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Schawk, Inc. (SGK)

Q2 2008 Earnings Call

August 19, 2008 10:00 am ET

Executives

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

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

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

[Christine Walvak] - Dresner Corporate Services

Analysts

James Clement - Sidoti & Company

Craig Kennison - Robert W. Baird & Co.

[Myron Kaplan]

Presentation

Operator

Welcome to the second quarter 2008 Schawk earnings conference call. (Operator Instructions) I would now like to turn the call over to Christine Walvak, Dresner Corporate Services.

[Christine Walvak]

I’d like to thank everyone for joining us this morning. Yesterday a press release was distributed outlining the results for the second quarter of 2008. 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 Tim Cunningham, Interim 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’d 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’ll turn the call over to David Schawk.

David A. Schawk

Good morning everyone and thanks for joining us. As you saw from our press release issued late last night the results of our second quarter were a continuation of the slowdown that we experienced during the first quarter. We believe that the slowdown in business reflects the general softness in the US economy. While we were optimistic near the latter half of the second quarter given the uptick in business that we had seen in April and May, results from the month of June were below our expectations and the positive momentum did not continue as planned. Furthermore, in June we experienced delayed client project activity as the month progressed. As a result we believe that clients are taking a cautious stance with respect to their promotional, innovative and marketing activities due to the uncertainty that exists within the economy.

For the second quarter of 2008 our sales were down approximately 6.5% over the second quarter of 2007 as consumer products packaging companies continue to deal with higher raw material and transportation costs and private label competition, along with the entertainment and advertising retail customers experience adverse sales performance versus last year. The 6.5% decrease in sales was driven by an 8.6% sales decline within our North American and Europe segments. This was partially offset by an 8.6% increase in sales in our other reportable segments which was a result of strong sales at Anthem, our creative design group.

Unlike in the first quarter we experienced a slight increase in consumer product packaging sales and a decrease in advertising retail entertainment accounts. The weakness in sales was broadly based. In the second quarter of 2008 versus the same period last year, consumer products packaging accounts decreased 2.7%, advertising retail decreased 7.7%, and entertainment accounts decreased 9.9%. 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.

As we highlighted on last quarter’s conference call consumer products companies know that when their branded products do not provide innovation in the form of new product introductions along with new packaging and design, they start to lose business to private label brands. Therefore despite the reduced activity on behalf of our consumer products packaging clients we are fairly optimistic that they will begin to resume marketing activities such as new product introductions, package redesigns, and promotional materials as the year progresses. Additionally, in difficult uncertain economic times like we’re experiencing now, private labels tend to gain market shares as consumers look for ways to cut back on spending. Therefore we continue to see robust activity in our private label market.

As to retail advertising and entertainment accounts we continue to see weaker overall market versus last year. In general companies in these areas have reduced their spending on advertising and marketing.

As a result of the adverse sales performance in the first half, growing price pressures, and the related profit impact we are focusing on enhancing our capacity utilization and anticipate that we will improve our operating margins.

During the first quarter conference call we had announced a plan to consolidate and right size our workforce and our operations to improve capacity utilization by reducing personnel, consolidating manufacturing locations, and realigning work sites to perform work in lower cost venues. During the second quarter of 2008 the company began to implement this cost reduction plan by closing and consolidating manufacturing locations and expanding our sales and service offering while reducing staffing levels. We are seeking to consolidate technology and work flows thus allowing the company to improve its capacity utilization rates.

As a result of the initiation of this plan during the second quarter, Schawk incurred expenses totaling $3 million. The total costs of this plan to reduce personnel and realign sites to perform work in lower cost venues while continuing to provide high level of services and quality to our clients are still expected to be approximately between $7.5 million and $8.5 million for 2008 fiscal year. However, cost savings are estimated to range between $4 million and $5 million in 2008 with a full-year 2009 savings estimated to be between $12 million and $13 million.

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