ACCO Brands Corp (ACCO) 2003 Q2 法說會逐字稿

Welcome to the first quarter GBC conference call. (CALLER INSTRUCTIONS). GBC would like you to know that certain information presented during this conference call may constitute forward-looking statements subject to certain risks and uncertainties. Actual results may differ materially from the Company's expectations depending on a variety of factors and risks as described in the Company's past SEC filings, which you should refer to for detailed review.

I would now like to introduce Mr. Dennis Martin, Chairman, President and CEO. Sir, you may begin.

Thank you very much and welcome to all to our first-half review. Today as usual with us are Tony Gulliano (ph), Paul Boors (ph), Steve Rubin, Jeff Hayden (ph) and Don Civgin and we will be available to answer questions as we conclude the presentation portion of the meeting.

We had a lot of ground to cover today and we're glad you joined us and I will have Don kick off. When he gets done, then I will come back and talk a little bit about the tone of the business, where we see it going and so forth. Don?

Thanks Dennis. As an overview, the second quarter continued to be a challenging one for us while operating results were fairly stable with last year, the lack of sales growth did preclude us from making the improvements in profitability. We did initiate several meaningful changes during the quarter, which should help us get back on track towards growing our profitability in future.

We do have a lot to cover. I want to do four things this morning. First as you probably noticed, we're know reporting financials in line with our recent organizational realignment, and I will walk through those changes with you. Second I will review the results for the quarter. Third I want to talk a little bit about GBC's restructuring activities which were announced last week. Last I will walk you through our refinancing of our senior credit facility.

Late last year, GBC announced a realignment of our organizational structure. This was done primarily to better align our company with the needs of our customers and end-users and reduce redundancies in operations. Beginning with the second quarter, our results will be presented consistent with the new organizational structure. The commercial and consumer group, CCG, is a combination of the old document finishing group, the old office products group, the AsiaPacific region business and the education division. This group will focus on branding and marketing strategies for binding, lamination and information display products in the work, school and home environments.

The industrial and print finishing group, IPFG, is a combination of the old films group and automated finishing division. This group will focus on print for pay and other finishing customers who use GBC's professional grade equipment and supplies in their production process.

The second quarter and year-to-date results reflect this new organizational structure and last year's results have been restated as well.

Sales for the quarter were 171.2 million, down about 3.2 million or 1.8 percent from last year's quarter. While the second quarter sales were up a small amount from the first quarter this year, we continue to be down a similar percentage on a year over year basis. Although it's too soon to call it a trend, June was the strongest month of the quarter, but exchange rates had a favorable impact on the second quarter as well, adding approximately $8 million to sales.

While Dennis will discuss the sales environment in more detail, sales in both CCG and IPFG were disappointing for the quarter. The CCG decline was attributable primarily to a decline in writing boards and bulletin boards which continue to be impacted by the lack of new office construction. Unfortunately, boards are a very high margin product for GBC and that has an impact on gross profit rates as well.

IPFG's decline was due to continued weakness in the commercial printing market and this market continues to be very competitive and we lost business from several customers on the basis of price competition.

Gross profit margin for the quarter were 39.8 percent, down slightly from prior year but stable with the first quarter. There are a couple of things to note here. First our mix of business hurt this year with lower sales of the more profitable boards I mentioned but higher sales of less profitable products such as private label three ring binders.

Second, as the lower sales volumes have put downward pressure on production volumes, it has impacted our cost of goods through lower absorption of fixed overhead costs. While operational excellence initiatives have been successful in reducing costs, we were unable to fully offset the impact of product mix and lower volumes.

Operating expenses for the quarter were 56.4 million, down nearly $2 million from the prior year and down a little over $1 million from the first quarter. Last quarter, Dennis and I stated our commitment to reduce expenses in the face of a soft revenue line and we are seeing the results of those activities.

In spite of exchange rates working against us on this line, we feel good that our activities to reduce overhead expenses helped us in the second quarter.

Operating income for the second quarter was 11.6 million, down about $200,000 from prior year. This is up from the first quarter's $9.7 million but frankly, below our potential. Unfortunately, all the good profitability that is resulting from operational excellence at this point is being lost on the topline and its impact on margins.

I will cover the restructuring expenses in detail a bit further on but interest expense for the quarter was $10.2 million, about $300,000 higher than prior year. In the second quarter, due to the extinguishment of the previous senior debt facility, we charged off approximately $1.1 million through interest expense of remaining unamortized costs relating to the prior credit facility. That was primarily fees.

Net loss for the quarter was $5.1 million or a loss of 32 cents a share. This obviously includes the restructuring charge and the charge-off of the $1.1 million in interest expense. Last year's net income was $2.1 million or 13 cents a share but that included a small amount of restructuring and other charges.

The net debt for the end of the quarter was 334 million, which is up about $11 million from the beginning of the year.

For the second quarter of 2003 GBC announced two actions aimed at reducing costs and expenses in the future. First, we announced the realignment of certain manufacturing in Booneville (ph), Mississippi. As part of our continuing efforts to make our manufacturing more efficient, we will over the course of the next year, transfer the production of certain high labor content SKUs from Booneville to New Heuvo Rado (ph) Mexico. Further, we will begin outsourcing the production of certain items in an effort to lower costs.

Although there will be additional employment opportunities created in New Heuvo Rado, unfortunately this process will eventually result in a reduction of 250 jobs in Booneville.

Also for the quarter, GBC announced a workforce reduction in which approximately an additional 115 people were terminated. This reduction impacted many functions in most of our divisions. The Booneville realignment will result in $8.1 million of restructuring charges. $7 million of that will be in the second quarter. Of these, $2.6 million will be cash charges related to severance with the remainder representing non-cash asset impairment charges. The workforce reduction will result in $1.4 million of restructuring charges all in the second quarter and all in cash relating to severance.

These decisions were difficult ones to make, especially given the loyal and talented associates that were impacted. That having been said, our commitment to you has been to generate growth and profitability and these steps were necessary ones, especially in light of the lack of topline growth at this point.

When completed in 2004, the Booneville realignment is anticipated to generate $6 million a year in reduced costs. We do not anticipate any savings from Booneville in 2003. The corporate workforce reduction should generate $2 million in the second half of this year.

Lastly, in June GBC, refinanced its senior credit facility which is a big milestone for us. The new facility which is $197.5 million, is comprised of $72.5 million revolver and $125 million term. It matures in January 2008. Interest rates are lower with the revolver priced at LIBOR plus 375 and the term at LIBOR plus 450. The agents on the facility are Harris Bank, LaSalle (ph) Bank and GE Capital Corporation. We are very grateful for all our senior lender support and pleased that this refinancing with completed in a timely and effective manner.

The reason we were able to refinance the old facility with much smaller one is due to three reasons. First we repaid a significant amount of debt since the beginning of last year. Second, we reduced our excess borrowing capacity needs and third, we completed two additional financings which reduced our reliance on our conditional senior lenders.

Collectively, these refinancings will save GBC approximately $4 million a year in interest payments due the lower interest rate spreads.

In summary, the second quarter was a fairly busy one. While the sales environment has continued to challenge our results we have hit some important milestones during the quarter that are aimed at improving the future profitability of GBC. Dennis?

Thanks Don. As I start today I would like to review our long-term commitment to the GBC transformation. Our team is committed to the operational excellence that we started two years ago. We continue to invest in developing our people while we go through these difficult times. We continue to invest in the innovation of new products and bringing those to market and during this last period we've really continued our effort in expanding sales through our existing customers.

The GBC team is solid, and they are willing and qualified to step up to all challenges. The weak economy is one challenge and the tough issues like the recent reduction in force really does test our team. But within our offices and within our factories, the team has stepped up and stayed dedicated to our transformation process. I want to thank all the team members that are leaving the Company for their dedicated service and thank and encourage all the remaining members of our team for staying focused, staying committed to the GBC mission.

In the first six months, Don talked about our numbers. I will give you some of the tone of what we see rather than a lot of time on the numbers. But if you look at the business, our office products business has really struggled through the Iraq situation in a period from March through early May in terms of point-of-sale so our decline in sales revenue really has come from that area primarily. In the film area, we are down on the commercial film, but we have been able to make up for that with new products and activities in our digital print business, so the majority of the activity really is centered around the distraction caused by the activities.

On an OI basis, we have been able to stay even with last year based on all the continuos improvement but our goal has always been to exceed last year and continue to grow the top and the bottom line.

In the last six weeks, we've seen orders and shipments pick up. The CCG Group which really comprises about 80 percent of our business is starting to see a recovery on the office products side. Our manufacturing which has been on a decline for the last two years hit a bottom trough in February. I am talking about the CCG, not film which is the other part of the business but the business did hit a manufacturing drop in February. It appears that our business in manufacturing lags the point-of-sale activity in the retail by about 60 or 90 days. So what we've seen is from that bottom, an increasing trend in manufacturing of our product while our inventories have actually come down so we're not increasing manufacturing and building inventory. We're actually increasing manufacturing and selling its through the customers. That trend continued through June and June popped up significantly in terms of manufacturing requirements. July appears to be on track with the June manufacturing levels and our forecast for August is equal, so we are not declaring an end to the difficult margin but we are pleased to see that the manufacturing trend and not a buildup of inventory, has allowed us to start showing more positive results on the manufacturing line.

This four to five-month trend really centers around our consumer and commercial group which is 80 percent of the business which really centers their activity on our corporate customers so it appears corporate customer has gone back to work.

The industrial print finishing business is still being challenged by competitive pricing but we're seeing improvement. We are seeing improvement offsetting some of that competitive attack as well as increased revenues from new products. We're seeing machine sales improve and we're seeing some of the strategies that we are employing to regain lost business working as we have hoped they would so while that's going to remain a challenging environment for us, we feel that the commercial business at least is in control and yet we are still going to see competition as we go through the rest of the year.

Even though we've remained at a profit level of about last year we're not happy with that. We've done aggressive things to get back on track and continue to grow our profits. The cost actions that we've taken, Don talked about some but if you think about what we have done and have not announced, we have had a salary freeze at GBC that will be in effect through April 04 which means we basically all have foregone our raises this year and that should add some income to the stream. The reduction in force which we regret also will ad income to the stream both this year and next year. The refinancing adds a significant piece of leverage as well as adding to the income stream. The Booneville activity, and the other A20 (ph) activities will continue to drive the expense side, so we're confident that the activities on the operational excellence area will continue to show improvement for us.

At the same time, we're confident that our new product program and new sales programs are going to drive growth and in fact, in the first half while we've been down on base business primarily furniture, which is following the trend in the furniture industry, we've been able to offset some of that with new products and new programs so in the case of the new products, our film division is actually introducing some very nice, very well accepted new film products that are driving sales, some new machinery that is actually consuming more of our film and also driving sales. The binding team is introducing the new stream punch which is being shipped this month which is the high-speed punch that's integrated with the Reko (ph) printer which will again begin to drive product and office products team has introduced products both in the office area which is all the new products for the 2004 catalog that has just been launched and have launched a high number of mass merchandise products which are actually starting to ship in June, July and August, so we will begin to see and have seen some impact in new products to offset some of the general weakness in the market.

In the mass merchandise area which we've talked about repeatedly, we have signed a number of very strong back to school promotions in a number of different customers so we are excited about the progress there. And fall promotions of our products at Wal-Mart as an example will generate not only sales but enthusiasm and awareness of the brand products that we have.

So we've talked about these products driving sales, offsetting some of the losses that we've seen in the traditional market and as the market strengthens a combination of two (indiscernible) should improve our sales as we move ahead.

We continue to refine our go to market strategy. We talked about combining document finishing last year with our office products group and the result of that has been steady. We've been cautious in terms of timing in introducing that. We've done two pilot projects which have now lead to a launch in the middle part of the country for us. And we have excellent results from that. The team is working together. We are launching a new promotion this summer where document finishing salespeople will promote all the products manufactured by GBC for the first time to all their corporate customers and then, pull those through our retail and wholesale partners so it's an exciting time for us and that process is going well.

So while we're still cautious and not ready to predict that we're going to see a significant and sustained upturn during the second half, we do believe that the activities, the leadership, the new products, the new programs and the cost reductions should allow us to complete the year in good fashion in terms of earnings.

We would be glad to take questions at this point and we open it up.

(CALLER INSTRUCTIONS). Sandy Burns of Deutsche Bank.

Hi good morning everyone. A couple of things. First in terms of the Booneville Mississippi plant restructuring, is that one of your larger plants within your system? Secondly, are there are other opportunities similar to that that you may be contemplating as well?

The Booneville facility was about a million square feet and it was the largest facility that GBC had. It was an acquired plant and it's in a number of buildings and spread out quite quite extensively. By the time this restructuring is done next year there, the employment there will have gone from something over 1000 people to the mid 400 range. We'll house primarily our large board manufacturing and our distribution and customer care purchasing (ph) so it will shift its complexion but it will still provide a very high-value in terms of the logistics and the engineered board products.

We are always evaluating our facilities. We actually have expanded some facilities during this period but we do not think we have a lot of large activities like that in the future either planned or even practical.

In terms of the other cost reduction efforts, overall sounds like things are going well. Have there been any material problems there and in the past you mentioned you were expecting 20 to 25 million of savings by the end of ' 03. I do know if that guidance has changed at all?

We are on track for that level of savings from the original operational excellence program I talk about. The thing that's disappointing to me is it does not show in a positive sense because we've also offset a $130 million reduction in our market due to the economy primarily in the furniture area so we have achieved those savings and offset the 23 or 25 million, some with revenue reduction, others have covered increased salaries, increased insurance costs and things like that so we're very very satisfied with the success of that and this new round of activities that we're talking about here is another significant opportunity in terms of additional savings like that on top of that. So the program is alive and well and we've had -- these are obviously risky but the team has been able to pull together and not sustain any damage really from any of the activities.

In terms of the organizational restructuring that you are implementing, has that created any issues or confusion with customers or the sales force or on the manufacturing side?

Actually, the organizational change you are referring to is the office products and document finishing combination and in fact it's improved our relationship with our customers because it creates a better opportunity for our direct wholesalers as our direct salespeople now will be out representing them and creating pull through opportunities so we've been very pleased with it but we put a very high-risk potential on this when we went down this path. And as a result of it, we've actually slowed down implementation about a year. We originally thought we would do it much more rapidly but the learnings from the trial test really pointed out to us there was so much more leverage by really doing it thoughtfully and by combining this pull through activity and we are excited about it. It's helping us. It's helping our margins and we're getting penetration in to places where we hadn't before.

You don't feel like you have lost any business where you have kind of switched over and confusion as to who is calling on who?

No, in fact we have made it simpler. We use to have five people calling on the same customer trying to take the same order. Now we have one person and in fact, we've taken our customer care departments now from a number of 12 to 3 that are very specifically targeted at these customers so we have actually given them improved service contact and fewer people calling on them so it's actually better for the customer, it's really what drove it to begin with.

My last question and I will open it up to others, on the fourth quarter conference call at that time, you did state that you're expecting EBITDA to be up in '03 predominantly because of the cost savings. It sounds like some of those savings have been given back on the top line. Any further thoughts you would like to add on in terms of your expectations for the full year or the second half of the year at this point in time?

Let me go back and talk about that fourth quarter comment. What we said was two things -- that we had achieved A20 savings and that it was important and significant in driving improved earnings and that we thought and planned this year for an increase in sales of two to three percent or some number. At that time we thought we would see an improvement in actual revenue this year and that in turn would have driven an increase in EBITDA and with the challenge we had in the first quarter around the Iraq situation, we really have actually gone slightly under last year in terms of revenue. So that it really makes it difficult to figure and predict that we're going to be ahead of last year's EBITDA and obviously, all these cost things we're doing now should indicate to you that we're taking the revenue decline very seriously and are doing whatever we can to preserve the EBITDA and the earnings.

Okay, great. Thank you.

Walt Lipcick of McDonald Investments.

Good morning Dennis, good morning guys. Along the lines of the last question, with the new round of restructuring, the 10 million in savings, I understand the timing of it but I guess the question is why the timing where you are getting only 2 million in the second half? Why the 6 million savings in the first half of '04 for the Booneville restructuring?

The timing in terms of '03 is we paid severance to these folks and it really offsets the people that were involved in the reduction in force. There will be some savings beyond that during this year. The savings on the Booneville piece don't come in until we actually transfer all the products to the new manufacturing lines in New Huevo Redo (ph) and they come as a result of a reduction of labor, so until the products are actually shifted and production is shifted, we are not going to see a reduction in that, so while we will see -- the improvements we're going to see this year will be from the interest rate and from the reduction in force and we actually had the salary increase so we will see improvements for cost savings there. The savings that will really tick up towards this time next year will be those from Booneville where the production will actually be fully shifted and we will see a significant reduction in labor on those products.

Okay. Is there any risk at all, is this a tricky move going from Booneville to Mexico?

No. I will say no and tell you why I say that. The team that is involved here, both the people at Booneville and the people at Redo (ph), implemented a similar shift in product a year ago and when we closed down the Asheville (ph) facility. At that time, we actually enlarged the factory and not with this particularly in mind, but as it turns out, we have the space to do that so the implementation risk that you have is that sales take off or something like that and we generally build -- we will build a six week inventory buffer into that. The one risk that we have been feeling all along with all our businesses has been how do you balance and forecast production in an economy where the market is going here, there and everywhere. It's hard to deal with, how do you see how to forecast so the risk we have is one that's inherent in the business but we think we have it under control and are actually beefing up our production planning to balance that.

I want a clarification on another comment you made. You said that the 20 to 25 million, the cost savings you have seen has been offset by the lower volumes, the labor costs, insurance etc.. Of the new round of restructuring, are you going to see similar -- maybe excluding volumes if volumes are steady, are you going to see similar offsets to it immediately, or is this more of a cost savings that we can count on not seeing an offset?

We will get a good piece of that because in the case of the salary, the 2003 salaries, we are basically skipping those (inaudible) the share which is difficult to everybody but that is a real savings. The things that have gone up the most on us in the past few years, salaries is a big piece, insurance and those things should likely be stable. We're seeing materials moving up and down so you are going have to have some things but a fair amount of that should be -- we should be able to bring that to the bottom line.

With respect to execution, not only are the original 20 to 25 on track but I think we have a very high confidence level with the execution of the steps relating to Booneville as well so I think we are counting on all of the benefits going to us but the problem that you pointed out that we can't really predict is what's going to happen on the top line. And what's that going to do to the ultimate net impact on the bottom line.

The real upside in the business as you know is that all of the cost efficiencies that we've built in for the last two or three years with the volume down to where it is as soon as volume comes back, we should start to see that come back in. So I think we will see (inaudible).

Okay, in the SS&A expense line, you mentioned that foreign currency raised that. Can you quantify by how much approximately?

Yes, the FX exchange rate in the quarter were a net benefit to us but as I said before, we had about $8 million of sales pick up as a result of translation and that translated to about $3.5 million of GP (ph) dollars but the expenses were negatively impacted by about $2.5 million. So the fact that we're down from last year is as you point out, really understated because we had 2.5 million more expenses on the expense line due to a foreign exchange.

Just onto a couple of revenue things, how much was your business up in June versus May? For instance, on a sequential basis, you are up about one percent Q2 over 1Q, are you seeing a bigger pick up in the June July period?

I will put it to you a little differently, at the end of March we're down 3 million from last year. At the end of May, we were down 5 million. Now we are back up. So we dipped down, we dipped down in April May period. But we're seeing it coming back which we picked up some of the difference, we picked about $1 million of the difference in June.

Can you talk about the products or the channels that you're seeing the pick up in?

We looked at the, if you look at the business and look at the office products business (inaudible) actually if you look at our whole CCG business that's 80 percent of our business and if you look at that, we are up in every area except visual communications, which is really related to office furniture and if you look at the BISMA (ph) numbers reported by all the office manufacturers, we are down about the same range as they are but in every other area we're pretty close to flat or up. We have some areas that are actually up. In the case of film, the only place we are down down is in U.S. commercial film so we're seeing pretty good strength or at least stabilization in most markets except for this office related which I think is still going to be challenged because there are no new offices being built. But in all the other area's we're either equal or better and that's a good thing considering it was so weak in April and May.

Okay good. On the interest expense, I guess excluding the fee that you had to take this quarter, what is the run rate for interest expense for the third quarter, fourth quarter if we assume that rates are stable from here?

If the rates are stable, we, as I mentioned before, would pick up about $4 million a year which is about $1 million a quarter so we would expect the savings to be about $1 million on equivalent debt level basis. For the quarter.

Okay, all right. Thanks very much.

David Degraff of MFS.

Hi guys. I was interested in your penetration into the mass channel, what's happening I guess specifically with Wal-Mart and how many stores are you in, how many SKUs you have and if you are making any progress in Target?

I am not going to give you exact numbers because I do not know them but I will tell you that we have about 1500 stores where we have a set (ph) program of a full set. plan'o'gram and we have a back to school promotion that's going into about that same number of stores, a onetime back to school end cap promotion which is very exciting for us. So that is moving in the direction that we are expecting and we're seeing some expansion in a number of stores so that's going well.

During the summer period, starting in June, for the summer period through fall we actually have about 13 or 14 promotional programs that our customers such as Target, Bed Bath and Beyond, Biars (ph) and others have actually signed up with us as trials for the products and to take them into the stores on a promotional basis so again those will be endcap situations and by doing that will really allow us to get the foot in so we're making really good progress and the team is excited about it, they're bringing new products to the market. People like the products and we're moving that along as we expected.

Okay. You said those promotional programs started last month?

Starting now --

July through September?

They are spread out, they are all starting different start dates, different end dates but primarily they are package programs where there is a promotional endcap, and you walk in a store, and these are all emotional buys when you see them, point of purchase kinds of things, so it's exciting, getting the visibility, getting the name out there.

How are the sell throughs at Wal-Mart, are they hitting plan?

Yes, absolutely.

Okay. CAPEX was again lower than I thought. Have the plans there changed? I think the plans for the year were like 10 to 12 million if I recall correctly?

I think we said we could probably sustain 10 to 12 million previously. We are watching that very carefully because given the environment on the top line, and our interest in not only in preserving and generating cash, we are spending the money where we need to spend it but we're being careful. So my suspicion is we will probably spend a bit less than we thought we might spend this year in reaction to everything else that's going on, but I do not feel that we are cutting into bone on that. I think we're still making the necessary investments.

Okay. For the fee for refinancing, any cash you paid for restructuring in the second quarter, what was that amount?

The restructuring charges while four million of them are cash related and were written off immediately, we did not pay the bulk of that in cash yet. Many of these and Booneville obviously, the reductions will take place over time and while the corporate ones have taken place already,, the bulk of them will (inaudible) so as a result most of the cash related to the restructuring has not yet gone out. The fees for the bank deal did go out in June and we have not disclosed what they are but they are fairly standard for a deal of this nature but they were paid on the 26 or 27 of June when we closed the transaction.

Okay. All right. Were there any other cash payments for prior restructuring charges in the second quarter?

Not particularly significant -- there was but very minor.

Okay. It looks like working capital jumped up a little bit on all fronts, receivable days, inventory turn down a bit and payables were also down. Anything going on in any of those or is it just sort of a blip?

I think it's a blip. That's a good question and we are on that. We have targets for the year for cash and for working capital. We are aggressively working on those targets. I think we are more interested in getting to the right levels the right way than managing things on a month-end basis so I would characterize them as blips and I think we are probably on target to hit the year-end levels we're looking to hit.

Having said that, you're right it was a bit disappointing in the second quarter. I would like to have done a little better on the cash front but I am not concerned about it at this point.

Okay, any receivables in inventory, payables, any one more focused than other?

Cash is cash so they are all-important and we are focused on all three of them.

Lastly, the film segment, looked like it had to be pretty weak because sales were down even after you consolidated some other units into that segment. You said prices were down. Was it mostly volume though? Did you walk away from business or did you match the prices? What happened in that segment?

There are three things that are consolidated into that that makes it hard to read. One is we moved the high end equipment from binding into that group so the high end equipment is part of the post finishing for the industrial and print finishing group and that business is down also so that is in there.

Part of it was the -- We did match some pricing which impacted margins and some of it was actually volume related. So it was a mix, it was all three although we're seeing the binding business come back, we're seeing the high film business we have some nice orders lined up on machine so some of that should start to come back a little bit.

Okay. How much are the pricing concessions?

You mean in terms of actual dollars or percents?

Percent.

They are 20 percent range, they are ugly.

What segments are those in?

It is primarily commercial film so it's book binding and high use film.

Okay, all right and -- so how much are volumes down there?

Down about a couple of million. It's not horrendous, but every dollar you give up there hurts. We're being very aggressive, part of what we're doing, too, is we're bringing in film from our Korean factory because we can reduce our costs that way so but some of the programs (indiscernible) competition are actually being implemented but it's a couple million dollars and it's in sales and that's more than we want to see.

That's 4 to 6 six percent in terms of volume?

It could be about that.

Okay, great. Thank you very much.

Tom Spiros of Spiros Capital.

You mentioned the Korean JV a few moments ago -- I was wondering if you can give us a little update on how it's faring?

We actually have two and the one I was referring to was our production joint venture, the one I was referring to is actually the internal joint joint venture but we're doing the actual production and running the plant ourselves and that's an (indiscernible) that's excellent, that's going extremely well. The other joint venture you may be thinking about is GMP, where we do buy film and product from them. While their finances are still a little stretched, we stay close to it and we do not see any negative change and they continue to be a good supplier and deliver good products and so far, we are watching it every day but it's going okay.

Are you still financially assisting them in various manners?

We've cleared out our round of things that we did with them, every month there is something that we do. I will put it that way, sometimes we accelerate orders coming in or we do a few things but nothing major at this point, it's not material.

Is there some type of a decision point or refinancing point that they have to deal with the next couple of quarters?

No, what they actually do is they have annual deadlines where they have things going on but our approach with them is our management team's meeting with them and going to help them set up a cash management process similar to what we have here. And we think based on that and the recovery in the markets they should probably be okay. But we are watching that because we do not want to be surprised.

On our own refinancing the senior bank facility, are there covenants which we should think about, covenants that are somewhat tight at this point? Or is there plenty of headroom?

Of course there are covenants in it -- both financial and nonfinancial -- just like any senior secured loans would have. We don't anticipate having any problems with the covenants. They are obviously just sent and we have a fairly reasonably comfort level at this point, depends on what happens this year, next year and the year after with respect to the forms of the business but we are very pleased with the covenant levels we have right now.

Thank you.

Sandy Burns of Deutsche Bank.

I wanted to follow-up -- this wasn't brought out previously. I guess in touching on some of the previous comments, in terms of the debt balances you mentioned, they were up about 10 million in the first half (indiscernible) mostly in the working capital side. Anything that you can talk about in the second half do you expect that to come down? Is there any other cash needs out there that would prevent you from using your free cash flow from operations in a stable working capital environment to help reduce that debt?

That's a fair question. I think several things did happen in the first half of the year. We did not expect a tremendous amount of cash generation in the first place in the first half just due to the way our quarters were lining up. Obviously the fees on the bank financing at the end of the quarter made that number worse and the working capital, we knew was not going to be a strong cash generator in the first quarter or second quarter because we were really working toward doing the right thing which take a little longer to do. So I think the answer to the question is: we expect to generate cash this year. We are working hard at it, obviously, the topline affects everything throughout the Company and cash is one of them.

That having been said, I think we are aggressively working on working capital management and we expect to end the year with lower debt than we started.

Okay. Great. And on the business end, any thought you can share with us on any possible impact from the Boise Office Max combination, I don't know if you did a lot of business with Boise at all?

These are two of our very good customers. And the combination of those two probably will not occur until the end of this year and since they both hold inventory, we would expect over the time next year they would begin to reduce some of the inventory from us. So on a sell-through basis, we do not think that will be an issue but I think in terms of their current inventory holding, there will be some reduction. Although Office Max has been reducing for the last four, five months with us and so has Boise (indiscernible). We do not think it will be a huge impact this year and there should be some impact next year but it will be absorbed in the normal course of business.

Okay great. Thank you.

Walt (indiscernible) of McDonald Investments.

Did you mention what cash flow was from operations during the quarter?

No, we didn't talk about cash flow from operations for the quarter. I mean you can take -- I expect you can do that calculation with the information we presented. But I think the answer to the question is: if you look at operating income and add depreciation and amortization, you'll get a good approximation of that.

I will try to back into it.

If you have trouble, Walt, call us back.

(CALLER INSTRUCTIONS). At this time, we have no further questions.

We would like to thank everyone for their questions today. And we'd also like to thank our finance partners for working with us as we've gone through this recent refinancing. While we're not sitting here projecting high enthusiasm for a rapidly increasing marketplace, we're confident that our strategies will continue to drive us toward the operational excellence and profitability that we hope to achieve. So thanks again and enjoy your day.

(CONFERENCE CALL CONCLUDED)