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Checkpoint Systems, Inc. (NYSE:CKP)

Q2 2008 Earnings Call Transcript

August 5, 2008 10:00 pm ET


Bob Joyce – IR, Financial Dynamics

Rob van der Merwe – President and CEO

Ray Andrews – SVP, CFO and Treasurer


Robert Labick – CJS Securities

Andy Young [ph] – Thomas Weisel Partners


Good morning. My name is Janise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Checkpoint Systems Second Quarter 2008 Earnings Conference Call. (Operator instructions) I would now like to turn the conference over to Mr. Bob Joyce. Thank you, sir. You may begin.

Bob Joyce

Thank you, Janise. Good morning, and welcome to Checkpoint System's second quarter 2008 earnings conference call. On the call 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 a copy of this morning's second quarter 2008 earnings release, it is available on the company’s website at and click on the investors tab. Additionally, an archived version of this conference call will be available on our website.

Before we begin, I would like to remind you that statements made 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 future plans. Checkpoint's actual results and the timing and occurrence of expected events could differ materially from our plans and expectations due to a number of factors such as changes in overall economic condition and changes in the legal environment, as well as those factors disclosed in the earnings release and in our filings with the Securities & Exchange Commission.

Also, please be aware that all information disclosed and discussed in this conference call is as of August 5, 2008. Checkpoint undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company's expectations.

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

Rob Van Der Merwe

Thanks Bob, and good morning. Thanks for joining us today to review our second quarter results. I'll briefly touch on the second quarter, then Ray will provide more detail on the second quarter numbers. I will follow that up with some perspective on the first versus the second half outlook for 2008 and also make some comments regarding strategy before we take your questions today.

Now regarding the second quarter we're pleased with the top line performance considering the economic headwinds that the industry is facing. The integration of all our recent acquisitions is progressing very well despite some delays in delivering the results which we saw in the second quarter, ADS, for example in the U. K. and Hong Kong were not at the levels we anticipated this quarter but has shown improvement in July. So it took longer to rectify some ERP-related implementation issues in Asia. Those have now been largely rectified. We began to see traction in Alpha from a broader sales force reach and the introduction of new products in the latter part of the quarter. I and they had hoped we would see those results earlier but it took more time to get the training completed around the world and a few minor product introduction related issues that have also been rectified. With respect to SIDEP, we incurred higher than expected operating expenditures in the quarter to complete that integration with our existing operations in France. Those two are largely behind us.

We continued to gain market share this quarter in our CheckNet service bureau business, particularly in the U.S. In the Shrink Management Solutions segment, which as you know, includes core security systems and hardware business, we signed two significant deals in Europe at the end of this quarter. One was an upgrade and the other was a competitive swap up [ph] to RF technology. We also closed a transaction with an account in the U.S. that is a new user of EAS. Now the impact of these transactions will be realized in the second half of this year. The Evolve product rollout that we have talked about is advancing and results from the placement of pilot sites is very encouraging. The pilots have resulted in some conversions already in the first half of this year and we expect additional conversions as the year progresses. We are, of course, feeling the impact of increased raw material distribution and energy costs that most other companies have already reported on. Ray will provide you with more detail for the second quarter, but I wanted to share with you two programs, one of which you're very familiar with and that is an ongoing global cost reduction effort and secondly a combination of higher margin products like Evolve and Alpha coupled with selective price increases are both underway and should help mitigate the ongoing effect of rising raw material costs through the second half of this year.

We saw some softness in the EAS label volume this quarter due primarily to an opportunistic competitor that was active in selected U.S. accounts. We also saw some costs come through that were associated with investments to upgrade equipment to drive better efficiencies in a couple of locations and high energy costs in Puerto Rico, all of which impacted margins in the quarter. We expected roughly one half of this adverse impact should abate as we get the new equipment up and running and the cost savings start to come through during the second half. So, in conclusion I was satisfied with the top line but disappointed that we did not drive the revenue growth in the quarter through to the bottom line. However, I believe that we are well positioned for a solid bottom line performance in the second half of the year and I will talk about that once Ray has shared more detail on the second quarter. Ray will now provide that detail for you.

Ray Andrews

Hi, thanks Rob. Revenue for the second quarter was $236.2 million compared to $195.7 million in the second quarter of last year, a 20.7% increase year-over-year. Foreign exchange had a positive impact on revenue of approximately $18.7 million or 9.6% of the growth in the second quarter of 2008.

Revenue from the businesses we acquired in the past year, primarily the Alpha S3, SIDEP, and Asialco businesses accounted for approximately 10.3% of the overall sales growth in the quarter. We achieved 0.8% in organic growth with the key contributor being CheckNet Service Bureau business.

Gross margins in the quarter were 41.5% compared to 42.4% in the comparable period of the prior year. Our second quarter 2008 gross margins were positively impacted by improvements in EAS Systems and Handheld Labeling Systems’ margins along with a positive impact from the Alpha S3 acquisition. However, this was more than offset by the decline in EAS labels and CheckNet Service Bureau gross margins in the quarter.

Now, I'll walk through the results for the segments and geographies. For the second quarter of 2008, the Shrink Management Solutions and Intelligent Labels segments reported increases in revenue on a constant dollar basis, while Retail Merchandising segment revenues declined when compared to the second quarter of 2007. Our Shrink Management Solutions segment generated revenue of $136.8 million in the second quarter of 2008 or 58% of total company revenue. This represents a year-over-year increase of 17.6% on a constant dollar basis. The growth in this segment was led by the Alpha S3 acquisition, which contributed $16.9 million in revenue in the second quarter on a constant dollar basis, as well as growth in our U.S. CCTV Systems Integration business and our Asia-Pacific EAS Systems businesses. The gross profit margin for Shrink Management Solutions segment was 41.3% as compared to 40.2% in the same quarter in 2007.

As I mentioned in the first quarter call, the seasonal impact on revenues normally experienced by Checkpoint with revenues weighted towards the second half of the year is even more pronounced for the Alpha S3 business. We expect to see sales contributions from this business significantly increase in the second half of the year.

The increases in gross profit margin attributable to EAS Systems and the Alpha S3 business were partially offset by a small decline in the CCTV gross profit margin. Second quarter 2008 CCTV gross profit margins were near last year’s levels as the second quarter was not impacted by the increased warranty expense that we experienced in the first quarter of this year.

Our Intelligent Labels segment reported revenue of $73.3 million for the second quarter or 31% of total company revenue. This represents an increase in revenue of 6.6% on a constant dollar basis. Strong growth in our CheckNet Service bureau business in the U.S. and Asia was partially offset by a decline in our library (inaudible) services business. Revenue in the Intelligent Labels segment for the second quarter of 2008 also includes $4.1 million in EAS labels revenue from the November 2007 acquisition of SIDEP and Asialco.

The gross profit margin in the Intelligent Labels segment was 39.6% compared to 45.3% in the comparable quarter of a year ago. EAS Label’s gross margins were impacted by manufacturing variances that were primarily attributable to reduced capacity utilizations, production issues that resulted in increased scrap and labor inefficiencies, higher energy costs and increases in raw material costs. We have been addressing the production issues by upgrading equipment and processes.

In the CheckNet Service bureau business gross profit margins were impacted by lower margins in our US and ADS businesses. ADS was unable to sustain improvements we saw in the first quarter due to competitive pricing pressures in the UK and operational inefficiencies in Asia which we have been addressing.

Library gross profit margins have been impacted by the fourth quarter 2007 agreement with 3M, which has moved Checkpoint from direct sales to distributor revenues with lower margins.

And finally, our Retail Merchandising segment reported revenue of $26.0 million for the second quarter or 11% of total company revenue. This represents a decline in revenue of 6.2% from the prior year on a constant dollar basis. The decrease comes from our Retail Display Systems business. Our Handheld Labeling Systems business reported a slight year-over-year increase.

The gross profit margin in the Retail Merchandising segment was 47.8% for the second quarter of 2008 compared to 44.8% for the same quarter of 2007. On a constant dollar basis we expect that the trend of declining revenue we've experienced in the years prior to 2007 will continue to be evident in 2008.

In our geographies, our European operations reported revenue of $122 million for the second quarter or 52% of total company revenue. Europe revenue increased 2.6% on a constant dollar basis over the prior year, primarily attributable to the benefits of the November 2007 acquisitions of Alpha and SIDEP.

The U.S. operations reported revenue of $79 million or 33% of total company revenue. This represents a 26% increase in revenue over the second quarter of 2007 and is primarily attributable to the recent acquisitions including Alpha and strong year-over-year results from the U.S. CheckNet Service bureau business.

The Asia-Pacific region reported revenue of $27 million or 11% of total company revenue and generated 13% constant dollar revenue growth in the quarter. This is primarily attributable to the EAS Systems and Labels, including the revenue from the November 2007 acquisition of SIDEP and strong growth in the CheckNet Service bureau operations in the region. And finally, the International Americas region, which represents 4% of total company revenue, reported a 2% decrease in the quarter excluding the impact of foreign exchange.

During the second quarter, we spent $5.7 million or 2.4% of revenue on R&D, which is an increase of $4.1 million we spent on R&D in the second quarter of 2007. On a constant dollar basis, R&D spending increased about $1.6 million with $800,000 of this increase attributable to the acquisitions of Alpha and SIDEP. We expect R&D spending for the year to be in the range of $24 to $26 million.

Our selling, general, and administrative expenses for the second quarter was $75.9 million or 32.2% of revenue as compared to $59.9 million or 30.6% of revenue for SG&A in the prior year.

Foreign exchange increased selling, general, and administrative expense by approximately $5.7 million compared to the prior year. On a constant dollar basis, the remaining $10.3 million increase in selling, general, and administrative expenses is primarily the result of approximately $7.4 million of expenses generated by the recently acquired Alpha, SIDEP, and Asialco businesses, and an $1.1 million increase in management expense due primarily to additionally costs during the transition period related to the change in executive management that occurred late last year.

The growth in bad debt expense that we experienced in the first quarter of 2008 has been reduced due to efforts to work with customers to improve timing in its collections and reduced their exposure.

During the second quarter, we generated $25.4 million in cash from operating activities compared to generating $14 million in cash in the second quarter of 2007. Improvements in accounts receivable collections partially offset by payment of annual bonuses were significant factors in the year-over-year comparison.

Our days sales outstanding were 76 days and our days in inventory were 101 days at the end of the second quarter. We continue to work to improve balances in accounts receivable and inventory.

Our capital expenditures in the second quarter were $5.2 million. We expect capital expenditures for the full year to be in the range of $18 to $20 millions including capital expenditures required to execute the restructuring plan that we announced today.

Interest expense of $1.2 million was partially offset by interest income of $700,000 for the quarter. For the second quarter of 2008, other gains were $600,000, primarily due to foreign currency exchange gain.

Our effective tax rate for the second quarter was a negative 8.4%. Second quarter effective income tax rate was impacted by a $4.8 million tax benefit related to the release of a valuation allowance that resulted from strategic decisions related to foreign operations and the related impact on assumptions in future taxable income. For the year, we continue to expect an annualized tax rate of 24% excluding the impact of the valuation allowance release.

In late June, 2008, we acquired OATSystems for approximately $37 million in cash and net acquired [ph] debt. OATSystems operating results were not material in the second quarter and will begin to be reported in the third quarter results. When we acquired OATSystems, we noted that our expectations with the transaction would be dilutive through 2009. Through the second half of this year we expect OATSystems to be dilutive to after-tax checkpoint results in the range of $0.08 to $0.10 per share including net interest expense to fund the transaction. Approximately $0.04 per share of this dilution is attributable to an estimated intangible amortization in the non-cash share based component's of the retention program put in place for OATSystems management and employees.

The restructuring plan that we announced today is expected to result in after-tax charges in 2008 of approximately $5 million or $0.12 per share. Implementation of the plan, which is expected to be complete in 2010 is expected to result in annualized cost savings of approximately $6 million while also positioning our CheckNet Service bureau business for accelerated future growth. In addition to the restructuring charges, implementation of the program is expected to require operating expenditures of approximately $0.04 to $0.06 per share in the second half of this year, which includes actions to expand capacity with the objective of driving growth.

We have reviewed our operating margin projections for the year and expect to achieve operating margins in the range of 9% to 9.5% before including the impact of the OATSystems acquisition and the impact of operating expenditures resulting from the restructuring program that we announced today. Including the OATSystems acquisition and the operating expenses associated with restructuring, operating margins for the full year are expected to be in the range of 8% to 8.5%. Free cash flow for the year is expected to be in a range of $45 to $55 million excluding the impact of future the restructuring charges. The change from our previous guidance results from a combination of updates to operating performance for the year with the reductions resulting to free cash flow resulting from OATSystems acquisition and operating and capital expenditures associated with our restructuring program.

As of June 29, 2008 cash and cash equivalents were $95 million, working capital was $276 million and total debt was $144 million. The weighted average number of shares outstanding on a fully diluted basis was 40.3 million shares for the second quarter of 2008. In the fourth quarter of 2006, our Board Of Directors approved a share repurchase program that allows for purchase of up to 2 million shares of the company's common stock. In the first quarter of 2008, we repurchased 673,000 of common stock at an average cost of $25.53 per share spending $17.3 million. In second quarter of 2008, we repurchased the balance of 1,327,000 shares that was authorized under the share repurchase program at an average cost of $25.31 per share spending an additional $33.6 million. We have increased our debt leverage as the result of the share repurchase and the OATSystems acquisition. We believe our solid balance sheet and our cast generation capabilities provide the ability to comfortably carry debt loads of up to 2 and 1.5 times EBITDA. Therefore, we continue to possess the financial strength to execute in our strategy and invest in our future.

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

Rob van der Merwe

Thanks Ray. I would now like to characterize the first half and second half of 2008 for you to provide some perspective on why we think the second half will be strong, and that given the economic outlook both here and in the U. K. and Europe. Firstly as Checkpoint typically delivers a disproportionate result in the second half given the nature of our business and we're on track to follow that same pattern in 2008. We are clearly seeing retailers around the world react to consumer changes in behavior and we've seen that reported in the press. Some of our customers are cutting budgets or delaying new store openings but many are not. So it appears to be a mixed landscape in both the U.S. and in Europe and it is also a mixed landscape within channels like food or drug or hypermarkets at least as far as we can see from a Checkpoint perspective. It is important to note that our teams have done a great job in focusing on those customers that have a potential to deliver results in 2008. So they have juggled within the mix to cope with the changing circumstances. Stepping back and looking at our space from a high level, there appeared to be some insulating factors that we believe will continue to work in our favor during the second half and would like to share them with you as they are included in our assumptions.

In a recent study among loss prevention specialists across the U.S. and you might have seen that we published this a few weeks ago. It is clear from what they concluded that shrink typically increases during recessionary times. Secondly these specialists tell us that when loss prevention budgets are cut shrink increases as a result. The loss prevention managers that we are talking to are all working very hard inside their organizations not only to deal with the prospects of shrink going up due to the economic slowdown but also to fight the incremental increase that would occur if their loss prevention budgets or spending were reduced. Now we believe this is working in our favor to some degree or another and will continue to do so for the rest of 2008.

Next, the CheckNet Labels business in the U.S. is up and continues to be up implying that we're continuing to take market share in this particular region. The underlying reasons for us gaining share in this business has to do with two things, one the unique advantage of some of our supply chain software programs such as CheckNet On Demand [ph] and also the result of the major restructuring that took place in this industry in 2007 when the number one and number two competitors merged forcing customers now actively seek a second source. The dynamics of this situation will not change some time to come in my opinion. Therefore, we have the potential to continue to gain profitable share. I believe the recent growth in the CheckNet business, of course, is attributable to that but also the other. In other words both of these factors provide some insulation.

Now coming back to results for the second half. As you know, we made a number of acquisitions late last year and noted earlier in the call these integrations are generally going very well. However, we did see some unforeseen costs and timing-related issues occurring during the quarter that should not occur or reoccur during the second half and Ray touched on some of those but I want to build on them in a couple of areas for you.

The ADS recovery is now underway from what we've seen in July, of course that is late. We expected to see that in quarter two, but nonetheless it is turning around. Alpha has been a great acquisition for Checkpoint, however, had there and we expected that business to do a little better in the first half. Work to launch new products was delayed due to some startup issues and those have been resolved and work to integrate Alpha into Checkpoint's broader sales organization globally together with the cross training required to drive further growth was not fully completed until quarter two. Accordingly the Alpha mix in the second quarter was lighter than we had expected and is now anticipated to be heavier than originally expected during the second half. Our view that there'll be a strong second half is supported by a number of things, one of which is that Alpha exited the quarter with a record order book roughly 20% higher than the same period last year. Also, it is important to note that the Alpha indices its prices to raw material increases. So we expect that margins will hold up as a range of new products are introduced globally at margins much higher than the corporate average.

You also know that the sales cycle on new Alpha products is very short. These are high ROI and fast payback solutions that we fully expect to be favorably received by customers because these products were developed in conjunction with many of our leading customers. Separately, I have spoken about this before, the global procurement team and cost reduction programs we have talked about are likely to deliver highest savings in the second half versus what occurred in the first half of this year. That is helping us to deal with cost inflation. Also as you recall, first quarter saw higher warranty costs in the CCTV business, which as Ray noted earlier remedied during the second quarter. Those were not occur again during the second half. Interestingly, we saw a bias to more hardware installations in the first half of this year together with the upfront installation costs and as you know those typically abate fairly quickly, but since we signed 2 more big deals this quarter, we expect those installation levels to continue but with an increasing mix of consumables during the second half and this will help margins. As noted earlier one of the deals was a competitive swap up, the other was an upgrade, a success due to the early conversion of an evolved pilot test. Finally, Evolve prices are higher then on existing products and this has helped us keep margins up despite competitive pressures. We expect the higher prices to hold given the reaction from what we have seen from customers thus far. While competition has responded with some technical data to try and help protect their franchise, we did not see any substantial changes out there that would interfere with our short-term rollout plans. That is for the Evolve family product.

Turning to restructuring as Ray mentioned, we announced a new manufacturing and supply chain restructuring program today, not as significant as the 2005 program but very important nonetheless. We cannot provide specific, exact details until local plans have been communicated other than that the plan leverages our Asialco facility in China to help improve our competitive cost position on EAS manufacturing. It also includes cost reduction and the streamlining of the CheckNet Labels business and currently adding more productive assets, so we can continue with the rapid growth path.

So in summary the 2005 manufacturing and restructuring program was primarily focused on our EAS systems business. This new program addresses additional opportunities to streamline EAS but it focuses mainly on the CheckNet area. When I look at all these factors, I conclude that we are positioned for a strong second half both in terms of revenues, operating income, and earnings per share assuming of course there are no major shifts in the market conditions that we see today.

A few comments on our strategic direction. My first priority, as you know, was to get my hands on the wheel in which have done and then quickly turn my attention to where we're headed as a company. We have made very, very good progress on the strategic front these past three months and I will bring our vision for Checkpoint to you later this year as planned. However, in the interim stage I can confirm that we are going to be focusing on growth and you have heard us talk about that now on the various calls, not at any cost of course but meaningful growth nonetheless. We will also leverage that growth for lower cost space and that will entail introducing a continuous cost improvement culture at Checkpoint and I will provide more details for you in a few months but what I wanted to tell you today is that we will be building on our core Shrink Management and security business, where we believe we have a significant right to win. It is a big market where there are not get any broad go-to solution providers for our customers. We will also build our global positioning CheckNet.

The second leg of the business will provide more razor blades if you will, versus the somewhat lumpy security business that we have today to help to balance the growth portfolio going forward. Consistent with this strategy as Ray mentioned, during the second quarter we acquired OATSystems. This is a middleware leader. It brings the best software and supply chain visibility and talent in the industry to Checkpoint. We moved quickly because this company has unique capabilities that placed Checkpoint at least two to three years had of any of our competitors. Importantly, it has capability that can also enable existing customers of ours more quickly advance from pilot work to broader scale rollouts of RFID technology in our space. We are not seeing RFID simply as a technology but a key enabler in helping our customers with an existing shrink program where paybacks are easily measured, to reduce shrink, and gain better visibility into their supply chains. This is a gain changing move for Checkpoint. We would explain how it fits into what we are doing with Evolve and other products when we showcase our strategy, our technologies, and our leadership team at the analyst day we plan for later this year.

Janise, we will now take any questions.

Question and Answer Session


(Operator instructions) Your first question is from Robert Labick – CJS Securities.

Robert Labick – CJS Securities

Good morning.

Rob van der Merwe


Robert Labick – CJS Securities

Hi, thanks, that was a lot of detail you gave us there. Just trying to absorb it all. I was hoping we could step back a little and talk on – I'll start with the discussion on Evolve. You obviously discussed the pilot program rollout and I think you said some of the competitive wins were involved in that. First, could you just tell us how Evolve is going – the feedback from the pilots so far. Have there been unusual expenses? Also just targeting for the quarter where there any unusual expenses with the rollout or the first time it is going out, and what we should expect in the second half, and when does it become a meaningful contributor to revenue? Is that '09 or beyond, you know, what its scale right now and where can it go?

Rob van der Merwe

Okay Bob, most of the launch costs making sure that the product was checked out for launch occurred during the first half. Now, we spent a lot of money bringing those products to market, introducing them to the customers and as the hardware has started to flow into the market there were additional quality checks that had to be put into place to make sure that the product worked right the first time. Those are being removed now because the product has checked out worldwide. We have a lot of pilots, I can't give you the number but it is many, many, many pilots that are in place and are effectively working as we speak. We're starting to see the early conversion of those. We expect to see those conversions continue based on the product performance that we saw in the earlier conversions, being checked out and proven, if you will, by customers. This – you know, the launch of Evolve is the pathway that will enable customers to move into more RFID enabled capability and as such it has resonated. We are picking up new market share and we are also converting existing customers with aging basis to this new technology. So it is about an 18-month rollout. We should be substantially down the track to doing that by the end of this year and by the middle of next year we should be done. So, we will see it in terms of protecting our market share, we'll pick up market share. And when we can provide more detail on that we will, and we have already picked up some share so far, but it is not meaningful in the grand scheme of things. And I can share that with you as the program rolls out, but most of the costs are out of the way now. We saw those during the first half and we saw that during some of the innovation R&D spending and we saw it in our marketing costs.

Robert Labick – CJS Securities

Okay, great. And then what, you know, I obviously heard a couple of – essentially what percent of your customers is Evolve applicable to and what are the new potential, I guess, markets that it could help you get into?

Rob van der Merwe

Well it is enabling us to get more into the parallel. We're obviously looking to gain more market share in food and again I will provide you with more detail as it becomes available over time. But as far as the other areas you have asked about at present, I don't know that we break that out specifically.

Ray Andrews

I think when those results become meaningful and they start showing up we'll be happy to share them with you. We just want to be a little cautious at this stage because we are at the front end of this next twelve months migration if you will.

Robert Labick – CJS Securities

Now, definitely understood and agree. And then if you could expand a little as well on most obviously (inaudible), I know it ties in with Evolve. This year it appears to be, I guess, they are in a money losing phase right now as they grow up and they ramp up. Could you just talk about the P&L impact and the benefit to sales, I guess, expected in '09? Is this part of the package deal or what is the overall vision behind the acquisition?

Rob van der Merwe

I will answer the longer term part of the picture and then Ray can just confirm the harder numbers in the short term. If implemented properly this capability that we have acquired will allow Checkpoint to start changing the game in terms of providing more robust solutions for customers that are looking to reduce their shrink not only in the store but as it moves through – the product moves through the supply chain into the store, which is where a lot of error occurs and some theft occurs. As we can appreciate as the millions of SKUs are moving through, having touch points, intelligent touch points generate terabytes of information that has to be converted so that loss prevention and IT can start reading that information and making intelligent decisions about how they tackle shrinkage. There are very few if any companies today that do that on a broad scale basis and as you know shrink is a huge problem worldwide. The solution providers are still pretty much fragmented. What you are seeing Checkpoint do is start putting the glue in place so it becomes the leading provider in what is a pretty big market today. So the number is going up to become meaningful and when we share the vision with you later this year we're going to give you some numbers as to what we are trying to achieve in the next three to five years as a company. They'll be included in that. We're not ready for that yet, but to answer the first part of your question, I will hand over to Ray.

Ray Andrews

On the revenue side, currently OAT revenues this year are primarily attributable to the industrial base that they serve and it's a base we can expect to continue to serve into next year and beyond. The key here is not focus on specific OAT revenues but on the catalyst that OAT provides Checkpoint in unleashing our capability and sort of solutions that Rob mentioned. Not only in EAS, but solutions that potentially could reach back into merchandise visibility area. So it standalone OAT – it is modest revenue but we can see a lot of power in what it can unleash in Checkpoint in the future.

Robert Labick – CJS Securities

Great. I appreciate all the extra details and we look forward to seeing you at our conference next week.

Rob van der Merwe

Thanks, Bob.


(Operator instructions) The next question is from the Andy Young [ph] of Thomas Weisel Partners.

Andy Young – Thomas Weisel Partners

I have a couple of quick questions. First you mentioned that you expect full year pro forma operating margins to be around 9% to 9.5%. It seems to imply that operating margins in the second half would be roughly in the 12% to 14% range. Because of the normal seasonal improvement, the initiatives or factors drive that kind of improvement in the second half?

Rob van der Merwe

But and I think Rob and I or Rob in particular has outlined that in his discussion some of the factors our continued focus on cost reduction, the impact of Alpha, or Alpha's margins are higher than what average Checkpoint margins have been. There are two key contributing the factors that I can point out, and traditionally we have seen obviously higher operating margins in the second half of the year because we have higher volume in the second half of the year than we do in the first half of the year.

Andy Young – Thomas Weisel Partners

As they are. But like – if you look at the same quarter, I think the same factor is probably impacting the margin in the same quarter, but the improvement seems to be – anticipating a much bigger improvement in the second half and is that anything that you see changing that will make the improvement more likely?

Rob van der Merwe

More Likely. What we talk about what we're doing around reducing issues we had with our gross margins and our cost of goods sold. And again just to reiterate, Alpha has had a track record of the high seasonality, strong second half of the year and we see that as a contributing factor as well as the EAS systems business that we highlighted as well.

Andy Young – Thomas Weisel Partners

Okay, then just go back a bit on the overall market conditions, can you give us a little bit more color on the market condition in Europe, while we know there is the lot of weakness in the U. K., Spain, and Italy; do you see additional softening between the market in France and Germany and other large European markets?

Rob van der Merwe

Andy, Germany is – there's a little bit of softening occurring right now in Germany. France is holding up. As you know, we have a very, very strong market positions in France and Spain. A strong position in Germany. I think it is, as I said earlier, although those economies and consumers off-take seems to be slowing, our customer base is behaving in a mixed fashion, some are being more cautious than others, some of them are going ahead quite confidently with their spending plans and haven't changed their outlook depending on where they sit in the marketplace. The Alpha products that we're introducing this quarter in quarter three and quarter four, by the way, it is the broad range of products. They are very fast payback. I'm expecting that Europe does particularly well as well as a result of those because they're being introduced globally. And there is a totally new line of bottled [ph] protection, there's a complete revamp of the Spider X [ph] which as you know is an industry that Alpha started worldwide and we're address both RF and AM technologies. So, we just don't sell into existing accounts, Checkpoint accounts we go much broader throughout apparel and food with those solutions. And some of the solutions remove the labor required in store to apply those solutions by almost 50%, which is a huge benefit to retailers. So we know they will be excited by them and again, I expect that regardless of the economic situation because those payback are so fast that retailers in Europe will also respond positively to them.

Andy Young – Thomas Weisel Partners

By the way, when are these new products being introduced?

Rob van der Merwe

As we speak.

Andy Young – Thomas Weisel Partners

Okay. Great.

Rob van der Merwe

That is another reason why it was a little slow for Alpha in the first half. There are over 12 new products being launched and they're being launched worldwide, which is a major initiative.

Andy Young – Thomas Weisel Partners

I see. I see.

Rob van der Merwe

In the second half.

Andy Young – Thomas Weisel Partners

Great, great. That is it. That is all the questions I have. Thank you.

Rob van der Merwe

Thank you.


There are no further questions at this time. Do you have any closing remarks or comments.

Rob van der Merwe

I do Janise. Thank you to all of you for attending today. I have two key messages. One, we fell slightly short of our own expectations in the quarter, but we believe the second half will be strong assuming of course that our assumptions about the market are correct. And secondly, Checkpoint has an opportunity to grow significantly in the future and we're nearing completion of actions to formulate the strategies and plans that we will share with you later this year. If we can accelerate the timing of the analyst event we plan to have with you, we will do so. Now thank you all.


This concludes today’s Checkpoint Systems’ second quarter 2008 earnings conference call. You may now disconnect.

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