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Schawk, Inc. (SGK)

Q1 2008 Earnings Call

July 2, 200811:00 am ET


Philip Kranz - Dresner Corporate Services

David A. Schawk - President, Chief Executive Officer, Director

A. Alex Sarkisian - Chief Operating Officer, Executive Vice President, Secretary, Director

Timothy J. Cunningham - Interim Chief Financial Officer, Chief Accounting Officer


Myron Kaplan

Casey Flavin - CJS Securities

Craig Kennison - Robert W. Baird

James Clement - Sidoti & Company

Brent Miley



Good day, ladies and gentlemen, and welcome to the Q1 2008 Schawk earnings conference call. My name is Elvis and I will be your coordinator for today’s call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Phil Kranz. Please proceed, sir.

Philip Kranz

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

Joining us today from the management team of Schawk Inc. Is David Schawk, President and Chief Executive Officer; Alex Sarkisian, Executive Vice President and Chief Operating Officer; and Tim Cunningham, Interim Chief Financial Officer.

Management 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 today’s conference call may contain certain forward-looking statements that are subject to the Safe Harbor disclaimer found in today’s press release.

At this point, I would like to turn the call over to David Schawk. Please go ahead.

David A. Schawk

Thanks, Phil. Good morning, everyone. Thanks for joining us. Well, as you saw from our results issued this morning, business in the first quarter slowed due to the overall softness in the economy, as many clients reduced their promotional, innovative, and marketing activities in order to absorb higher raw material and shipping costs. Our sales were down approximately 2.5% over the first quarter of 2007. Sales were down 4.6% in North America and Europe, partially offset by acquisitions made in 2007. Strong new business wins in 2007 improved sales at our design group, Anthem, and strong Canadian sales, so that the overall sales were only down, as I mentioned earlier, 2.5%.

Consumer product packaging sales increased 0.6%, advertising and retail decreased 6.2%, and entertainment accounts decreased 12% quarter over quarter. The decrease in the advertising and retail category included the loss of the major retail account that we ceased doing business with during the first quarter of 2007. Absent the loss of that accounts, sales in the advertising and retail category actually increased 3.1%.

As a reminder, consumer products packaging accounts represent approximately two-thirds of our total revenue, so this part of our business has the largest impact on both our revenues and our profits. Advertising and retail accounts represent over 25% of our total revenue.

The good news is that we saw business in our consumer products packaging accounts start to pick up in late April and May, and we’re fairly busy now. Clients who had held off on new product introductions, customized products, package redesigns and promotional materials in late 2007 and in the first quarter are going ahead with their plans. Particularly, we are seeing increased activity in beauty care, baby care, and food packaging.

Consumer product companies know that when their branded products do not provide innovation in packaging and design, they start to lose business to private label brands. Additionally, in tough economic times like now, private labels tend to gain market share as consumers look for ways to cut back on spending. Therefore, we are also seeing a robust activity in the private label market.

As to retail and advertising and entertainment, we continue to see weaker overall markets than last year. In general, companies in these areas have reduced their spending on advertising and marketing, but for the account we ceased doing business for in early ’07, we have increased revenue in these areas through new client wins.

As you saw in our release this morning, we are taking several steps to improve performance. By increasing the utilization of our global network, and expanding our sales and service offering, we will continue to implement the latest and best practice workflows and technologies to be as efficient as possible.

In addition, we have made some tough decisions and are taking actions to consolidate and right-size our workforce and operations. During the second quarter and continuing through the end of 2008, we are improving capacity utilization by reducing personnel, consolidating manufacturing locations and realigning work sites to perform work in lower cost venues.

None of these actions we are taking will impact our customers or the level of service they receive from Schawk. While we will be taking charges between $7 million and $8.5 million in 2008 for these cost reduction efforts, we believe they will position Schawk to deliver sustained margin improvement beginning in the third quarter of this year and beyond.

Cost savings in 2008 are expected to be between $4 million and $5 million, and the impact for the full year of 2009 and beyond is expected to be between $12 million and $13 million.

Finally, we continue to work with our external auditors to address the material weaknesses in our internal controls. As you have heard me say before, our goal is to always right any errors or weaknesses we have as quickly as possible.

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