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Franklin Covey Co. (NYSE:FC)

F4Q08 Earnings Call

November 17, 2008 8:00 am ET


Derek Hatch – Corporate Controller

Bob Whitman – Chief Executive Officer

Stephen Young – Chief Financial Officer

[Stephan Mardiec] – International Operations


John Lewis – Osmium Partners

Kevin Henehan – KMH Capital Advisors


Welcome to the fourth quarter 2008 Franklin Covey Company earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today's call, Mr. Derek Hatch, Corporate Controller.

Derek Hatch

Good morning, everyone. On behalf of Franklin Covey, I'd like to welcome you to our fourth quarter and fiscal year ended 2008 conference call this morning. Before we get started I'd like to quickly remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, but not limited to the ability of the company to stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company's market share, changes in the size and overall market of the company's products, changes in the training and spending policies of the company's clients and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations and there can be no assurance that the company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation.

Now that that's out of the way, I'd like to turn the time over this morning to Bob Whitman, our Chairman and Chief Executive Officer.

Bob Whitman

We're delighted to have you on the call early this morning and we'd like to go over several things this morning that I think maybe starting back just to get some context. I know we have some new investors on the phone or some who effectively are going to become investors, so perhaps it would be helpful to just go back and set some foundation.

Several years ago, we identified four critical strategic imperatives that would reshape Franklin Covey and establish a foundation for what we hoped to be significant and sustainable future growth and profitability. The first slide, slide number four, shows what those are, but the first was to exit all non-core businesses and activities. The second was to significantly increase our financial flexibility. The third was to improve our business model and the fourth was to reposition ourselves strategically in the marketplace.

We really made significant progress on each of these fronts over the years and many of you have heard that progress and the sale of the Consumer Business Unit this year, along with the other steps taken during fiscal 2008, really marked the substantial completion of these restructuring efforts.

So, today I'd briefly like to review our progress on each of these key imperatives with a particular focus on what we kind of feel is a transformational impact of the steps taken during fiscal 2008, to share what underpins the sellable momentum what we're seeing 10-13 to the way to our first quarter, and third let you know what opportunities we see for Franklin Covey in the future.

So first, I'll just briefly review these four strategic imperatives. On the idea of exiting our non-core businesses and activities, you know over the years we've sold, closed or outsourced more than 20 individual businesses and activities, including selling our commercial printing businesses, selling or closing a number of manufacturing operations, selling premiere school agendas in our school planer businesses, outsourcing IT call centers and distribution centers.

And over the years we've also hade a significant restructuring of the CSBU, the Consumer Business Unit, over the years shifting from what was primarily a proprietary channel strategy to one that increasingly focused on selling to third party outlets. This positioned the business to be able to sell it this year and with the sale, as you see on slide five; it really is a very substantial change in business as more than 100 million of revenues for '08 were sold along with the Consumer Business Unit.

This completed our exit from business and activities that we consider non-core. That's been an ongoing effort for literally five or six years as we've exited these various things and we're pleased now that we can focus our entire effort on the training and consulting related service we provided to our more than 4,000 clients worldwide.

On the second topic of increasing our financial flexibility, at the time we established this objective we had about $120 million in senior debt, $87 million in convertible preferred stock with no redemption right and no ability with that preferred stock outstanding to purchase any common stock. As you know over the years, we've utilized the proceeds from the sale of businesses that we talked about above that we sold to pay off all of the $120 million of our senior debt.

We restructured our preferred stock several years ago to gain redemption rights. We eliminated conversation rights in exchange for the issuance of warrants. Got the right to, if they want to exercise those warrants, when they do exercise the warrants, to do it on a net exercise basis for either shares or cash, so we have the opportunity to reduce any real potential dilution.

We utilized the proceeds from the sale of our headquarters real estate and our excess operating cash flow to ultimately redeem all $87 million in preferred stock. During that time, we also bought a million shares of common stock, and as you all know we utilized the majority of the proceeds from the sale of the Consumer Business Unit this summer to repurchase just over three million common shares through a Dutch auction tender offer. The result has been that the balance of our shares has now decreased.

The stated number of shares is 16.9 million now down from 19.9 million previously, but as you know something that's probably been a little complicated to figure out is exactly what that means in terms of shares outstanding at different prices. As you know, we have 3.5 million shares that are in our management stock loan program that have been placed into escrow and will be exchanged at such time as their share price hits the trigger point, which is today around $14.00 a share.

But we also have a large receivable outstanding from them, which never shows up on our balance sheet, but therefore it makes the analysis a little complicated. I'm going to actually ask Steve Young if everybody will go to slide 17. There's a brief reconciliation of the share count as we see it, our analysis at various prices.

Stephen Young

What this slide on page 17 is intended to show, is what our outstanding share count would be at certain prices today. It's not intended to be what our share count will be when the stock reaches these different prices because other things could happen between now and then, but rather, as I said what the share count would be today if the stock was at different price per share.

So, the first column is the 16.9 million outstanding shares that we have now. The second column shows that if the stock price was $15.00 per share, then the 3.5 million shares that Bob talked about in the management stock loan program would come into the company and go out of the outstanding share base.

The next column shows the impact of the warrants at different share prices. If the warrants were to be exercised under a net share basis, the 6.2 million warrants would at $9.00 a share represent an addition of .7 million shares, and as you could see as the share price increases, the number of shares represented in a warrant net exercise also increases and those would be outstanding shares.

The fourth column shows what the impact today would be of a net exercise of all outstanding options at different share prices today. You could see at a maximum share price that we show on this sheet of $19.00, those warrants would represent an addition of approximately 500,000. So, the final column, as I mentioned before, is simply what our outstanding share count would be at different prices per share.

So, I hope that that's clear and gives some clarity to how the management loan program, the warrants and options will be impacted at different share prices.

Bob Whitman

We’ve probably all received questions in the past about how do you think about that, the outstanding number of shares. I think that’ll be helpful to mention for purposes of valuation, everybody does their own approach, but for those who do kind of a private equity valuation where you look at an enterprise value, add other assets and subtract other liabilities, for most it’s been a difficult thing because they’ve tried to figure out if you have those extra 3.5 million shares outstanding, is there an asset associated with it, which there would be, it’s just not showing in the balance sheet.

And so, for those who use the larger base of 16.9 million shares, depending how you value it, you might want to include approximately $50 million of receivable balance that isn’t shown as an asset, otherwise many probably will leave the 3.5 million shares out of the denominator.

So moving on then to the third major objective, which is to improve our business model, you see there on Slide 7 that shows kind of our worldwide offices, and I’ll refer to that in just a moment, but we really have had five efforts on improving the business model. One was to reset our cost structure and to significantly reduce our breakeven point, and we’ll talk about that one briefly.

When we began our restructuring efforts, the revenue necessary to generate the first dollar of operating income was just over $500 million, and of course at that point we weren’t generating $500 million of revenue. We had more than 2,000 central employees and really every operation as we studied it, had excess costs in one way or the other. We began a concerted effort to reset our cost structure, and over the next four years on an apples-to-apples basis, net of things that we had sold, we eliminated more than $125 million of annual costs and re-engineered basically how we did every operation in the country.

Prior to the sale of the CSBU therefore, our break-even point had been reduced by our analysis by just more than half, dropping to about $246 million, and with the sale of the CSBU, our breakeven point dropped even further to about $135 million. With additional cost reductions we’ll refer to in a minute, undertaken over the past year in capital spending reductions, also we expect operating cash flow breakeven to be approximately even $20 million less than it was in fiscal 2008 in our fiscal 2009.

Second business model improvement has been to reduce our capital intensity. We’ve done that over the years with the sales of various assets and reduction in our working capital, but that of course, again the sale of the CSBU helps to make additional big steps in the regard. We’re much less inventory intensive, and so really other than our receivables balances and inventory balances for training materials, we’re really not very capital intensive at all.

You may note that our receivables balances at year-end were a little higher than normal and that relates to really two categories of receivables. One, receivables relating to the sale of the CSBU, there’s a note that’s due in January, but there were also some transition costs as the systems transitions where we funded expenses that then the new company needed to reimburse to us. And so, they’re paying on that and we expect by January to have approximately $7 million of payments from them reduced and have received those.

Also our normal receivable balances because August is one of our highest sales months, obviously year end for us always has a little higher balance than on average, but beyond that the systems transitions efforts associated with the sale of CSBU resulted in just some, although it went actually quite smoothly, still as with the switch over to systems, etc., we got a few weeks behind on receivables collection, and that effort is now underway and it’s bringing the cash back in.

So we would expect that approximately between the $7 million of proceeds from the sale of the Consumer Business Unit that we’ll receive and the reduction of working capital of around $5 million, that with the collection of those two things, at least certainly by the end of our second quarter or early in the third quarter, we would expect to be fully retire our revolving credit facility and have even further increased flexibility.

We have availability obviously under that line today, but we expect to have full availability then into early in our third quarter. Another element, so in addition to reducing our cost structure and reducing our capital intensity, there are certain aspects of our business model that we’ve really focused on. One is to expand our international licensee model, and you see this on Slide 7, that we have today, 38 strong international licensee partners.

They truly are our partners. Their people are strong. They have great clients. They represent what you’d see with Franklin Covey domestically, you would see internationally with the strength of our partners. In India for example, we have more than 200 people.

In Korea more than 100, and more than 60 people in China and 40 in the [Nordic] region, etc. So we really have wonderful partners in Mexico and Brazil and Central America and places all over the world. Our 10 largest licensee partners that are starred account for just over 70% of our total licensee revenues.

The structure of those licensee agreements provides for minimum royalty payments, which escalate each year and are paid in U.S. dollars. And so that provides in these uncertain economic times, with at least some certainty as to what the income stream is. Our international licensee partner revenues have grown rapidly from less than $4 million several years ago to more than $11 million in 2008, and recognize that those generally represent about 15% of our licensee partner revenues.

We recognize that our international partners now have more than $70 million in revenues in their local currencies, and our international operation this year became larger than our domestic even though both have grown a lot. You'll note that we’ve converted Mexico and Brazil to licensees with trusted partners and they’re doing extremely well, but it makes comparing ’08 and ’07 a little difficult because while the revenues decreased, our profitability increased.

The next element of our business model, and it should note that our international licensees are off to a good start this year. In September they had strong double-digit growth and are expected to grow approximately 10% or more for the year. Our direct office business model is one that we’ve worked a lot on.

Our direct offices, which we have five in North America, one in Japan, one in Australia, and one in the U.K. have actually very low fixed costs. Almost the entire staff in those offices are sales people and consultants. The sales people are on a commission basis or mix in some of our international offices salary plus commission, but it’s substantially leveraged as they grow revenue.

And our consultants generally are paid on a per day basis, so their costs run through costs of goods sold. So, they’re available, we pay their health benefits, but beyond that, they get paid each day as they consult and deliver, so it’s a very leveragable business model. And as we’ve mentioned before, as you’ll see on Slide 8 that the principle driver of the economics, really for our licensee partners in their own businesses, but particularly in our direct offices as it relates to our economics, are driven by two factors.

One is hiring new sales people and having them ramp up, and the second is to have our existing sales people of course continue to increase their productivity. With gross margins near 70% and total direct selling costs around 20%, almost $0.50 of every incremental dollar of revenue that we generate drops through to contributions.

So you see in Slide 8, something we’ve gone over in previous Web casts, that a new client partner, as we call our sales people, in their first year might be expected to do $200,000 of revenue all in with their costs of marketing and equipment and travel and everything else, it’s either break-even or slightly negative in their first year.

But beginning in their second year, you recover the investment in the first year and generate contribution, and that continues throughout the year. So that as we continue to add client partners each year, their ramp up rate of course is growing very rapidly as they learn to sell our various offerings and as they build their client base.

And as you see in Slide 9, for 2008 those new client partners that we’ve had, we’ve reported this in the past, continued to hit their ramp rate, actually to be above ramp rate. We expected them to generate just over $15 million of revenue last year and they generated approximately $17 million of revenue. So that continues to be one of the key drivers of our economics.

The other is what we call our alumni client partners, which you see on page ten, or slide ten and when we began this approach of hiring a lot of new client partners as in 2005, and o those who were already with us at that time are called alumni and everybody else is one of the new classes. And so our alumni client partners, our plan was to have them grow their productivity at 5% a year at least compounded and they've done better than that in each of the last three years and also did better as you see in this year.

So, the combination of these things with the strong licensee model, a strong direct office model, a component of the direct office model which we don't often talk about, is the fact that approximately 35% to 40% of our revenue from our direct office comes from what we call our licensed facilitators. We have over the years certified more than 20,000 people that actually work inside companies and they're already employees of those companies.

They have other jobs typically within those companies, but because of their passion for what we do and their capabilities within their organizations; they become certified through a rigorous process here and then become certified to teach in their company. That is a good thing for their company because they both have somebody who knows the company inside, who knows the needs, and can adapt the content, but it also good from an economic standpoint because in tough times they don't need to hire outside consultants.

They have their own inside people. All they do is buy materials from us, training materials that is very profitable for us and tends to be a very highly recurring revenue stream that has done well in good and bad times. Finally, in terms of this business model restructuring, we've added a new something we're calling practices. They work like direct offices and they work in conjunction with direct offices, but they are around our major content areas like customer loyalty and execution, great schools, sales effectiveness, etc, leadership, productivity, etc.

And these are practice leaders who work with our sales forces to sell big strategic deals. The revenue ultimately runs through our direct offices, but with these sales leaders we are beginning to land even more big strategic deals and we think that helps to drive revenue through a model that’s, as we've already noted, is very leveraged when we do get revenue gains.

The last of our strategic objectives then was to reposition ourselves in the marketplace and that has been along several dimensions. As I mentioned, we've gone from being primarily a products company back in the early part of the decade to being now entirely trained consulting, thought leadership, content rich media, all in the content side. We've gone from being primarily a domestic company to, as I mentioned if you gross up the revenues from our international licensee partners, to now having more than half of our revenues international.

Within our training business, five or six years ago, approximately 90% of all our revenues came from what we would call, individual effectiveness categories, time management, communications, seven habits of highly effective people, all of which continue to be substantial businesses, all of which continue to grow.

But over the years we added significant offerings and sales effectiveness in execution, more recently in customer loyalty and education and in other areas and so, with the addition of these things, we now have almost 50% –this year in 2009, it'll be approximately 50% of our total revenues will come from that. We're just slightly less than that in '08, but there's been substantial growth in that. And in this environment, it is some of these new areas that are getting the most attraction from our clients.

We've also changed as we mentioned last year, kind of our focus on what we call relevance, which is which problems are we going to solve, how efficacious are our solutions for solving those problems, but also going to accessibility and scalability and going from being course centric to more resource centric.

Where instead of the course being the whole center point that the course, as important as it is, introduces people to materials, which they then on the web and through portals, etc., can get ongoing information that helps the richness of the solutions on which they've been trained, and actually where much of the training will be teaching them how to utilize the resource site so that they can get even further value from that.

Another thing is taking our content, which is again tended to be this course centric, single-bay or multi-bay model, to break it up into modules and even molecules as we would call it, into concepts and make that accessible.

And so, I'm ask Sean Covey, who as you know is our chief product architect, over the years has headed our Innovations Group, to just go over the next few slides and share with you some of the new developments, then I'll briefly finish up and we'll turn it over for questions and answers.

Sean Covey

Good morning, everyone, good to be with you. As Bob mentioned, part of our strategy we have what we call the four R's, which are to increase rates, relevancy, recurring revenue and return. And throughout the past many years we have felt that to achieve our mission and vision, we need to reach more people with more relevant products and to create new business models around solutions that drive recurring revenue.

So as part of this strategy, we've begun development on several new solutions that technology plays a very foundational role, so I just wanted to share with you two sets of projects quickly. On page 11, if you go to that slide, this first solution is called our customer loyalty solution and we launched this about a year ago.

And this is a comprehensive solution that’s designed to help organizations increase and improve their customer loyalty through two things. We help them get an accurate customer loyalty measure and then we help them improve it through various means, like improving the engagement of their teams and executing and so forth.

And we launched this about a year ago. We target this – we sell it to the C-suite. We go to the highest levels of the organization to position this and we target large multi-unit operators such as grocery stores, hotels, auto part chains, and so forth. So, on page 11, if you take a look at this, this is called the customer loyalty portal and this is the technology behind the solution.

And so as you can see, it has several different features and this is just one of many pages of course, but to keep this simple we'll just stick on this page. This allows a large customer to compare scores across the company. So, every store inside of a company, for example, would have a score, a customer loyalty score.

So, you can measure the loyalty scores over a three-month period, over a six-month period, over a nine-month period. You can compare scores across the company to see which store is doing well, which stores are doing poorly. You could look at it at the division level to see which divisions are doing well; at the regional level.

It also allows you to connect with customers, which is to follow up with customer complaints with any customer feedback. So, everything can be managed within this system. It also has an entire section called engage the team, which will help a store or a unit improve their score through engaging the team, through executing, and so forth.

So once an organization begins using this, it is very difficult for them to want to go off of it. For example, last year – just recently we landed a large deal with Advanced Auto Parts. It’s a large deal that we've recently been working on. And as you can see in this software, you're able to track different store scores and different XQ scores. An XQ is the customer engagement score that measures how well the team is doing. And so, again, it’s a portal that helps to solidify the entire customer loyalty solution and through which everything goes through.

The next slide, on page 12, is a slide that is about a new product we call Insights. Now Insights, as Bob mentioned, offers bite-sized, Web-based content. You can think of it as kind of the iTunes of leadership development. We have many three-day programs. We have two-day programs. We have one-day programs. We recently developed four-hour modules around our content, which have been very popular.

This is designed to take it down even to the smaller level of 20-minute bite-sized modules. So this product consists of 50, 20-minute modules that a leader would take his or her team through, around such topics as how to give effective feedback at work, how to better execute as a team how to increase the speed of your team. Each module would consist of a little bit of pre work, watching a very engaging video, having a discussion as a team, and then following up with some action or some goal setting.

So, for example, if you look at the page 12, as a team leader I could decide that we're going to have performance reviews shortly, and we're not doing very well on our feedback systems. So I might decide to take the little module called blind spots. And in my weekly meeting I would say at the start of the meeting, we're going to take 20 minutes today you guys to talk about giving and receiving effective feedback at work.

We could then watch this module, have a discussion around it; set some goals. Everyone in attendance would be seeing what I'm seeing, those who are remote would be seeing this remotely, those who are absent could go back in after the fact and watch it, and we would have this great little module designed to help us improve our feedback at work.

That's how it works, and you can scroll through the different modules, you can choose the one you'd like, you can focus it on the competencies you're trying to improve, whether it's communication or leadership or individual effectiveness. And it also consists of having a team assessment where you can go in and send a little assessment out to your team, get feedback from everybody on the team and from that design a learning plan. Find out which areas you're weak in, which areas you're strong in and have this content address those areas.

So, this is very different than traditional training because it's what we call just in time development. Meaning instead of going off to one- or two- or three-day program, a leader would do this training in the midst of their traditional meetings. And so these bite sized modules are designed to be part of the real work that's going on inside of those teams or organizations.

So these are just two examples of some of the technologies solutions we're developing right now, designed to increase our reach and to create recurring revenues streams for us. Technology we think is essential and key to our future. More and more our solutions we're finding, are being developed around core technologies that will provide with new business models.

So we're very excited by these, and inside of Franklin Covey we always say that nothing sells Franklin Covey like a Franklin Covey experience. And so many of these new solutions are based upon the powerful principals of Paradigm, the powerful videos we create, to create this great experience, but we're trying to do it in a leveraged way to provide us more reach.

So with that, I'll turn it back over to Bob.

Bob Whitman

Sean has led the development of these things over the years, and of course all of the new offerings that we have, that we have a phenomenal innovations team here that's been led by Sean, and continues to put out great new content that our clients and testers are finding extremely useful to them.

Well, I think we'll get ready to wrap this up and then open up for Q&A, but let me just make a couple of notes that while acknowledging the difficulty of the external environment, this is also a compelling and even an exciting time to be at Franklin Covey and I say there are three factors that make it so.

First, the sale of our CSBU in July marked the completion [initiative] of our multi-year restructuring efforts. There should now be a significant shift in the general business categories used to trade and define our company in the market and immediately we were working to position Franklin Covey as part of the educational services sector.

In the past, it was a little bit difficult for people to understand were we a training company, were we a retailer, what were we, and I think it should be very clear where we're focused. We've engaged [Frank Milano] and [Kate Messmer] of ICR to help us in our investor relations efforts. And others are working – beginning to work with us to build our research coverage, etc. Steve and I are going to be much more active moving forward in being involved in letting people understand the Franklin Covey story and what's going on.

The second reason why this is a compelling time is that while the current environment does create challenges, it also provides some real opportunities. Over the past years as I mentioned, we've taken a number of steps to expand and refine our offerings. These more execution-oriented, sales effectiveness, customer loyalty driving offerings are actually particularly attractive at times like this.

And as I mentioned, while the instincts of some when facing the storm are simply hunker down and wait it out, reject help from everywhere and just say we've got our head down. Frankly, most companies still have to go to work everyday and try to win in their marketplaces, and we're gratified that we've been awarded more than 400 new assignments thus far in our new fiscal year in the first quarter, in addition to those which are continuing from prior years.

Finally, I think it's exciting because we, and again compelling, because we've been experiencing good business momentum. Slide 13, we've given this slide out before, it just tracks the momentum, which is the revenue we're booking for delivery either in very short order or later in the year. And it just shows that thus far in this year we have approximately $6 million more revenue this time that we've booked for future delivery, and it could be as soon as tomorrow or over the next 12 months than we had at this time last year.

We made this last summer, as we we're talking about, the sale of the CSBU. Obviously there were questions of what the company would look like afterwards. And the guidance that we gave was simply that when the dust settled in a period of a little more than a year, we expect to be able to get back to a run rate on the operating income line that would be equivalent without CSBU –that we'd be able to get to the level without CSBU that we had with CSBU.

I know some have wondered what that actually meant and what number to attribute to it. There's slide 16, it gives some help on that, perhaps as we reconciled from the income statement all the way down to what we call operating EBITDA, which would be the EBITDA that doesn’t reflect restructuring charges and transaction costs and all that kind of thing to get kind of real operating, real EBITDA, an ongoing operations basis.

And so as you see there getting back to a run rate, which would get us to $23 million of operating EBITDA, with $10.7 million going out from CSBU, and $12.5 million remaining, which of course is much higher contribution for what was the OSBU, less the central cost is how it gets down to $12.5 million.

So the idea of that we could be back on a run rate of $23 million is really kind of what we were talking about at the time. And based on what we're seeing in the first quarter, we reaffirm our view that remains our goal and something we believe that could be achievable. Obviously, we don’t know what lies ahead and so we can only talk about what our current momentum is.

But something as we mentioned, when I think there was a question asked, well how would you be able to close a GAAP of like $10 million in run rate in a year. And one of the things we mentioned was that we had already been undertaking some cost reductions that we anticipated would be a least $5 million. We're pleased to say that those cost reductions have all been implemented and they turned out to be substantially more than $5 million.

So, that a significant portion of that GAAP, if we maintained sales and margins simply at last years levels with the cost reductions already undertaken, we could make up a substantial of that GAAP. This summer we consolidated our offices in North America, really less for cost reduction reasons than it was for strategic reasons to really give the strength to these bigger offices, but in the process saved more than $3 million on that move, which had not been part of the cost we'd otherwise outlined.

And so with that and our booking pattern in the first period to date, we're feeling good about that statement from today's vantage point. Because the cost reductions had some tail on them, where there were still people involved in those offices into our first quarter, the cost reductions in future periods will flow through more than they will in the first period, although we feel the first period will be strong.

And also some of our practice revenue will be bigger in the back half of the year. For example, in education where we have bookings, but they really can't do that while they're in school and so that revenue comes in at our summer period even though we have commitments now.

So with that, as I mentioned, we're excited that to be where we are today after all these years of work. We feel great about our team. I want to thank our incredible Franklin Covey team members for their relentless focuses on these objectives over the years for the tremendous creativity and commitment to our clients. We'd like to thank our clients for the tremendous honor it is to work with them every day and now I would like to turn this over for questions and answers.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Lewis – Osmium Partners.

John Lewis - Osmium Partners

Just a couple quick questions, I think if I heard you right, you said in the first quarter here, you've been – your team's won 400 new assignments?

Bob Whitman

We have.

John Lewis - Osmium Partners

And can you talk at all about just bookings in September, October?

Bob Whitman

Yes, in fact – oh, yes. We just show this through September but bookings in October and November to-date are up. We have two – we have kind of three things to look at, John, to get in – probably should have updated that slide all the way to now. The one is book days and that's really bookings for our own consultants to deliver and that's our primary focus.

A second category is contracts in place that might not be book days per se but includes like portals and other things like that, and the third is facilitator revenue. Our facilitator revenue, the big focus is in our fourth quarter and we had a big fourth quarter again and so the first quarter tends to be softer because of the strength of the fourth quarter there. And so we're down a little bit on the facilitator business. But our bookings to-date – our booking pays for October and November to-date and really year-to-date is up about – just a little less than 14% on booking pace.

Our contractual revenue is up substantially more than that. And so right now, that's what kind of makes up the revenue momentum. So if you had that revenue momentum continuing through last Saturday, it would look pretty much the same and be a little higher relative to last year.

John Lewis – Osmium Partners

Can you talk at all about anything on the new product line and of the business you're winning, is a lot of it from new products or just maybe a little color there?

Bob Whitman

I'd say that first of all, the positioning in the market place that we do for all of our offerings is just different. And it has been over the last years where whether it's the Seven Habits of Highly Effective People or execution, it's positioned around always helping people achieve certain key outcomes, which are sustained superior profitability and a winning customer loyalty and a winning approach.

And so these metrics, they're all connected to it in one way or another, and so we're actually winning business across the range and so often, John, it's a combination of things. We're assuming they have an – their issue is execution, it's increasing the, for example, at a manufacturing facility where they already have Six Sigma or lean manufacturing, they're hiring us to get everybody engaged around two or three key objectives that might drive that.

In the lodging business, even though it's a difficult time, it might be engaging us to help win – increase their customer loyalty scores or those kinds of things. But in the actual offering, for the job to be done so to speak, for which they're hiring us, tends to be perhaps more than any other time, execution-related things, whether that's around customer loyalty or improving productivity, their manufacturing operations or the productivity of their sales force.

But the actual offerings that get applied to that might include both our execution offering and our leadership offering or execution offering and our customer loyalty offering, execution and Seven Habits and so there really is a lot of content that's brought to bear against these problems. But I'd say that right now, with people focused very much on their bottom line, that they are reaching out most often, and certainly from the C-suite, are reaching out more often around something related to execution, customer loyalty, sales effectiveness, something like that.

John Lewis - Osmium Partners

You also said that you expect substantially more than $5 million in costs taken out of the business. You're trying – you're walking through, I guess, your adjusted – the operating EBITDA of $23.2 million and you showed your pro forma of $12.4. So just to understand, can you give any feel on how substantially more, is that $8 million or?

Bob Whitman

Yes, I'd say actually the cost reduction, John, if you look at the cost centers, where we took costs out, it – $8 million would be a very good number. We also have some areas where – with 3% costs of salary increases in certain areas and there's some spending areas that would offset that on a net-net basis. And of course, we hope that this year with, if we were able to increase sales, we'll have commissions.

Another thing is that where SG&A for the year might be flat, but with – because we're actually increasing commissions and so forth and profit sharing payouts. But if sales were flat and our mix were the same as last year, something just less than $8 million on a net basis would have been taken out of the cost structure that I mentioned, because some of those costs continued in the first quarter. The build-up of those cost reductions will be even more in the second, third and fourth quarters than they are in the first.

John Lewis - Osmium Partners

Just a few other quick questions here, so I guess I saw on your K that you're line with JPMorgan is still LIBOR plus 150 basis points?

Bob Whitman


John Lewis - Osmium Partners

And that you're – obviously, you're still allowed to buy back stock with that line right?

Bob Whitman

We have the flexibility to do that if that's what we chose to do, yes. John, one thing I just might mention is that in terms of the operating EBITDA that we achieved. As I mentioned, our run rate, where we start getting to a run rate within the 12 months or so that would be equivalent, that might mean that the actual number – we can be at a run rate because some of these costs wouldn't have gone through the whole year. And so the numbers are somewhat less than 23 would be at a run rate of 23.


(Operator Instructions). Your next question comes from Kevin Henehan – KMH Capital Advisors.

Kevin Henehan – KMH Capital Advisors

Congratulations on the tender offer and the sale of the business that you completed in the summertime. I understand you still own a small minority interest in that business. Is that right?

Bob Whitman

We do, a 19.5% interest.

Kevin Henehan – KMH Capital Advisors

I think your company's done a great job over the years and I especially would like you to outline how much cash has been returned both in the retirement of the preferred shares and the buy backs that you've completed say over the last, I think that maybe over the last three years or possibly four?

Bob Whitman

Yes. That would be probably about $125 million.

Kevin Henehan – KMH Capital Advisors

And the preferred was about $100 million?

Bob Whitman

Eighty-seven, yes. So $87.2 and then we've had about $40 million of, I guess, really almost $40 million of stock repurchase, common stock repurchases just less, maybe $36 million – $36 million or so of common stock repurchases. We can get the exact number but we purchased over a million shares previous to the tender and then another 3 million shares, a little more than 3 million shares in the tender. And so it's approximately that number, Kevin.

Kevin Henehan – KMH Capital Advisors

So about 4 million shares total?

Bob Whitman


Kevin Henehan – KMH Capital Advisors

And the preferred, most of that preferred was done from cash flow from operations right?

Bob Whitman

A lot of it was. It was – the first big chunk came from the sale of our campus real estate, which was about $30 million. And then all but about $15 million was done from cash flow or cash that we had on hand and then we borrowed against our credit facility, about $15 million a year ago to repurchase the rest of it. Obviously, it was a positive arbitrage on the 10% after-tax that we are paying on the dividend versus the cost of our debt.

Plus, we also had a timeline where if we didn't get the preferred retired by last December, we would have – it would have been locked to prepayment for five years. So we drew on the credit facility to complete that.

Kevin Henehan – KMH Capital Advisors

But the – and subsequently the credit was paid back down right?

Bob Whitman

We paid it up and down and with the transaction, as I mentioned, with the transaction in the summer, because there were a bunch of transition costs associated with it, and we draw on the line on a daily basis, as it's needed, but the build up of receivables today our credit solely outstanding on a net basis is somewhere around $14 or $15 million on a net basis.

As we mentioned that with the approximately $7 million to be received from Franklin Covey products, and we've received a good portion of that already, and with the re-mix of our working capital, we also have a small building we expect to sell in Canada, a couple million dollars, that with that, without using any operating cash so we'd be able to pay our line off. So we expect to have substantial availability on our line.

Kevin Henehan – KMH Capital Advisors

I'm delighted to see that you've retained [Frank Milano]. [Frank] and I have a long history, which was very positive and [Frank] knows me and I care about coverage, coverage, coverage. I think, if you're going to be a public company, you need to have coverage. You probably are working on that, but I think it's been a long, long time since you've had any coverage. I think that would be a real positive and it would be positive, as you said you would, that you and Steve would go on the road more, and talk about your business to investors.

Bob Whitman

And we intend to do so, Kevin, so I think now's a good time. You know the story has been a complicated enough one, and also with our desire to repurchase shares, and just in the middle of the restructuring steps, we just felt our best idea was to stay focused on the business and get everything restructured and done. But now we feel that we have a fairly straightforward story that can be told and we expect to go out and help to do that.


(Operator Instructions). Your next question is a question from John Lewis – Osmium Partners.

John Lewis – Osmium Partners

I have just a few other quick questions, can you talk, I know China was a real interest, can you talk about what kind of progress you guys are making in China so far?

Bob Whitman

Yes, in fact [Stephan Mardiec] who runs our international operations, is on the line with us and I'm just going to turn the time to [Stephan]. He's just been in China in the last few weeks, and he can speak to it.

[Stephan Mardiec]

We are making tremendous progress in the greater China, indeed. We are in eight cities now, and we are more and more working with Chinese large companies, and not only American multinationals. Our business is going well, and the Chinese are very, very interested by our new offering and especially on the execution side what Bob was talking about earlier.

John Lewis – Osmium Partners

That's helpful. So, India is still going well for you, as well?

[Stephan Mardiec]

Yes, India is the same, in fact India and China, as well as South Korea indeed, are doing very well, even in this economy, and in India, same story. The execution offering is working well as same as strategy, while working more and more with India, multinationals like Tata for example, are looking for our support in India even now on an international basis outside of India as well.

Bob Whitman

The growth rates, John, in these countries, have been very, very, very significant, and they're starting up a small base and therefore they have a lot of opportunity, but nevertheless, the growth rates are, in India, have been high double digits, and China, double digits, and so they're continuing . Everybody hears about the storm every day; at the same time, there are a lot of clients.

Every week, we're doing hundreds of proposals that are being given out, and we are winning our fair share of those, and so right now we're feeling good. Obviously, it's not a time to, and certainly in our customer's markets it is very significant, and so, we view it as a real trust for them to partner with us to do this, but we're hopeful that this trend will continue.

John Lewis – Osmium Partners

I saw, I guess in your K, you are now up to 97% of the Fortune 100, I guess from 90%. When you win a deal with a Fortune 100 company, does it usually go globally, or is it – I guess is it just one office at a time or how does that work?

Bob Whitman

Yes, that's a good question. I think that it's any of the above. It depends the level at which you sell it. I mean, the more execution-oriented things where you tend to be up in the C-suite week, often they'll start off in a division with the intention to roll it out. In other cases we're entering the organization through our regional office, and so whatever region they're in it starts and it spreads other ways. So wherever it starts, we're hoping, if it's a campfire, we're hoping it becomes a bonfire and a wild fire over time.

But I think we have the number of truly global deals that we have, has increased significantly over the years, and we used to have very few and now we have a significant number of truly global deals. But I would say of the general process here, because it takes time, even on something like an execution-oriented offering, to get people up to speed. It just takes a year or two, to get, even if there's a quote commitment from the top, to get something rolled all the way through a big organization, and so it tends to happen in that way.

John Lewis – Osmium Partners

Okay, got it. And when you look at your EBITDA, and you, I guess if you look at it from, kind of, a recurring or royalties/licensing basis, is 40 to 45% of that EBITDA in terms of recurring royalty and licensing, is that a decent figure?

Bob Whitman

Maybe try to help on that one, let's just walk through the different pieces, would that be useful, or should I just give you a yes or no?

John Lewis – Osmium Partners

Absolutely. Absolutely.

Bob Whitman

I can just do the yes or no, too, but –

John Lewis – Osmium Partners

No, more color would be helpful.

Bob Whitman

Yes, I'm just saying, let's say on an overall basis that, in any given year almost 70% of our revenue comes from clients who did business with us in the prior year, so there's a significant recurring nature to the revenue in terms of clients and clients above a certain level, but it's broken in to various pieces, John.

Our licensee revenue, which, the revenue piece, which is almost all contribution, it provides a very significant contribution to our EBITDA, right, because you have $11 million of licensee fees coming in, and our fixed costs of support and so forth are quite fixed and not a significant percentage. So that's a big contribution that tends to recur and grow year after year. It's broad-based across 38 partners operating in more than 100 countries. In addition to their minimum accelerations, most of them are growing in excess of that and so that's one source of recurring revenue.

We also have this contractual and, let's say, broad-based. We have other contracts, that occur and repeat from year to year with large clients and that is another part that tends to just be recurring year after year.

Then our next part would be the facilitator revenue that I talked about, which is not contractual, but because these trainers are inside the company, it tends to be highly recurring because it's a very good business model really for them as well. For $100 or slightly over that, of materials per person, they can train their company without hiring any of our outside consulting services, and that provides approximately $35 million of revenue a year with something close to maybe 78% contribution margin.

And so that tends to be highly recurring income that's based on our intellectual property, the value of our intellectual property, and so you combine that, with then ongoing book days and assignments, and I would think that certainly your number 40% is probably a little low, but, probably mid 50's would fit your definition I think.


At this time there are no further questions in the queue, I would now like to turn the call back over to Mr. Robert Whitman for closing remarks.

Bob Whitman

I think we've had, I hope, a useful discussion this morning, and that you all will find the analysis of the numbers useful as well as the discussion of the trends. To mention that it's not that we don't feel in any way we're immune from the current environment, and we're concerned by it, but at the same time, we're grateful that we're out there every day, and our great people are out there with our great clients, proposing new solutions every day that are really, I think, being found to be very useful, and feel good about the momentum, about the pipelines.

We do a pipeline review every week, of new opportunities on which we're working, and there is a substantial pipeline of rate, really strategic business that we're working on with clients we're making strong business decisions about in this environment who are making choices to partner with us, and so we will hope that we can keep the momentum going and really appreciate your patience and interest over these years of restructure, where I know it's been very difficult.

I'm sorry to tell you that our financial statements, as you see, aren't going to be very easy this year, because the sale of the consumer business unit didn't include discontinued operations treatment of that business because we had this ongoing involvement, partly because the ongoing ownership interest but also because they have out name and we have this license agreement with them.

So for the next year, we would intend each quarter to provide pro forma information as we've done here which we hope you'll find helpful. And then a year from now we'll then be on an apples-to-apples basis, but so sorry to make you work harder for understanding us. But at least when you get through it, hopefully it is an easier business to understand. Thanks very much for your support, appreciate it, bye.


Thank you for your participation in today's conference. This concludes the presentation.

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