Courier Corp F4Q08 (Qtr End 09/27/08) Earnings Call Transcript

| About: Courier Corporation (CRRC)

Courier Corp. (NASDAQ:CRRC)

F4Q08 (Qtr End 09/27/08) Earnings Call

November 6, 2008 2:30 pm ET


James Conway - Chairman and CEO

Bob Story - COO


Jamie Clement - Sidoti

Paul Hogan - Fenimore Asset Management


Good day, ladies and gentlemen, and welcome to the quarter four 2008 Courier Corporation Earnings Call. My name is Michelle, and I'll be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. James Conway, Chairman and Chief Executive Officer. Please proceed, sir.

James Conway

Thank you, Michelle. Good afternoon and welcome to Courier Corporation's fourth quarter and fiscal year 2008 earnings conference call. I am Jim Conway, Chairman and Chief Executive Officer. Thank you for joining us.

We released earnings at about 8:30 this morning. I hope you've all had a chance to see the results. It was by and large the quarter we anticipated, though it certainly was not the year we had anticipated. A year ago, we were in record territory with clouds on the horizon due to the weak housing market, but expectations of continued overall growth.

Today, we are in a changed economy and [with the scars] to prove it, but we had a profitable quarter and we have great strength as we face the uncertainties to come and I will share these with you in a few minutes.

Courier’s Chief Operating Officer, Bob Story, is here with me today. Peter Folger, Courier’s Chief Financial Officer is also here with us. Bob will begin with an overview of financial results for the fourth quarter and the fiscal year. I will then discuss the key issues driving our business. I’ll also provide guidance and what to expect for the year. Bob, please go ahead.

Bob Story

Thank you, Jim. Before I begin, I'll remind you that during this call, we may make forward-looking statements relating to the company's financial goals and business environment. Actual results may differ materially. Information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our 2007 annual report on Form 10-K. We encourage you to review those factors in conjunction with any forward-looking statements we make today.

During this call, we will discuss certain non-GAAP financial measures including EBITDA and free cash flow. You will find additional disclosures regarding these non-GAAP measures in our press release, including reconciliations of these measures with comparable GAAP measures. These non-GAAP measures should be considered in addition to not as a substitute for or superior to GAAP financial measures.

Also, during this call, whenever we refer to earnings per share, it will be on a diluted basis.

Okay. I'd like to start off today talking about our biggest business challenge in 2008, Creative Homeowner.

Creative publishes and distributes books on home design, decorating and gardening through a variety of channels, the largest being the home center chains. Creative sales have been under severe pressure since the housing market began its downturn almost two years go. As the housing market worsened this year, so did Creative's results.

Their sales in the fourth quarter were down 33% from last year, and down 27% for the entire 2008 fiscal year. Given this difficult environment, Creative took steps earlier this year to reduce costs, including a reduction in payroll of approximately $1 million. They also narrowed their focus of their publishing program, reducing spending on new titles by an additional $1 million.

And they incurred charges of approximately $1.4 million in the second and third quarters, they increased inventory reserves and write-down the investment in titles that were not performing up to expectations in light of the difficult market conditions. As a result of the falling sales and these other charges, Creative incurred a pre-tax loss of $1.3 million in the fourth quarter and $6.5 million for the fiscal year.

On top of this in the third quarter, we incurred a pre-tax impairment charge of $23.8 million because of Creative’s deteriorating performance and outlook. We completed the impairment assessment in the fourth quarter reducing the charge by approximately $200,000 to $23.6 million.

In light of the continuing weakness in the economy, we determined that further steps were needed to [write] the ship at Creative. Today we have announced that Creative will be exiting the distribution business in December. Their distribution business serves one customer, a nationwide retailer. Creative manages the warehousing, distribution and placement of its books, as well as the books from other publishers across a portion of this customer's store network.

As part of this service, Creative performs weekly in-store functions including restocking and display management. We believe that exiting the distribution business will serve our interests without compromising those of our customer.

Together with the other steps we have already taken, we believe that these actions will reduce pre-tax losses at Creative by more than $3 million in 2009, including the initial expenditure of approximately $300,000 for severance and other related costs.

Creative's operating results and the impairment charge have significantly impacted Courier's results this year. Overall, Courier sales in the fourth quarter were $76 million, down 5% compared to the same period last year with net income of $7.2 million or $0.60 per diluted share, down from $90.4 million or $0.74 per share last year.

For the full year, sales were $280 million, down 5% from last year with a net loss of $370,000 or $0.03 per share. Excluding the impairment charge, net income for the year was $15 million or $1.22 per share compared to $26 million or $2.03 per share last year.

Now, I will break these results down between our two business segments, starting with Specialty Publishing segment, which is comprised of Dover Publications, Research & Education Association or REA and Creative Homeowner.

Specialty publishing sales were $16.4 million in the fourth quarter, down 18% from last year. Sales for the fiscal year were $61.8 million, down 15% from a year ago. Creative Homeowner with sales down 33% in the fourth quarter and 27% for the year was the major reason for the sales decline. But the weakness in the housing market spilled over into the rest of the economy reducing consumer spending in fourth quarter sales at both REA and Dover.

REA sales were down 14% in the fourth quarter and down 2% for the year, finishing the year at $7.6 million. The market for test preparation books and study guides soften significantly during 2008 and competition for its limited shelf space was fierce.

REA’s 2% drop in sales in 2008 follows three consecutive years of growth in excess of 15% per year.

Dover sales in the fourth quarter were down 9%. They finished the year with sales of approximately $34 million, also down 9%. The decreases crossed most all sales channels, reflecting softness, softening of consumer demand and leading to cautiousness by retailers.

During the quarter, we made progress ramping up our new field sales force, which is now cross-selling for all three of our publishing units, but this could not offset inventory reductions among large retailers.

Gross profit as a percent of sales for the publishing segment was 40.5% in fourth quarter compared to 42.9% last year. Creative’s gross margin percentage was down sharply due to the weakness in sales. Gross margin percentage for both REA and Dover increased in the fourth quarter despite their drop in sales.

For the year, the segment's gross profit percentage was 36.8% compared to 42.1%, again as a result of Creative’s difficulties.

Selling and administrative expenses for the segment were $5.4 million in the fourth quarter, down 4% from last year. And for the year, were $22.9 million, down 2% reflecting the impact of cost reduction programs this year.

Interest expense allocated to this segment in the fourth quarter was $134,000 compared to $474,000 last year and for the full year was $1.5 million compared to $1.9 million last year. Interest expense allocated to Creative Homeowner decreased in this year’s fourth quarter because of the write-down in assets due to third quarter impairment charge. Interest expense allocated to Dover and REA was down this year because of cash generated by each of this businesses.

For the fourth quarter, pre-tax income in the Specialty Publication segment was $1.1 million, down $2.6 million. This drop was the result of a $1.3 million loss at Creative Homeowner. Dover and REA's combined pre-tax income of $2.5 million in the quarter was down from $2.9 million last year as a result of their soft sales.

For the year, the publishing segment lost $1.6 million compared to pre-tax income of $5.6 million last year. Again the major factor was the loss at Creative Homeowner, which totaled $6.5 million in 2008. Dover and REA combined earned $4.9 million in 2008 compared to $6.1 million last year.

In our Book Manufacturing segment, fourth quarter sales were $63.5 million, up 2% from last year. Sales for the full year were $230 million, down 1% from 2007. In this segment, we focused on three publishing markets, education, religious and specialty trade. Each of these markets has experienced varying results this year, so I'll review the sales in each one.

Sales of the education market were up 2% in the fourth quarter to $30 million, and for the year were $96 million, down 5%. We started the year well behind our expectations, and despite modest growth in the fourth quarter, we never really fully recovered.

Industry predictions for 2008 growth turned out to be overly optimistic as budgetary pressures on school districts increased due to higher costs and falling revenues in the face of a slowing economy.

In addition, the consolidation between two major educational publishers earlier this year resulted in modifications to their publishing programs and reductions in their inventories, which adversely impacted the timing and amount of our sales to them in 2008.

We have invested heavily in the past few years to create the industry's most efficient four-color textbook manufacturing operation. But with our capacity utilization down, throughout the year because of the softness in this market, our margins suffered as a result.

In the religious market, sales were $17 million in the fourth quarter, down 3% from last year and for the year were $66 million, up 4%. Sales to our largest customer were up 2% in the fourth quarter and up 7% for the year. This is above our long-term historical growth rate for this customer of 3% to 5%, in part because sales to this customer last year were down for the first time in over a decade.

We have continued to work with this customer on a long-term plan to reduce cost through manufacturing efficiencies and material cost savings and then to pass a portion of these savings back to the customer, so they can receive even more testaments for distribution around the world.

This year, we completed the installation of a major new press and highly automated binding line dedicated to these testaments, which significantly increased their manufacturing capacity and lowered our costs.

Sales to all other religious customers were down this year, as we did continue to manufacture of certain low-priced work that was not a good fit for our operations.

In our third key market, specialty trade, fourth quarter sales were $14 million up 5% compared to last year.

For the full year, sales were $56 million, up 3% from last year. Growth came from new customers including Creative Homeowner, who earlier this year transferred most of their book manufacturing from a competitor to our four-color plant in Kendallville, Indiana.

Gross profit in this segment decreased by 16% for the quarter to $16.2 million and as a percentage of sales decreased to 25.5% of sales from last year's 31%.

For the full year, gross profit declined by 16% to 55 million and as a percentage of sales was also down to 24% from 28.2% last year.

The increases in the gross profit percentage in both the fourth quarter and the year were the result of competitive pricing pressures and lower capacity utilization combined with increased depreciation expense associated with our large capital investments to expand capacity in the past few years as well as significant increases in benefit costs.

Selling and administrative expenses in this segment were $5.8 million in the fourth quarter, down $1.1 million from last year.

For the full year, selling and administrative expense were $28.9 million down $355,000 or 1% from last year.

These reductions reflect cost savings initiatives completed during the year and a decrease in variable compensation. Interest allocated to this segment in the fourth quarter was an expense of $110, 000 compared to an income of $20,000 last year.

For the year, interest income allocated to the segment increased to $323, 000 from $279,000 last year.

Pre-tax earnings in the Book Manufacturing segment were $10.3 million in the fourth quarter, down 18% from $12.5 million a year ago. For the full year, pre-tax earnings were $26.5 million, down 27% from last year’s $36.4 million.

On a consolidated basis, interest expense decreased in the fourth quarter from $454,000 to $244,000 and for the fiscal year, decreased from $1.6 million to $1.1 million, primarily as a result of lower interest rates.

Our effective tax rate this year was impacted by the impairment charge, which received a 35% tax benefit. Excluding the impairment charge, our effective tax rate was 36.8% in 2008 compared to 37% in 2007.

Now, I'll shift gears and talk about our cash flow and our financial condition. Cash provided by operating activities was $38.7 million this year compared to $37.5 million in 2007 and $39.2 million in 2006.

A net loss of $370,000 this year included the non-cash after-tax impairment charge of $15.4 million, while depreciation and amortization was $21.4 million, up 13% from last year. We expect depreciation and amortization to be about the same amount next year.

Investment activities for the year used $18 million, down from $32 million last year. Capital expenditures dropped sharply from $26 million last year to $13 million this year. The largest expenditures this year were $4 million for a new warehouse being constructed in Kendallville, Indiana. They will be completed this winter, and $3 million in final payment to complete the capacity expansion project in our Philadelphia facility.

We also continued to purchase new equipment throughout our operations, increase productivity, lower costs and improve employee safety.

In fiscal 2009, we expect capital expenditures to be between $14 million and $16 million, including $4 million to complete the warehouse in Kendallville, Indiana.

Prepublication expenditures were $5 million this year, down 8% from a year ago, primarily at Creative Homeowner. Cash dividends in 2008 were $10 million, up 10% from 2007.

Today, we announced a 5% increase in our quarterly dividend, our 12th consecutive year of increases, and for the first time in many years, we've repurchased Courier shares spending $20 million during the year to repurchase $856,000 shares.

Our repurchase program was completed in August, and we have no current plans to continue it in 2009. Free cash flow this year was $28.9 million or $1.70 per share, an increase of $15.2 million from 2007, primarily as a result of a $14 million reduction in capital expenditures.

We ended the year with $24 million of long-term debt, an increase of $6.3 million during the year. We have a committed credit facility of $100 million, with a maturity that we extended last spring by two years to 2013. This credit facility is spread among four leading financial institutions.

So, to sum up, we have taken significant steps to restructure Creative Homeowner's business, to focus it, refocus it, reduce costs, and sharply reduce their loss. We have completed a multi-year capital investment program, which has provided Courier with the most efficient production platform in the industry for four-color textbooks and for religious testaments.

We announced a 5% increase in our dividends today, which was possible because of our consistently strong cash flow, even in a year with a large drop in earnings. And we have a healthy balance sheet, with minimal debt and $100 million credit facility, leaving us well positioned to compete in this challenging economic environment.

Now I’ll turn the call back over to Jim.

James Conway

Thank you, Bob. As I noted at the start of the call, this was not the year we intended, though we finished it in better shape than many companies. With the fiscal year behind us, and the election finally over, we can now concentrate on the road ahead and the work to be done.

Last quarter, we took some difficult steps to address our biggest challenge, strengthening Creative Homeowner's financial performance in light of the continuing recession in housing and home financing and its evitable impact on book sales at home improvement centers. This week, as we mentioned in our release this morning, and as Bob pointed out a few minutes ago, we took another step, which would reduce our exposure still further, without compromising our service to Creative Homeowner customers. Namely, our decision to exit the book distribution business.

As you may know, the distribution business is really a sideline to Creative Homeowner’s core publishing business. Its serves a single large retailing customer, and only a portion of that customer store network at that.

In good times, it strengthened this important channel relationship, but in a faltering economy, it has increasingly strained Creative Homeowner’s resources, without delivering the results we needed. We remain on good terms with these customers, and we have every intention to make the transition to another distribution company, as seamless as possible. We are grateful for their continuing interest in Creative Homeowner’s award winning products and we hope they will remain a vigorous sales channel, well beyond the point, when the economy turns and consumers resume their longstanding love affair with home ownership and home improvement.

With the economy looking shaky, the challenges at Creative Homeowner are obviously not going away soon, but I expect that the steps we have taken will cut its losses by over $3 million in fiscal 2009, while preserving its core strengths of outstanding content, superb presentation, and a proven math, creating distinctive titles to become category leaders and category creators.

We also face challenges elsewhere in our publishing segment. At Dover, sales were down 9% for both the fourth quarter and the year as a whole, reflecting the drop in consumer confidence and lackluster sales across a broad range of retail categories. In REA’s case, this year’s 2% sales decline brought an end to three plus years of better than 15% annual growth, as the tight economy brought fierce competition for shelf space.

In response, beyond the measures we have taken at Creative Homeowner, we are moving proactively throughout our publishing segment to run [lean in] heart, to grow share, and minimize cost in this constrained environment.

With our SAP back-office systems fully implemented in all three publishing businesses, a new field sales force trained and equipped for effective cross-selling, and new leadership in place at Dover Publications. We face the struggling economy, with the best resources we've ever had.

Equally important, we have a clear focus on new products that are in-tune with consumer interests, developed in partnership with retailers and supported by a robust array of marketing and merchandising solutions, from incentive programs to fixtures and displays.

So will it all work? Well, the economy is still right against us. But we have a great new generation of Dover products that has just made its way into the stores and been very well received by retailers.

Here are just some of these new releases. Several terrific series for children, including a beautiful new line of four-colors listen and read storybooks, with audio CDs. Eight new kit products, led by a Civil War Discovery kit, which expands the successful line into a slightly older age range. A great new crossline called Dover DesignWorks, with more than 100 products. And the first titles in the new premium series, the Dover [Color] Editions. Absolutely gorgeous books, with outstanding production values.

And now I want to move on to book manufacturing, where we had a satisfying quarter in two of our three major markets, especially given the overall economic picture but the education market did not deliver the volume we had expected, particularly, in the elementary and high school segment. As always, the higher education textbook market remains the largest segment for Courier and we continue to see growth in it, with college enrolments still on the rise.

Over the last few years we have built a significant presence at the elementary and high school, well, that is El-Hi level as well. As our growing four-color capacity and advanced production capabilities, have made Courier increasingly, a vendor of choice, for el-high textbooks. But this year, the El-Hi market has come under pressure from escalating energy costs, decreasing state tax revenues and the continuing economic slowdown. School budgets have been squeezed and publishers have been managing very conservatively, ordering cautiously, and minimizing inventories.

In addition, with the consolidation of two major textbook publishes, we saw a combination of inconsistent ordering, as the two organizations came together, and ultimately, the cancellation of a number of redundant titles. So was a difficult environment to plan in, as well as an increasingly difficult environment for selling. And inevitably we wound up with excess capacity at certain points during the year when we had expected to be much busier. Despite all this, we expect modest growth in education sales in 2009. We have already taken steps to secure increased share in the college market, and we have begun the new fiscal year on an encouraging note, with significantly higher utilization levels for textbook printing and manufacturing.

Meanwhile, we are coming off a very good year in the religious market, with 4% growth overall and 7% growth at our largest customer, reflecting their expanded scripture distribution program and the completion of our extensive upgrade at our Philadelphia plant. In this economy we are pleased to have this period of major capital investment behind us, and excited about the efficiency in capacity gains it has given us.

Finally, in specialty trade, we picked up over 40 new accounts this year, both large and small. They were instrumental in our ability to grow that business, in the face of a weak market. Though we were also helped by the infusion of new four-color business from Creative Homeowner, following the expiration of it's external manufacturing contract. Bringing this business home to Courier was also a victory in environmental terms, eliminating the needs for oversea shipping that has been part of that previous arrangement.

And this brings up another notable accomplishment this year, which is our emerging leadership in the move to a greener message of book production. This move spans both sides of our business, including both titles we published ourselves, and those we manufacture for other publishers. We have been environmentalists right along, but during this past year, we took several steps to strengthen our environmental practice, both as a competitive differentiator, and as a marketing tool for ourselves and our customers.

In February, we gained certification by the Forest Stewardship Council, and we launched our own green editions brand, to identify books made in the US from recycled papers. We hope consumers will come to seek out the green edition seal as they increasingly integrate environment awareness, into their buying habits. Over the long term we have no doubt, this move and the strict environmental practices behind it, will be good for the planet, as well as good for our business.

And with that let’s go to our outlook. There is question that until the situation in the global financial marketplace eases, and consumer confidence begins to return, we will face a challenging sales environment across the board. Because we can’t tell when or how things will improve, we have made our guides for fiscal 2009 wider than usual. In the near-term, we expect a disappointing holiday season to put a damper on performance in our specialty publishing segment.

Looking ahead to 2009, we expect the steps we have taken at Creative Homeowner to reduce losses in that business, and we expect improved performance as the year progresses.

In the education market, we expect spending at the elementary and high school levels to be weaker in 2009. In the higher education segment, which accounts for the majority of our education sales, we have had important initial successes in securing our growing share of business with two key customers. Overall, we continue to expect modest growth in education sales.

In our religious business, we expect growth in keeping with past trends, and with the completion of our facilities upgrade, we expect to compete in a growing range of international markets.

And, finally in specialty trade, we expect the new accounts we gained in 2008 will help us in 2009. Fortunately, we are go into this tough economy and solid financial condition, with consistently strong cash flow, low debt, and an excellent infrastructure, thanks to our disciplined program of capital investment over the last several years. With this wave of investment behind us, and with continued fiscal discipline, we expect to generate free cash flow of approximately $20 million in 2009.

Underlying this confidence, today, our Board of Directors declared a quarterly dividend of $0.21 per share, an increase of 5% over the pervious dividend. This increase marks the 12th consecutive year of dividend increases at Courier.

For fiscal 2009 overall, we expect to achieve total sales of between $284 million and $297 million. We expect earnings per share of between $1.20 and $1.50, versus our fiscal 2008 earnings of $1.22 per diluted share, this is excluding the impairment charge. And we expect EBITDA to be between $46 million and $52 million, compared to $46 million in fiscal 2008.

And at this point, I’d like to turn the call over back to you, Michelle, and see if there are any questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Jamie Clement with Sidoti. Please proceed.

Jamie Clement - Sidoti

Hey Good afternoon gentlemen.

Bob Story

Hey Jamie, how are you?

Jamie Clement - Sidoti

Good, thanks, Jim let me -- just first let me ask you a question about the religious business, and then on to education. With the facility upgrade, that you all have performed here, I know you've sort of, you discussed the revenue picture looking forward, but was there a kind of operating costs that you also had during fiscal 2008, particularly maybe earlier in the year, associated with upgrading those facilities, whether by training or whatever that kind of come out this year?

James Conway

There was some training. But the workforce there, has been a long term workforce Jamie. So the equipment upgrades, there is always a bit of a startup curve. But I'd have to say we are very pleased with the way the equipment started up.

Jamie Clement - Sidoti

Okay. And just is the way you have that facility set up right now, I mean, I assume that this is a more efficient setup and could we assume, and I know you don’t report these sorts of things. But, I mean is your expectation that margins from your religious business going forward will be enhanced over what they have been over the last couple of years?

James Conway

Somewhat Jamie. I can just tell you that the efficiency of the equipment is everything we had hoped for and expected. It’s running well and it’s now completely installed. So we'll get full benefit from the new equipments throughout 2009.

Jamie Clement - Sidoti

Okay. Thank you. And just moving on to education, Jim. It’s kind of an uncertain time from a state tax revenue perspective and El, that stuff. How much visibility do you guys have into 2009? And I guess another way of sort of asking that question is, you know, I would have thought that may be, you know, the past couple of months may have been okay. But that the trouble could be sort of the horizon next year. It sounds as if, you know, maybe, you already encountered a little of that weakness? So can you just sort of comment on the educational outlook and how much visibility you have.

James Conway

Sure. And Jamie, when you talk about the education market, you want to take it in two bites.

Jamie Clement - Sidoti


James Conway

That is the elementary and high school, which is very much driven by state adoptions and state funding. And we did see that slow down in August and September. That’s the El-Hi market. For us, our bigger market is the college market, and that’s been a far more predictable and steady market for us. And we are continuing to focus a bit more on that market, than the new emerging elementary and high school market. So, we feel, as far as what we can see going forward, there is far more predictability to college. So we are emphasizing that more so than elementary and high school. Even though for us we will continue to participate in the elementary and high school market. But that is the one that gives you less visibility and predictability.

Jamie Clement - Sidoti

Jim, you certainly have certainly been in this industry for a heck of a while longer than I’ve watched you guys. As you look back over your career and past economic cycles and that kind of things, I mean, what is a disastrous nationwide El-Hi textbooks been decline in a given year, in your experience. Like what’s the kind of magnitude of -- what could be worst-case scenario here?

James Conway

You know, that’s far more a question for the publishers in the elementary and high school market or…

Jamie Clement - Sidoti


James Conway

Even the textbook adoption people in the mega states, because it is a state-by-state issue.

Jamie Clement - Sidoti


James Conway

So, I have some impressions, but that’s all it is Jamie. I think, I’d leave that to the experts.

Jamie Clement - Sidoti

Okay. Fair enough. Thank you very much for your time.

James Conway

Thanks Jamie.


Your next question comes from the line of Paul Hogan with Fenimore Asset Management. Please proceed.

Paul Hogan - Fenimore Asset Management

Good afternoon guys.

James Conway

Hey Paul, how are you?

Paul Hogan - Fenimore Asset Management

Doing well, thank you. Few questions for you. Jim, when I’m looking at the manufacturing margins, you dropped about 400 basis points, and if I am doing that math that's, I guess an additional 9.4 million in expenses over last year. And if I assume that depreciation that was incremental for the year, that all went into that bucket, you had about 6.9 million additional of expenses. So can you just break out what those expenses were, are they fixed? How much can you tackle trying to reduce those expenses in the current year?

James Conway

When you talk about 6.9 additional expenses, I am not sure, it’s all additional expenses, Paul, step one. I think, part of it has to do with the way some of the work came in, particularly in our third quarter, where we weren’t able to run at full capacity. So, I think that had a pretty significant impact, certainly in the third quarter and therefore that had a pretty good impact on the year. But Bob may have a better handle on where some of the expenses were, and we will try to break it down as best we can for you.

Bob Story

Yeah, Paul, you also get things like the effect of pricing changes or a product mix, rolling through there, that affect your calculations I think. But at the end of the day, we certainly did have some fixed cost increases. As you pointed out, depreciation expenses, we also had some increases in benefit costs, and ultimately, I think a big factor was our capacity utilization, which was down all year and that affected the margin.

Paul Hogan - Fenimore Asset Management

Okay. And how much would you say that pricing pressure took out of the top line?

James Conway

We don’t break that down specifically Paul. But I can tell you, this is a competitive environment. But frankly, it has always been a very competitive business. There is always pricing pressure, and this year, if anything, it was a little bit more tough than pricing environment than it has been years past. But that’s just something we've come to expect year in and year out.

Paul Hogan - Fenimore Asset Management

All right. And then looking back at the previous downturn, back in ’01 and ’02, your revenues on the manufacturing side were down in both of those years, and then flat in ’03 and I was surprised that you are able to keep your manufacturing margin pretty steady through that period, and even increase it, and then finally increase it by -- substantially in ’03 and no increase in revenues. And so can we expect something similar when we come out of this downturn?

James Conway

You know, Paul when you look back there, one of the first things you want to recognize is, our emergence is in the four-color textbook game and four-color pricing tends to give you a chance to have a little bit better margin. So that’s when we start to make major moves in to that marketplace, which would have improved the margin. And we are hopeful this year, with some of these wins we have had in the higher Ed market, that our capacity utilization will go up, and if capacity utilization does go up as we expect it well, our margins will improve.

Paul Hogan - Fenimore Asset Management

Okay. And with the El-Hi market and pressure on state budgets, can you anticipate a trend going more away from the four-color back to the black and white for a period of time, in order to save costs for them?

James Conway

I really don’t think so; because the critical thing is there are multi publishers in this environment, they have to compete against each other. And four-color, more attractive books tend to win in the marketplace. So I don’t anticipate that at all, Paul.

Paul Hogan - Fenimore Asset Management

Okay. And to what extent since your first quarter last year, you had some issues with the customer consolidation. So presumably, you've got easier comparisons going forward from here. So does that help you or do you think the market is still going to be down in the first half of the year. And I'm trying not to pin you down and being too specific,but just your general thoughts there?

Bob Story

General thoughts Paul would be, that we think the El-Hi business will probably be down a bit in the first half of the year. But we see at least from our side, the college business being up. Probably up more than the El-Hi business is down, within the context of our overall business.

Paul Hogan - Fenimore Asset Management

Okay. And one last question. All the initiatives that you've undertaken at Dover, how much of that improvement do you think is being masked by the current environment and what you are seeing at Creative?

Bob Story

Well the current environment is pretty tough for anybody, that's selling a consumer product right now, Paul. All three of our publishers are seeing the effect of that. We are doing a lot of pretty interesting things, some great new products coming out. But we still feel like we are paddling upstream against a very difficult sales environment. And all we can do is keep trying to make the improvements in our products and our sales force and the marketing improvements we are running alike, and that will leave us well positioned for when the markets rebound. But, that's what we are trying to do, as we also work pretty hard on the cost side of the business.

Paul Hogan - Fenimore Asset Management

Okay. Thank you.

James Conway

Thanks Paul.


At this time there are no additional questions in the queue. I would now like to turn the call back over to Mr. Conway for any closing remarks.

James Conway

Okay. Thank you, Michelle. And folks thank you for listening in and we look forward to talking to you at the end of our first quarter 2009. Again, thank you for listening in. Bye now.

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