers

I am particularly interested in the announcement that you recently made about the introduction of the Evolve system, which actually looks like it has three or four separate parts to it. If you could perhaps, kind of trying to find out what markets are you initially going to target with the Evolve system and how do you believe that system will now get you up to or beyond your competition out there, mainly one specific company.

Since you have been trying to do this now for a number of years, it looks like you have accomplished what you’ve needed to with this new system?

Robert van der Merwe

Well Jeff, yes I believe we have and it is very exciting. First thing I would tell you is that, in this market you don’t launch products and have them out there in a couple of months. This is a process that we’ll start rolling out now, through the back end of ‘08 and well into 2009. We’ve had an excellent reception from our customers.

But now we start the analysis and we obviously will start with our existing customer base, working with Alpha and the interest generated by EuroShop and other activity. We’ve had interest from customers that we are not penetrated in yet, and we will obviously work with them.

But it is an 18 month program, the benefits in terms of improving the distance and pick rates, being able to work with information that loss prevention managers are starting to do, to provide more intelligent solutions within retailers and all-store format is a new development for us that I think will also allow us to expand our reach beyond our customer base.

So, providing comprehensive solutions to reduce shrink for retailers is very meaningful for them, I think we are one of the few companies that can do that and I am excited about it.

Jeff Kessler – Lehman Brothers

If the distances are greater, are you going to be able to make these systems “more invisible” when need be?

Robert van der Merwe

Well we have from an aesthetic standpoint some of the designs we have are much more aesthetic. They fit better, look better, and provide more space for retailers so that shoppers are not knocking into them and so on.

But we can work with wider aisles, which gives us access to channels that we haven’t been in before. And with the increased detection we’re getting interest and having that information being used by retailers more intelligently, we’re getting interest from a wide customer base, wider than our existing customer base.

Jeff Kessler – Lehman Brothers

On source tagging, can you give me some idea of whether or not the percentage of tagging business done through source tagging increased in the fourth quarter and about what that percentage is up to at this point?

Ray Andrews

We don’t have the precise numbers, but it’s definitely growing and particularly as we start funneling source tagging through our CheckNet –e-commerce platform that’s given us an additional route to get source.

Jeff Kessler – Lehman Brothers

And that was going to be my next, whether or not CheckNet has had an effect on source tagging?

Ray Andrews

Yes, so that gives you an access into the apparel chain.


Your next question comes from the line of Bob Labick - CJS Securities

Bob Labick - CJS Securities

First on the questions on Evolve, you obviously elaborated it is roughly an 18-month cycle rollout, could you tell us are there any incremental sales expected then or what levels in ’08. And is this product primarily an upgrade product or could this create a new upgrade cycle, or is it more kind of going in a new store but not see a change-out from existing customers or how do you expect that to shape up over the next 18 months?

Robert van der Merwe

Bob I think it’s both. I think it will allow us to move faster, there is a churn, there is an upgrade included. I think later in the year I will share with you some interesting developments around our ability to provide shrink management solutions more comprehensively for our customers where we bring more capability.

I think that will set Checkpoint apart from the other competition in the market and start to set us up as a very credible partner in this area and you will find that interesting but we are not quite ready with that.

Evolve is one of the technologies that will provide us the path to RFID and enable us to talk in the different frequencies with different information systems out there. So it’s the beginning of a pathway to becoming a very comprehensive provider of intelligent systems in the loss prevention area.

Bob Labick - CJS Securities

Pick a timeframe three to five years out there, what is the expected penetration of Evolve? Does this replace all of your existing units out there over the next five years or how should we think of it in terms of its application to your installed base?

Robert van der Merwe

Well Bob, it is different. Every customer is different, looking for slightly different solutions. If you look at our broad base of solutions for alarms, access control, CCTV and so on even down to the EAS labels, all provide, play a role in reducing shrink for our retailers and depending on their needs they will either move faster or slower.

So I would, I have to get back to you and then speak to the experts as to how long that might take, but we do have end-of-life technologies that will slowly be migrated out. I think probably that’s all I can say for now.

Bob Labick - CJS Securities

Sticking with the upgrade cycle theme, obviously, you showed tremendous growth in the CCTV business this year. Where do you stand in that upgrade cycle and what’s the outlook this year? Should the sales maintain at this current level or is there going to be a drop-off or what are you expecting in CCTV for ‘08?

Robert van der Merwe

I expect CCTV to continue to grow, perhaps not at a 30% clip. We had a lot of orders hit the system late in the year and we struggled to meet our customer needs and so there was some congestion in the supply chain. So I would expect that to abate which should flatter the margins just a little in ‘08.

I still see some very good growth there it’s a good team. They are resonating well with customers. With store-openings being delayed a little, that might temper the growth but as we bring CCTV in to provide a more robust shrink management solution, I expect that to help us continue the positive trend.

Bob Labick - CJS Securities

You obviously used your large cash balance or net cash balance I’d say with some of the attractive acquisitions in Q4. You are still net cash positive and expecting significant free cash flow. What are your expectations for the cash use in ‘08? Are there more acquisitions out there that you are looking at? Is there a repurchase opportunity or how are you viewing cash allocation?

Robert van der Merwe

Couple of answers to that. One, we already have an approved program to repurchase some shares to mitigate some of the dilution. So that’s out there. We haven’t utilized that yet because we’ve been in blackout periods in 2007, but it’s marginal.

Primarily for acquisitions, we do still see acquisitions out there that we can achieve at a reasonable price. We have no plans for any major share buybacks or dividends or anything of the sort at this point.


Your next question comes from the line of Jerome Lance.

Jerome Lance

There was talk last quarter about the benefits from customers of Avery or Paxar seeking a second supplier post the merger. Any update on that?

Robert van der Merwe

No, I think that we still hear from customers that they are looking for a reliable second source and we’ve benefited, I think somewhat from that. The competition is aggressive in that market. There are other players also vying for that business. So no new news on that front, I don’t think that the benefits that are coming from that are material. We couldn’t point to any specific chunk of business or element of growth that derive directly from that.

Jerome Lance

So, but you wouldn’t change the characterization of the opportunity? It sounded like something you were optimistic about, maybe before is that still the case?

Robert van der Merwe

Well, I can’t comment on what George and the team reported on last year. I do know that customers are very interested. So I think that the opportunity is still out there. But again, I couldn’t characterize it in terms of dollars and cents or growth rates for you at this point.

Jerome Lance

Can you talk about pricing environments across the business, are you experiencing pressure and if so where?

Robert van der Merwe

Well, generally price these days is hard to come by. We have seen inflation in some of our feedstocks, our raw materials like aluminum and resin and paper. Where we can, we pass those on, we build them into the cost structure, we’ve recovered surcharges on freight and so on and so forth. Beyond that, the way to do that is really with the introduction of new technology that justify the premium.

And secondly, to get our cost down to continuous improvement, as I mentioned I think we’ve done an outstanding job at that. We’ve done quite a bit of hedging through contracts that are protecting us into 2008 and we will continue to do that.

Pricing in some markets is more intense than others. In markets that are fragmented, where there is not a lot of concentrated market share like CCTV, like in the ticket tag and label business you’d see more price competition or certainly retailers with buying power, placing more pressure on us. We obviously want to avoid that, simply to we don’t really want to participate in the high volume low margin business.

I think with the growth we saw in 2007, as we took market share, we probably saw some margin erosion that I would like to see rectify with more focused selling in 2008 and I think we can do that. But I don’t think we’re in any businesses right now where we are suffering from a major price war situation that can’t be managed.

Jerome Lance

Following up on the question about capital allocation and I know this was addressed. I didn’t hear it but is there is a level of leverage that you target or you would be comfortable at or maybe could be expressed as the level that’s the highest you would be comfortable at running debt EBITDA calculation. Sure you find anything really attractive?

Robert van der Merwe

Well it might something really attractive, yes, I think we certainly could add some multiples on the calculation. So I hate to mention a specific number but certainly a multiple of where are now.

Jerome Lance

Just to flesh that out a little bit, in the past going years back after large acquisitions you were comfortable, or the organization, they were different people, were comfortable running at three times plus debt to EBITDA, do you think that’s realistic?

Robert van der Merwe

Yes, I think three years realistic, we have to go there. We do that for the right acquisition, I wouldn’t go beyond that at this point. And when we talk about the long term strategy with you later in the year will give you more clarity on our appetite for that and some of the hurdle requirements that will place on ourselves for judging acquisitions going forward as well and return on those kinds of investment.

Jerome Lance

Is there a number for ‘08 D&A, we should be expecting?

Ray Andrews

‘08 D&A, figure in the high 20s.


At this time there are no further questions in queue, I would like to turn the callback over to management.

Robert van der Merwe

Well thank you very much for joining us. I just wanted to state one more time that I thought that George and the management team did a great job to turn the business around in 2007.

I’m excited about the prospects for 2008 and beyond and will be updating you on our progress versus the guidance we’ve given you for 2008 during the quarter conference calls going forward. And then later in the year, share with you some perspectives, once I’ve shared it and had it agreed with Board as to where we going to take Checkpoint and how we are going to get there. So thank you very much.

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