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Schawk Inc. (SGK)

Q3 2008 Earnings Call

November 18, 2008 10:00 am ET

Executives

Philip Kranz – Vice President, Dresner Corporate Services

David A. Schawk – President, Chief Executive Officer

A. Alex Sarkisian – Executive Vice President, Chief Operating Officer

Timothy J. Cunningham – Chief Financial Officer

Analysts

Jamie Clement – Sidoti & Company, LLC

[Myron Caplan] – Private Investor

Craig Kennison – Robert W. Baird & Co., Inc.

Presentation

Operator

Good day ladies and gentlemen and welcome to third quarter 2008 Schawk earnings conference call. My name is [Francine] and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Philip Kranz, Vice President of Dresner Corporate Services. Please proceed sir.

Philip Kranz

Thank you. I’d like to thank everyone for joining us this morning. Last night a press release was distributed outlining the results for the third quarter of 2008. If anyone has not received a release, please contact us at 312-726-3600 and we’ll provide you with another copy.

Joining us today from the management of Schawk is David Schawk, President and Chief Executive Officer; Alex Sarkisian, Executive Vice President and Chief Operating Officer; and Tim Cunningham, Chief Financial Officer. Management will begin with an overview of the results and then we’ll open the call to your questions.

Before we begin however, I would like to remind participants that this conference call may contain certain forward-looking statements that are subject to the safe harbor disclaimer found in yesterday’s press release. At this point I would like to turn the call over to David Schawk. Please go ahead.

David A. Schawk

I thank you. Good morning and thanks for joining us. Well the year 2008 is ending up to be one that will touch the people in our business in many ways. For most of the year and certainly most recently, the world economy has gripped in an economic slowdown. As a result, our business volume through the end of the third quarter is down from the level at 2007.

We have responded to this challenge focusing even more intently on client relationships. Although Tim will provide a detailed review of our results in the third quarter and for the first nine months, I would like to briefly summarize some of the key points. Through the first nine months, sales were down 4.5% over the same period of 2007. Consumer products packaging accounts sales were down less than 1%, while advertising and retail accounts sales were down 8.3% and entertainment accounts sales declined 18.1% as compared to the same period last year.

Gross profit declined 1 percentage point as a percent of sales although our cost reduction activities, which began in the second quarter of this year, added 2 percentage points to operating margins as we have not yet realized the full impact of these cost reduction initiatives. The decrease in operating income over 2007 period is a result of lower sales volume; higher SG&A expenses; the impairment of long lived assets; cost reduction plan expenses; and unrealized currency losses associated with foreign exchange transactions as detailed in yesterday’s press release.

The impact of the non-cash $3.5 million asset impairment charge, $1.9 million restructuring charge, $1.9 million unrealized exchange losses and $2.2 million of expenses primarily related to our remediation activities adversely affected operating income performance by $9.5 million in the current quarter.

As we look towards 2009, we anticipate that our operating income will improve as we expect many of these items will not be part of our results. Importantly, while not reflected because of the overall slowdown, our market share remains strong. While we continue to see a steady flow of maintenance type work on behalf of our clients, we have experienced a slowdown with respect to new design and innovation type activities. Importantly though, based on our discussions with our clients, this type of work is being delayed and postponed.

As I said earlier, this year is proving not to be an easy one. However, the impact of the difficult economic environment in 2008 has reaffirmed our wisdom to focus on our clients, as well as our strategy to capitalize on the reinvestment of technology and global position to perform work more efficiently for our clients and more profitably for our bottom line. By closing and consolidating manufacturing locations, and expanding our sales and service offerings while reducing staffing levels, we seek to consolidate technology and workflows, thus allowing the company to improve its capacity utilization.

To combat the business slowdown that we’ve experienced and in an effort to improve margins, the company continues to execute on a cost reduction plan that we discussed last quarter’s conference call. As a result of this plan, we incurred $1.9 million and $5.1 million in restructuring expenses for the third quarter of ’08 and the first nine month period of 2008 respectively.

While we expect to incur a total of between $7.5 million, $8.5 million for the total year, through a combination of restructuring existing businesses and closing selected operations, we will be able to reduce the expense base in 2008 by $4 to $5 million. And in 2009 and beyond by $13 to $15 million, creating profit leverage for when the economy turns. The $13 to $15 million savings expected in 2009 is a higher estimate than we indicated last quarter. We will continue to look for opportunities to increase these savings as we continue to react to market conditions.

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