posted on: July 02, 2008 | about stocks: SGK    

Schawk, Inc. (SGK)

Q1 2008 Earnings Call

July 2, 200811:00 am ET

Executives

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

Analysts

Myron Kaplan

Casey Flavin - CJS Securities

Craig Kennison - Robert W. Baird

James Clement - Sidoti & Company

Brent Miley

Presentation

Operator

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.

Last week we filed an 8-K detailing the restatement of our 2002 results due to an error in accounting for goodwill associated with one of our Canadian operating units, Cactus. Tim will provide more detail on the particular matter later in the call but this correction is the result of the complete review and overhaul of our SOX compliance program that began earlier this year. Our consultants have completed a risk assessment of all of our units and we are in the process of working with them to design effective controls and provide appropriate accounting resources as necessary. We expect to make substantial progress on remediating the internal control issues by the end of this year.

Our executive management team and I want to assure you that we will take the steps necessary to ensure that our accounting and our IT functions reflect the level required of a $550 million global organization.

While our markets have been soft, we believe we are well-positioned to deliver more efficiently than ever before. With our diversified offering and agility, we believe Schawk will succeed even in the unsteady economic times that we are now facing. We will continue to work to increase shareholder value by following our strategic plan to improve margins and increase our global service offering. We are committed to continuing leading our industry in delivering the greatest value to our customers around the globe every day.

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

Timothy J. Cunningham

Thanks, Dave. Good morning, everyone. As Dave had mentioned, comparing the first quarter of 2008 with the first quarter of 2007, our sales were down 2.5%, comprised of slightly higher consumer product packaging sales, lower advertising retail sales, and lower entertainment sales.

The loss of the large retail account that David alluded to, and we disclosed in 2007, impacted the quarter by $3.5 million. Excluding that client loss, our advertising retail accounts were essentially up 3.1% compared to the prior year first quarter. The softness was particularly evident in our domestic business in the U.S., which represents more than two-thirds of our revenues. Our Canadian operations had a strong sales quarter. However, our European and Asian operations were down slightly compared to the 2007 first quarter. Our creative design group, Anthem, also had a strong quarter, as two acquisitions contributed to strong revenue gains in the 2008 period.

On the operating income line, we had operating income of $6.7 million in the quarter versus $12.2 million in the previous year’s first quarter, a decrease of 45%. Most of that decrease was attributable to the lower sales, as well as increased SG&A costs of $1.8 million related to our internal control issues, rebranding initiative, and professional fees for due diligence related to a potential acquisition. In addition, SG&A expense rose $1.4 million because of acquisitions made in 2007.

Now, moving on to interest expense, we continue to drive down our interest expense as we have for the past two years. First quarter 2008 interest expense was down almost 26% compared to 2007, as we continued to use our strong cash flows to reduce our debt. However, outstanding debt rose by $6.7 million at March 2008 compared to December 2007 due to working capital requirements, driven in part by a $6 million income tax payment related to pre-acquisition tax obligations of the seven worldwide group.

Compared to March 2007, however, total debt is down $18 million at March 2008. Our effective tax rate was slightly under 15% for the first quarter, as compared to 39% in the prior year’s first quarter, due primarily to the release of reserves in the first quarter of 2008 that were no longer needed due to statute of limitation closures on certain non-U.S. tax returns.

Last Thursday, as David mentioned, we filed a Form 8-K regarding material charge for impairment of good will associated with Cactus, a Canadian large format print producer acquired by the company in 1999, which should have been recorded in fiscal 2002. For purposes of good will testing, this operation had been incorrectly aggregated with the company’s broader Canadian reporting unit at the 2006 and 2007 year-ends, and with all the operating units of the company for fiscal years ’02 through ’05. Cactus should have been treated as a separate reporting unit and its good will should have been tested for impairment on a standalone basis because it is a dissimilar business.

We determine that the good will associated with Cactus was impaired by approximately $2.2 million in fiscal 2002, and that this error was material to fiscal 2002 results and would have been material to the fiscal 2008 income statement.

The Form 10-Q filed this morning presents unaudited restated consolidated balance sheet information as of December 2007 to reflect changes in the amounts of previously reported good will, retained earnings, and accumulated comprehensive income to reflect the correction of this error. At December 2007, the restatement resulted in a decrease of good will of $3.5 million, a decrease in accumulated comprehensive income of $1.3 million due to the fluctuation in exchange rates between the Canadian dollar and U.S. dollar, and a decrease in retained earnings of $2.2 million.

The accounting error has no effect on net income for any period after fiscal 2002. As David mentioned, beginning in the second quarter and continuing through the remainder of 2008, we initiated the process of reducing personnel and utilizing office space in a more cost effective manner. These actions are anticipated to result in total charges between $7 million to $8.5 million in the last three quarters of 2008.

Cost savings from these actions are expected to range between $4 million to $5 million in the second half of 2008. The full annual impact is estimated to range between $12 million to $13 million and is expected to be realized in fiscal 2009 and each year thereafter.

Now, moving on to the balance sheet, we reduced our accounts receivable by over $9.5 million compared to the December 2007 due to our continued strong collection efforts in 2008. Our debt-to-equity ratio remains strong at 38.5% as of March this year, and our debt-to-total-capital ratio also continued healthy at slightly under 28% at the end of the first quarter.

The company is well-positioned to finance its growth in 2008 between operating cash flow and over $70 million of availability on our revolving credit facility.

Finally, as we mentioned in this morning’s press release, we incurred about $900,000 in professional fees related to our internal control issues and anticipate higher G&A costs of up to $3 million during the remaining three quarters of 2008 related to the development of the proper internal controls, as well as higher external audit costs.

The company, with the assistance of a major accounting and advisory firm, recently completed the plans to remediate our material weaknesses in SOX program. We anticipate starting these remediation activities in the third quarter, with the expectation that we will make major progress with our controls by the end of the year. The company expects to continue receiving assistance from a major accounting and advisory firm as we progress through these remediation activities.

This is expected to be a major driver of increased G&A expense in the last three quarters of fiscal 2008, as well as higher external audit costs, until such time as we complete and test the revised internal controls.

I would now like to turn the call back over to David.

David A. Schawk

Thanks, Tim. Well, clearly 2008 will be a year of many changes at Schawk, changes we believe will strengthen our operations and our company. Along with my executive management team, I am fully committed to continuing to improve our growth in operating performance.

With that, I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Myron Kaplan]. Please proceed.

Myron Kaplan

Good quarter, all things considered. Do you think that -- is your plan to be fully Sarbanes-Oxley compliant by the end of the year and --

David A. Schawk

We’re working towards that end. I would suggest that we are on schedule with trying to get it completed by then, but that is our goal and if not, we’ll be very close.

Myron Kaplan

So it would be accomplished, let’s say, hopefully within a year?

David A. Schawk

Absolutely.

Myron Kaplan

And as far as the selection of a permanent CFO, how are you progressing?

David A. Schawk

We are still progressing through interviews and we are making sure we get the right candidate and we are working towards that end.

Myron Kaplan

Very good. Okay, I’ll get back in the queue. Thanks.

Operator

The next question comes from the line of Casey Flavin from CJS Securities.

Casey Flavin - CJS Securities

Your pre-announcement last month reflected a major slowdown in the consumer packaging products part of the business. How much of this is actually due to the slowdown in North America versus client specific order patterns or losses? And more importantly, what are you seeing in terms of these trends currently?

David A. Schawk

Well, it’s primarily due to the softness in the economy. While we have lost some brands with a certain major consumer product company, we really -- other than the client loss that we mentioned that we lost in ’07 really on a client basis there’s no major impact. So most of it really is North American related due to the softness in the economy.

Casey Flavin - CJS Securities

And the brands you’ve lost, are these things that may be just a quarter or two issue, or are these brands that have gone to a competitor?

David A. Schawk

They are brands that have gone to a competitor but in a particular account, we also won brands, so there’s been some loss of business but there’s been also some gain of business. But nothing on -- nothing major.

Casey Flavin - CJS Securities

Okay. Now, taking a step back, on the last call back in April, you had mentioned, or there was mention that business was ahead of plan through February. Again, based on your results, obviously March you must’ve seen a pretty significant slowdown. Can you help us understand if this is more due to internal processes or is it more of a demand issue that caused the slowdown there?

A. Alex Sarkisian

It is indeed more of a demand issue. Traditionally, we see the middle months of the year is where there has historically been more activity. That was the case last year. This year, that did not happen.

There are a couple of different views of this. Some of our clients take the view that marketing budgets need to be accelerated during these soft times. You’ve seen some of those pronouncements. Others retract more and become more cost-saving focused.

One of the challenges, as Dave mentioned, that a lot of particularly the branded companies have is that they indeed are losing market share to a lot of private label types and corporate brands. We see Walmart and Tesco and Target have picked up dramatically through this as consumers are looking for ways to save on the other side.

We are now starting to see a little bit of a rebound effect -- can’t predict whether or not that will be more of a trend that will be secured throughout the end of the year but as Dave mentioned, our business has picked up and that’s -- in talking to a lot of these clients, their concern that they are starting to lose market share and they have to go out and start promoting and doing more new product releases.

David A. Schawk

And to add to that, we did anticipate a soft first quarter in our planning process, and while we were ahead in our planning it was a slowdown anticipated. It was just slower than we thought it would be.

Casey Flavin - CJS Securities

Okay. Now, can you give us your reaction, David, to how the remediation process is progressing so far? And more specifically, where a reduction of your various ranges of $4 million to $5 million in ’08 and $12 million to $13 million in ’09, where those are going to come from in the business?

David A. Schawk

Well, first the goal with the remediation effort, it’s -- like I said, we’re on track. We are now designing the controls and starting to implement putting these controls in place. I am very comfortable that we will significantly reduce our material weaknesses and significant deficiencies by year-end. It’s a very good process that we are going through and it’s something that actually will make us a better company. There’s no question about it and I am glad we are going through it.

As for the other areas, I’ll have Tim address those.

Timothy J. Cunningham

Yeah, the savings are going to be principally in employee costs. I mean, a little over 80% of the savings we anticipate will be in that area; 15% or so in just lower lease and related expenses from that aspect, and a small percentage, you know, maybe in the area of 3% or so from less depreciation expense. So principally in employees costs is the biggest chunk.

Casey Flavin - CJS Securities

Got it. That’s very helpful. Thank you. And lastly, I’ll ask, can you just give us a sense of where you are in reevaluating your non-core businesses and the potential of divesting a couple of those? And then I’ll hope back in the queue. Thanks.

David A. Schawk

Right now, we can’t comment about that. We’re always looking at ways to improve the business.

Casey Flavin - CJS Securities

Fair enough. Thank you.

Operator

The next question comes from the line of Craig Kennison from Robert W. Baird.

Craig Kennison - Robert W. Baird

First question, on the $12 million to $13 million in cost savings you anticipate in 2009, could you help us understand the level from which you expect to save that? So for example in ’07, your SG&A was about $132 million but in ’08 it’s going to be higher due to some one-time costs. Is it fair to assume something in the neighborhood of $120 million to $125 million in SG&A as a result of those cost saves?

Timothy J. Cunningham

Well, the bulk of these costs are in the cost of goods sold in the business. I mean, there will be -- I mean, there are -- of that 80%-plus of employee costs, the bulk of that 80% is people who are classified in the cost of goods sold.

Craig Kennison - Robert W. Baird

That’s a fair point.

Timothy J. Cunningham

It is not directed as an SG&A, although there is some of that in there. That is not the focus of the effort.

Craig Kennison - Robert W. Baird

So should we look at ’07 as being a better comparative year? Or is ’08 a fair comparison from which to reduce by $12 million to $13 million?

Timothy J. Cunningham

I would just say if you are going to compare, use ’07.

Craig Kennison - Robert W. Baird

Okay. We’re at a unique spot in that your earnings report is delayed, so you are in a position to comment on results in the second quarter, given it concluded last week. Can you give us an early read on the tone of business in the quarter?

David A. Schawk

Like I said, Craig, we had a better April and May, and we’re anticipating hopefully that continuing. We certainly haven’t closed our books for June but we saw an up-tick in business.

Craig Kennison - Robert W. Baird

Okay. With respect to your tax rate, would you expect going forward about 40.5%?

Timothy J. Cunningham

No, because of what we saw in the first quarter, I think in the area of 36% to 37% is a good number right now for ’08.

Craig Kennison - Robert W. Baird

For all of ’08?

Timothy J. Cunningham

For all of ’08, that’s correct.

Craig Kennison - Robert W. Baird

That’s including the 14% this quarter?

Timothy J. Cunningham

That’s correct.

Craig Kennison - Robert W. Baird

So just from a -- on a quarterly perspective, staying at that 40% to 41% range?

Timothy J. Cunningham

Yes.

Craig Kennison - Robert W. Baird

Okay. With respect to the green packaging initiatives you’ve discussed in the past, are you seeing any momentum at all in that business, and is that at all driving your sales?

A. Alex Sarkisian

Well, it’s client by client. One of the things that we’ve been talking about with this capacity improvement, we’ve gotten positive feedback from a number of clients that are more directly impacted by the consolidation activities and feeling that indeed they are -- the reduction of our global footprint does help us in terms of making us not only more efficient from a financial point of view but also environmentally more efficient and that’s something that’s being looked upon positively.

Again, it’s client by client in terms of some of the green packaging activities and most of that has been again slowed by those decisions to hold back on some of the new marketing.

Craig Kennison - Robert W. Baird

David, could you comment on your long-term organic growth expectations for the business? You’ve shown some organic growth with many clients but then occasionally there’s a large client that may contract. Rolling all that together, what are your expectations for organic growth in this business?

David A. Schawk

You know, the industry studies show that this grows 3% or 4%, and we always shoot for higher than that. We are always looking at 5% or 6%. But as I mentioned, we did lose some lines from a large consumer product company. We gained some lines in other areas from that company, other areas of the world, so there is a little bit of contraction and certainly the slowness of the economy is decreasing some of that activity. But our goal and certainly our strategic goal is really to work in the 4% to 6% organic growth rate.

Craig Kennison - Robert W. Baird

Would you care to comment on why you think you may have lost those lines of business? Is it price or is it a different service?

David A. Schawk

No, it’s strictly price and that was the decision made by them.

Craig Kennison - Robert W. Baird

Are you competitive on price on the other lines of business you have with that consumer packaging company?

David A. Schawk

Absolutely, otherwise we would have lost more of it, so we are competitive and we are also -- like I said in my remarks, we are looking at transferring business to lower cost areas around the world and we will continue to be competitive in the marketplace.

Craig Kennison - Robert W. Baird

Great. Last question; with respect to the stock price, it’s taken a beating recently. Would you consider a share buy-back and sort of what are your plans for cash?

David A. Schawk

Yeah, absolutely. We did approve this year, the board approved $2 million share buy-back. We are restricted by the time we can buy it. Right now, it’s -- now since the second quarter is so close, we have to wait until the second quarter results come out, so 48 hours after the second quarter results are published, the company can buy back stock and certainly at these levels, it is attractive and we’ll look at that at the proper time.

Craig Kennison - Robert W. Baird

Finally, when do you expect you might report second quarter results?

Timothy J. Cunningham

The goal right now, we expect to report on time. We’ve got -- we’re going to continue with the same process that we approach with the first quarter, implementing new procedures and waiting for our auditors to complete their review of our results and then obviously working closely with our audit committee. Right now, that’s the expectation.

Craig Kennison - Robert W. Baird

Okay. Thank you.

Operator

The next question comes from the line of James Clement. Please proceed.

James Clement - Sidoti & Company

David, just putting the last 12 months into perspective, it seems to me, and just correct me if I’m wrong here, and I’m curious for your thoughts on this, I mean, it seems like the economy actually really started to impact you in the third quarter of 2007 and that the kind of project delays and the on again, off again -- I mean, that’s now basically been going on for a year, hasn’t it?

David A. Schawk

I think our third quarter, especially after we restated, showed that we had a better quarter than what we thought. So I think it’s really started obviously in earnest in the fourth quarter. That’s where we saw the slowdown, continued in the first quarter, and now fortunately we’ve seen a pick-up, trying to get back to somewhat normalized levels.

James Clement - Sidoti & Company

Okay. With respect to the remediation work that you are going into and then also with the cost savings plan that you announced, I’m a little -- what I’m a little unclear on from the press release is of the costs that you absorbed in the first quarter, and then I think you mention roughly about a $3 million number, an SG&A number that you expect to kind of continue to face for the rest of 2008. Is your expectation that those costs will continue to be with you? Are some of those costs part of the cost savings number for 2009 that you guys threw out there? Can you help us understand that a little bit better?

Timothy J. Cunningham

I would say the $3 million that we talked about largely are one-time costs. I would call them incremental costs to get the controls righted and so that those would not continue in the run-rate of the company going forward.

James Clement - Sidoti & Company

Okay, but are you including the fall-off of those expenses in the $12 million to $13 million number for 2009, or is that a separate number?

Timothy J. Cunningham

That’s a separate number.

James Clement - Sidoti & Company

Okay, so in fact you actually -- I think your hope would be that when all of the remediation work is done, you actually -- your cost profile could actually be even more improved than the 12 to 13?

Timothy J. Cunningham

If you look at all the one-time costs in ’08, that’s correct.

James Clement - Sidoti & Company

Okay, great. Thank you very much for your time.

Operator

(Operator Instructions) The next question comes from the line of Brent [Miley] from [inaudible] Capital.

Brent Miley

Good morning, everybody. I have a couple of questions; Dave, you mentioned you guys are moving -- regarding the cost savings, you are moving some stuff to lower cost venues. Is that both across the domestic facilities and international or is it going mostly to international? Just curious about that.

David A. Schawk

Well, we’re actually moving internationally as well as domestically into lower cost regions, lower cost centers.

Brent Miley

Okay, so you are basically just -- it’s around the world but you are just going to your better lower cost centers?

David A. Schawk

That’s right.

Brent Miley

Okay. You’ve mentioned in the past that you’ve got some window with your design activity and the fact that you are sort of more forward integrated into that process, that you have a little visibility. Any kind of a road map regarding design activity that might bode well or ill for the future?

David A. Schawk

Things seem to be picking up overall, and we think -- you know, first quarter again was soft but we see that activity in the design and our core business picking up.

Brent Miley

Okay. On the entertainment side of things, anything in particular going on there? Has that just continued to be just a competitive marketplace? Anything in particular going on in that part of the business?

A. Alex Sarkisian

Brent, some of the -- a couple of things that are going on. It’s overall economy based. They had the writers’ strike last year, slowed things down. They’ve got -- they are looking at the possibility of a screen writers guild strike coming up, so it’s been choppy.

What we’ve been doing in that regard is trying to diversify into other areas beyond just having that group being dependent upon the studios exclusively, so we are moving into -- we’ve had a little bit of success in terms of being able to capitalize on other relationships that we’ve got with clients expanding into the retail markets. We did a joint sale into a niche business that’s related to the liquor industry, which seems to be picking up a little bit, and being able to utilize our capacity there. And that’s the way we’re doing it for short term, is trying to diversify and expand that way and not be so dependent upon just one sector.

Brent Miley

Okay, and that effort is still ongoing and you’ve got some decent prospects on that front for either restaurants or, as you say, other venues?

A. Alex Sarkisian

That’s correct.

Brent Miley

Okay. Let’s see -- Canada was strong. Is there anything in particular that drove that?

Timothy J. Cunningham

I’m sorry, can you repeat that, Brent?

Brent Miley

I’m sorry, yeah -- in terms of the Canadian business, you said it was strong. I’m wondering, was that mostly currency, was it actually just a different market? Could you just talk about what drove that?

A. Alex Sarkisian

The business there, those markets do not seem to be as negatively impacted as do the U.S. markets, and so a little bit of it is currency, although currency has flattened out pretty much, the currency differential has flattened out pretty much. It’s just new business and expansion with existing accounts.

David A. Schawk

And it’s been accounts that we’ve been doing the work in the U.S. that we’ve been able to now secure the Canadian business as well up there, which has added a significant amount of business to our operations up there.

Brent Miley

Okay, let’s see, I had two more, if I could; one on the -- just to continue to beat the dead horse, you guys had a $1.8 million in non-recurring kind of audit costs, that kind of thing, in the first quarter. You’ve got $3 million for the rest of the year, so is the entire roughly $5 million for this year, is all that one-time costs? You just clarified the $3 million, so I get that part but in terms of the actual expenses you guys had in this quarter, is that 1.8 also considered basically one-time?

Timothy J. Cunningham

It would be fair not to necessarily bake that into the run-rate. It would not be unfair.

Brent Miley

Okay, so I mean again, I know you guys may have to build out staff a bit and some of that may stick, but it sounds like most of that is probably not going to be ongoing?

Timothy J. Cunningham

That’s correct.

Brent Miley

Okay, fair enough. And then you mentioned, you guys did allude to the fact that obviously you’ve got -- you know, you mentioned that you’ve won some accounts, lost some accounts within a major client. Can you just talk about either major rebids coming up, either -- you know, you mentioned often you guys will go through kind of new wins or new clients or anything like that. Can you just talk a little bit about what activity is coming up for the rest of the year, and either, like I said, either if you’ve got other major rebids coming up or if you’ve won any new clients in the past quarter or so?

David A. Schawk

We don’t have anything significant that we are aware of of any new -- of our major clients, let’s say, coming up this year. We do have a lot of activity going on in the business development area. You know, unfortunately as we’ve mentioned before, these new wins take several months to complete, so we are in the pipeline, tens of millions of dollars that we are working on today on new business, so that looks very robust and we will continue to win a significant amount of those RFPs, but they take forever. So it’s difficult to say whether a lot of that stuff is still going to hit this year or next year yet.

Brent Miley

Okay, very good. Great, that’s all I had. Thanks.

Operator

The next question comes from the line of Myron Kaplan.

Myron Kaplan

A question I had was do you -- well, what percentage of the physical facilities are you going to be reducing that’s included in these -- let’s say these projected one-time expenses for right-sizing the business?

David A. Schawk

I don’t know if I have a percentage. There will be some offices completely closed and there’s some offices that are going to remain service centers and the production will be done in other areas, but I don’t know, Alex --

A. Alex Sarkisian

Myron, we have been saying for a while that technology allows us to be in the situation where we can reduce the number of manufacturing centers and increase the number of client-facing centers, and this is what this is all about. And we’ve begun to pull the trigger on some of those things. We had to plan them, we had to work with the clients, et cetera, and assure the flexibility to be able to move them, the utilization of technology and that’s what we’re doing. But we don’t really look at it -- we haven’t quantified it in terms of what percentages of that activity are going on.

Myron Kaplan

In that case, you might say then maybe 5% or something like that?

A. Alex Sarkisian

Let’s put it this way -- we’ll say that we’re moving, impacting in this activity something in a handful of operations are being impacted.

Myron Kaplan

Even beyond this year, you would expect that that would continue in some sort of evolutionary --

A. Alex Sarkisian

Well, I don’t want to have people think that we are going to have an ongoing, taking charges with great regularity but the point of fact is that we are going to do everything we can to utilize our processes to become more efficient every step of the way, so long as that does not negatively impact our client relationships or --

Myron Kaplan

Forgive me, I didn’t mean that you’d be taking charges forever. I just meant in the next year after that, presumably there will be some facilities that might be trimmed or something --

A. Alex Sarkisian

That’s correct. It’s an ongoing activity.

Myron Kaplan

-- handle that would be in the course of the normal business just because it would be more -- let’s just say more continuous and come from a --

A. Alex Sarkisian

That’s correct.

Myron Kaplan

-- instead of right now, you are sort of having a readjustment, let’s say, to the company as it is.

A. Alex Sarkisian

Yeah, we’re making some very deep cuts that we’ll make the second half of this year, ’09, and hopefully ‘010 more productive and improve those margins.

Myron Kaplan

Right. Okay, thank you.

Operator

The next question comes from the line of Craig Kennison from Robert W. Baird.

Craig Kennison - Robert W. Baird

Thanks again. I just wanted to follow-up on your opportunity to move some of your costs to regions with lower cost opportunities. What is your capacity in a country like India to absorb some of this work? And what is the status of your union here in the U.S. and in the U.K.?

David A. Schawk

I can address India and Asia in particular. India is producing now on the level of three to four times what it did a year ago. We’re expanding there significantly. Throughout Asia, we have significant capacity that we are going to be filling up between now and the end of the year, and we could probably do twice as much work in Asia overall. Now, I’m not saying that we have that capacity in place today but our goal is to increase that business 2X what we are today. Over a period of time, we’re going to be building that up and moving the business over there.

I’ll let Alex comment on the union and U.K. situation.

A. Alex Sarkisian

Our union relationships are strong with employees. There’s obviously -- whenever we get into a downsizing situation, people are a bit concerned about that but in terms of wages and benefits, those types of issues, we’re in good alignment with what the markets -- with where the rest of the market is, and so we don’t have ongoing issues as it relates to that.

Craig Kennison - Robert W. Baird

Do you have non-union domestic capacity? And could you put more business with that employee base?

A. Alex Sarkisian

We do have non-union capacity and I don’t want to talk about strategies about where we move things. We relocate business, as we are doing this time, to the areas where we think we can get -- where we can be most efficient, and we will continue to do that.

Craig Kennison - Robert W. Baird

Okay. Thank you.

Operator

(Operator Instructions) We have no further questions at this time, sir.

David A. Schawk

Okay, great. Well, thanks for joining us today. We are making the tough decisions to get this business right-sized and the costs in place. We’re excited about the direction we’re heading as far as reducing these costs and look forward to talking to everybody on the second quarter call, which hopefully will be on time during August, mid-August some time. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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