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Schawk, Inc. (SGK)

Q4 2007 Earnings Call

April 4, 2008 11:00 am ET


Philip Kranz - Investor Relations, Dresner Corporate Services

David A. Schawk - President and Chief Executive Officer

James J. Patterson - Senior Vice President and Chief Financial Officer

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


Casey Flavin - CJS Securities

Ryan Kelly - Robert W. Baird

Myron Kaplan



Welcome to the fourth quarter 2007 Schawk earnings conference call. (Operator Instructions) I would now like to turn the call over to Philip Kranz.

Philip Kranz

Earlier today, a press release was distributed outlining the results for the fourth quarter 2007. If anyone has not received the 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 Jim Patterson, Senior Vice President and Chief Financial Officer. The management team will begin with an overview of the results and then we will 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 today’s press release.

I’d like to turn the call over to David.

David A. Schawk

While 2007 was a year of significant accomplishments for our operations, we have seen a number of accounting-related challenges. To start with the challenges, we have determined that certain errors in our internal practices of accounting have required us to make various non-recurring adjustments, causing the most impact occurred at our digital solutions business, which represents about 2% of our revenues, and in the area of IT and software.

The cumulative effect of these accounting errors required us to restate our financial statements for the 2006 and 2005 fiscal years, as well as for each of the first three quarters of ‘07. For the 2007 fiscal year period results were adjusted by a price of $0.04 per share for the first three quarters of the year. For the 2006 fiscal period, the earnings per share [inaudible] were $0.98 versus $1.08 as previously reported.

For the fiscal 2007 fiscal year period, restated earnings per share for continuing operations were $1.06 versus $1.10, which was reported. We continue to work with our external auditors to address the related material weaknesses in our internal controls.

As you’ve heard me say while discussing other areas, our goal is always to right any errors or weaknesses we have as quickly as possible, and this is no exception. Our executive management team and I want to assure you that we will take the steps necessary to resolve these issues, and we’ll work to ensure that our accounting and IT functions reflect the level required of a $550 million global organization.

Of all these accounting-related items, internal control weaknesses represent significant challenges. Our operations showed good solid performance in the fourth quarter, and along with the efficiencies we put in place throughout the year resulted in record operating profit for the full year 2007, even though the markets we serve experienced a difficult year.

In 2007, we completed and integrated the three acquisitions, increased our service offerings and geographic footprint, and we saw a good expansion in our consumer products packaging accounts.

In addition, by leveraging the cost reduction efforts completed in 2007, we have positioned Schawk to deliver sustained margin improvement in 2008 and beyond. Alongside the acquisitions we made in 2007, we also had a number of strong new business wins and were able to grow our business organically.

Finally, we dramatically reduced our debt by $32.6 million in 2007, due to our generation of operating cash flow of $69.8 million in 2007 versus $28 million in 2006. As you will recall, we had a very slow third quarter in our U.S. operations in 2007.

As we anticipated in the fourth quarter, many of the projects we had been on hold came through. And in fact, consumer products packaging accounts increased 10.6% in the fourth quarter over the previous year. However, the entertainment business continues to be a drag on the top and bottom line, and our advertising agencies’ accounts were soft during the fourth quarter.

Our packaging business worldwide was up 8.3% in 2007. Higher-end branded products were under consumer pressure while corporate brands had gains. While the rising fuel costs continue to impact global economies, new product introduction and customized products coupled with aggressive marketing programs are ways clients are driving growth.

This all bodes extremely well for Schawk. With our diversified offerings and agility, we believe Schawk will succeed even in the unsteady economic times that we are now facing.

We remain extremely confident in our operations and in the ability of this organization to win global opportunities that no one else in the industry could handle. We will continue to work to increase shareholder value by following our strategic plan and increasing our global service offering.

We are committed to continue leading our industry while delivering the greatest value to our clients around the globe everyday. Additionally, we will continue to make the tough decisions of consolidating, improving technology, and right sizing our workforce.

Now, I’d like to turn the call over to Jim, and he’ll review the numbers in more detail.

James J. Patterson

First, I would like to address the accounting issues. Software capitalization, there’s actually two issues related to software capitalization. Software for internal use is the first issue.

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