Derek Hatch – Corporate Controller
Bob Whitman – Chief Executive Officer and Chairman of the Board
Stephen Young – Chief Financial Office
David Covey - Senior Vice President of U.S. Sales
Stephan Mardyks – International Operations
[John Rolfe] - Argan Capital
John Lewis - Osmium Partners
Unidentified Analyst - BWS Financial
Patrick Retzer - Retzer Capital Management
Franklin Covey Co. (FC) F1Q09 Earnings Call January 13, 2008 5:00 PM ET
Good day, ladies and gentlemen, and welcome to the Q1 2009 Franklin Covey Co. earnings conference call. My name is [Antoine] and I will be your operator for today. (Operator Instructions)
I would now like to turn the call over to Derek Hatch, Corporate Controller. Please proceed.
Good afternoon, ladies and gentlemen.
Before we begin I'd just like to remind everybody that this everybody 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, including 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 for 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 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 financial 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.
With that out of the way we'd like to turn the time over to Bob Whitman, our Chief Executive Officer and Chairman of the Board, for the interesting part of the discussion today.
We're glad to have a chance to talk with everyone today and thank you for making the time to be with us.
We'll go into more detail on the first quarter, Steve will, in a few minutes, but I wanted to say that we felt good about first quarter. It is pretty much on the plan that we had established actually even last summer. The two variances from the plan were one, about $1 million less I'm going to refer to operating EBITDA so, you know, kind of the recurring EBITDA - about $1 million less than had been originally planned. Almost all of that, essentially all of that was due to foreign exchange hits and the dollar's strength in the middle of the fall.
The other was that we were $1 million lower on revenue than we had originally anticipated, and that came almost entirely from our facilitator business, we think more because we had such a big fourth quarter, where they really bought a lot of manuals and so forth and therefore they had less need. Partially also because of our focus on what we call booked days, but booking real solutions instead of just selling manuals, and so we had a real softness there in September and early October which has strengthened since then.
But beyond that our first quarter was pretty much as planned and I'll give you some more detail about that.
If you turn to Slide 4, I just thought I'd quickly report on - probably number one may be the most interesting to you all - but the four objectives that we have this year and in this environment.
One is to increase our profitability, cash flow and liquidity significantly. Second, to strengthen our relevance to our customers; in these times you really find out the extent to which the decision makers inside customers really value your solutions, and so we have a big emphasis there. Third, we want to energize, focus and unleash our associates and that is even in a difficult environment often confronting reality and really winning in the face of hard things really is a very energizing thing for an organization; it allows you keep and attract great people. And then we have a few of the key strategic initiatives that we really feel we want to move forward on this year, and I'll spend less time on the last three and more on the first.
In our last calls we've emphasized that beginning last May really that our goal for the company post the sale of the Consumer Business unit was to get back to a run rate of operating income or operating EBITDA that was equivalent to what we had - I should say get back to a run rate of operating EBITDA without the Consumer Business unit equivalent to what we had with it. In our last call we said that would be some number in the $20 million range would we think be a run rate. Probably a little less than that actually would still be on a run rate of hitting the $23 million of operating EBITDA.
That plan has been laid out. Like I say, with a couple of exceptions we've been pretty much on that plan for the first quarter and through December. It had really two prongs to the plan. One was the real commitment to try to find a way to hold the top line. We weren't expecting even in the summer that we'd have huge top line growth, but our plan provides for some modest growth in the top line - 1% or 2% for the year was our original plan.
But the big news was that, with the sale of the Consumer Business unit, we restructured our operations, saving a lot of money in the summer, but we knew we would save money going forward. We took additional cost reduction actions right before the year end and in the early part of the first quarter, and we previously reported that we had anticipated originally that we'd be able to take out $5 million of costs on comparable operations year-over-year. And I think we reported last time - if not, we can report now - that it's millions more than that that have been taken out.
And so for us, because the booking pace was slower in the third and fourth quarter of last year, as we reported in the summer, we knew we'd be entering the first and second quarters a little flat, in fact, a little down from last year. And we also had some planned decreases in revenue because in public programs, which many of you understand we do - mainly we invite people to come to a public program at a hotel or something - that's something where there isn't very much profit in it in its best days. So we can scale that up and down where it hits revenue but it doesn't change the profit line very much, and we had planned deductions that were significant in our public programs revenue this year with almost no, in fact, an increase in profitability as a consequence.
And so in the first quarter we knew we were starting with about $1 million less revenue on the books, we were going to have $1.2 million less revenue due to the public programs plan, and as I mentioned, we were softer in the first six weeks on our facilitator than we had - you know, we hadn't anticipated we'd finish quite as strong. Actually, we finished up about $900,000 stronger in the fourth quarter than we had planned and it robbed it partially from the first quarter. But we've seen that rebound some.
I think for us the really important news - and of course we're glad to be two months further down the road and be able to still report, in fact, report maybe more strongly than we did last time - that our booking pace has actually accelerated over the last two months. If you take the first two months of the year versus the last two months, the last two months have been significantly up. And the result is that right now we're sitting in a position, if you look at Slide 5, this revenue momentum where our bookings have been substantially up and so for the remainder of the fiscal year, sitting where we are today, we have several millions of dollars of more revenue sitting on the books to be delivered between now and the end of August than we had at this time last year.
And so that means that our bookings for future periods have been very strong; we have a number of new contracts that have been awarded. And so in the back half of the year, with revenue planned to be off $4 or $5 million because of the public programs for the whole year with a positive profit impact, the idea is that we would be down in revenue for the first two quarters and that then, with this bookings backlog that we have of revenue and with our continued booking pace that, in the late second quarter and then all of the third and fourth quarters that we would be able to build revenue on that side. That's looking right now, if things continue as they are right now, that's really what would be happening.
A year ago December was our largest booking month ever up to that point, and then January exceeded it last year. In December we were slightly ahead of our booking for last December, and so we're feeling good. I mean, we're feeling grateful and solid that things are holding in, that the efforts that we're making are producing revenue.
So that one prong, the idea that we could be, even after cutting $5 million out purposely because of the public programs, that we could end up slightly up for the year in revenue given what's already on the books and the booking pace, if it were just to continue, it appears that that seems likely at this point in time to us.
And, of course, we can't predict the future and things could change in the environment, but right now, four months into this environment, our teams are doing a really great job around the world and we seem to be having good, strong booking efforts everywhere. And our third quarter pipelines, which we study each week along with second quarter, the late second quarter and early third quarter are looking very strong.
On the cost side, when we did all the cost reductions in the summer we had some transition because the sale of the Consumer Business unit didn't occur until July and therefore the reorganization of the company didn't occur until late July or early August, we had some costs that transitioned into the first quarter where we had just people who needed to transition in our Canadian offices and otherwise. We also had other cost reductions that we undertook centrally to flatten our organization from being kind of a holding company with two divisions to just being one company, and some of those also carried through into the first quarter.
We did nevertheless receive some cost benefit year-over-year during the first quarter, but if we think of a number that's millions more than the $5 million we'd say that most of that will now run through on a relatively straight line basis for the second, third and fourth quarters. And so while revenue will be down in the second quarter, expected to be despite good bookings which are hitting late second quarter and early third, the profit impact of that will be mitigated substantially by the cost reductions, and we're thinking that we could be having more than $2 million a quarter of cost savings in the next three quarters.
And so the overall idea is, like I say, really very much on track. A couple of misses in the first quarter, as I mentioned, but offset or perhaps a little more than offset by the significance of new contracts signed for future periods. But fundamentally we always knew this would be - the story of the profit increases would be primarily in the last two quarters and, as I say, we're feeling good about that.
And so right now I'd say we would reaffirm our expectation that we would during our fiscal year, even though our original statement was within 12 to 15 months of the sale, we're feeling that within this fiscal year we can get to a point, you know, a run rate that would be equivalent to what we had without the Consumer Business unit.
Just touching - we will have, of course, time for questions - as relates to cash flow and liquidity, beyond what would be a significant increase in operating EBITDA, we also have reduced capital spending this year, although we're still investing in new people in key territories and new offerings that are very specific. But with a little more than $4 million less capital spending targeted for the year, obviously the operating cash flow would increase that much more.
We mentioned in November that we had a big focus on our balance sheet with the thought of by late second quarter or early third quarter eliminating our outstanding credit facility. We've made good progress in that regard. We had four categories of assets that we've been working on. One was our receivables, just our normal receivables, which, as we noted last time, had increased significantly right before year end and in the first quarter due to some system transition issues that made it so we weren't able to bill accurately for a few weeks. Those receivables have improved by millions here in the last six weeks or so.
The second was the collection of notes and amounts owed relating to the sale of the Consumer Business unit, which was about $7.5 million at year end. We noted that we also have some working capital outstanding because we do shared services - you know, a relatively smaller amount but they've been good at paying us to date. Because they're in this retailing world, they've had a tougher last quarter for them than they had anticipated, although they otherwise made the sales and things necessary, asset sales necessary, to pay us in mid-January, I think there's a chance, maybe a reasonably good chance, that we're going to need to extend at least a portion of that.
We had inventories and so originally we thought that reducing receivables and inventories for us would be around a $5 million improvement. We think that that's likely to be a couple of million dollars higher than that. We originally thought we'd collect $7.5 million; that's likely to be a couple million less than that. But net-net, we think we'll be in a similar position.
There's been not a lot of progress on the sale of this small office building in Canada, but we still have hopes and some leads on that and continue to focus on that.
So I think in terms of the probability that we'll increase profitability, cash flow and liquidity we feel good about still and that plan remains really unchanged. Some of the elements of the plan, of achieving it, have been modified on the margin, but fundamentally we feel good about that.
I'll just touch on these other three points just because I think they may be interesting to you.
Every week we rank - we have a score on every course that we've offered from any of our direct offices and from many of our facilitator sites. And the participants in a blind survey, which are then put into a FedEx package by one of their own employees and sent to us, rank on a 0 to 10 scale how likely is it that they would recommend Franklin Covey or this course to others based on what they experienced. As you know from previous discussions, our goal is to have, you know, 9s and 10s is the real goal, and we get a lot of 9s and 10s. If we get anything below a 7, we view that as a crisis and make calls to the individuals to find out what's going on.
But in that regard, our scores on our courses - and our courses are viewed as relevant or more relevant than ever by the participants. We are also, of course, and this - I think they're also being viewed as relevant by the decision makers who more and more are controlling those training decisions in this environment. And, you know, there are a number of organizations who otherwise have discontinued outside training, but who have reaffirmed their commitment to work with us in the area. So I'd say that that effort continues.
Our associates, we have kept all of our best people. They're performing well. We track very carefully to make sure they are winning in this environment and most are. More than half of our sales force met their first quarter revenue goals even though we'd started off, you know, we had some softness on the facilitator side, and another 20% actually were within a few percentage points of hitting it. So we really had about 70% of our people in the first quarter who would say they were winning, and that's really about normal.
And on our delivery side, even though we started off with fewer days on the books, there's been a real focus on these bookings and so I think more than half of our consultants also were up on their delivery during the first quarter. And with the backlog that's building, I think they're feeling good, too. And so for us, we're trying to eliminate or reduce anxiety of uncertainty and really focus on those things where we can make a difference.
And finally on the strategic initiatives, we continue to have as one of our biggest strategic initiatives ramping up our sales force and that, so there's a lot of effort going on with Stephan and David and Jen to make sure that is working well.
We also have a focus on establishing firmly these new practices around customer loyalty, around education. We at December 31st completed the acquisition of CoveyLink. Many of you are aware of the book, "The Speed of Trust," which was written by Stephen MR Covey, Stephen Covey, Jr. Stephen used to work with the company, left several years ago to pursue this content area, has a small sales force that has done very well and has a lot of strategic clients. We have roughly, I mean, there's a million or so of revenue on the books for future periods at the time we acquired it, December 31, with the expectation of generating more.
And so establishing these practices is important. We've had some significant wins in our sales performance practice, in our trust practice, in our education practice, and in our customer loyalty practices. In our execution practice, that has been one of the most active areas this fall and there's been a worldwide effort to expand our capabilities for selling and delivering that solution because it's one that a lot of our clients need and value.
Finally, we have the launch here in the next 45 days of a couple of new electronic products, one called Insights, which we hope will be very well received by our large client base. The way that we develop courses, we spend a lot of money on films and things that give us a centerline for other teachers. It's important to have both so that our facilitators and consultants worldwide can deliver on a very consistent basis. Anywhere from 35% to 60% of a course will actually be taught by filmed anecdotes or others teaching content. It's also allowed us to have 20,000 certified facilitators and have them be able to deliver the course as well as we do.
That is also giving us an asset which heretofore we've not used outside the courses but, because we have these wonderful films that most people would not spend the money on but for the course, we now have this library of films and we're able to use that as a resource to provide surround sound, etc., for other courses.
This Insights product is one where we have segments from 50 of our best films with concepts taught around them where I as a leader could say to my team and will be saying to my team when it comes out - that we pick a series of topics or you can do a preprogrammed course or a course outline that will take you through the course of a year or you can take it on your own, but where our team can go home and take the modules online or we can watch the film segment together and answer two or three questions, and it allows leadership training to be delivered in small bites.
In and of itself, we think it'll be a well-received product, but as an add-on to the thousands of clients who buy training from us to have for, say, another $15,000 or $20,000 for their entire organization to have that resource. We're excited about the prospects of that. We think it's also a good thing through this environment, where people are cutting back on travel and other things. It wasn't developed for this environment per se but, now that we're in it, we think that'll help us also to continue bookings strong in the last part of the year.
So net-net, we felt confident in November that if things were to continue as they were our original projection of what we thought we could do this year would hold. Two months later, we feel more strongly about those things, but we still don't control the future. But we do have four months under our belt and a good pipeline and so we're feeling solid about our key assumptions.
And I'll now turn the time to Steve Young, our CFO.
Thank you, Bob. Let me just first say that I also echo optimism about our future.
So my opportunity here is to talk about our first quarter results. I believe that while I'm talking our first quarter will actually be filed. That wasn't planned for theatrical effect. It's just the way it seems like it's worked out.
We of course would rather have filed last Thursday and we're sorry that we didn't, but I'd like to explain that first and then go into our first quarter numbers. Late in our closing process of the first quarter, our controller in Japan brought a couple of matters to our attention. Those matters took us some time to resolve and they were unresolved on last Thursday and therefore we filed an extension. We're resolved now and filing today, but it was those matters that came to our attention in the closing process that caused us to delay our filing.
There were two matters that our controller brought to our attention; one related to revenue and one related to inventory.
The revenue matter was a matter that was a magnitude of $900,000 of revenue that has about a $500,000 margin associated with it. The situation there was that in Japan they adopted a good business strategy to get product in the hands of customers for the holiday season in order to be able to increase our sale to customers. These were to retail chains. We're not selling directly to customers in this case; we're selling to wholesalers who are selling through to customers.
Maybe I should note that, you know, although we sold our whole Consumer Business, the only place that we still have a Consumer Business at all is in Japan and it was so integrated with our organizational operations that that was a piece that wasn't sold. And they sell planners on a wholesale basis to retailers. And so that's the reason why we talk about product, even though we're not in the product business anywhere else.
Yes. So these wholesale sales to retailers is what we're talking about and what I would characterize as a good business strategy was adopted. And we gained agreement with our customers that it was a good strategy whereby they would take the inventory so it would be available for them during the holiday season and they wouldn't run out.
As a part of this strategy, before the end of our year, of August 31st, they shipped or a better word would be separated - we don't have a warehouse in Japan; they're third-party warehouses before the end of the year they separated the inventory out of our inventory and into other areas of the warehouse held for the customers. This process was done in such a way that all of our associates in Japan thought that they had met all of the requirements to properly record revenue in the fourth quarter of last year.
When we got involved and did an additional analysis with KPMG, we determined that the requirements that you have to meet in order to have this type of a transaction qualify as revenue are very difficult hurdles. And while we thought that they had met all of those requirements and while we determined that the customers agreed, etc., etc., at the end of the day we were not able to provide the supporting documentation to indicate that the risk of loss of that inventory had actually transferred to the customer and therefore the revenue should have primarily been recorded in the first quarter of this year rather than the fourth quarter of last year. And that's the nature of that issue.
The second issue was related to our inventory reserve over dated material, and we simply determined that the calculation of our inventory reserve in Japan, while adequate to create an inventory reserve materially correct in each of the following periods, still at the end of the day we had too much dated inventory for the reserve against that inventory.
The reason for that was that even though inventory is dated, we sometimes use it for promotions and other matters that give value to that inventory and therefore the inventory was held in an active status. But the amount of inventory that we move in that way was not sufficient to hold that status and we determined that it needed to change, and that resulted in a need for about a little more than a $600,000 increase in the inventory reserve. So while our inventory reserve had increased in Japan every quarter for the last couple of years, it simply hadn't increased enough.
The impact of this adjustment is primarily in FY '07, but about $200,000 of that increase would have been more appropriate in FY '08.
Our analysis of this matter concluded that our previously issued financial statements are materially correct and do not need to be restated. However, we determined that to make those adjustments in the first quarter of this year would be material to this quarter. So in keeping with the proper handling for that circumstance, we are going to in future filings when we report comparative information, we will modify that information to be what it would have been had these two matters been dealt with in the past.
As an example of that, in our first quarter, when you see it, the number that we are comparing against in the first quarter of last year has been changed. The amount of the change was a little less than $100,000 of net income, clearly an immaterial amount, at least in my mind, but nonetheless an adjustment that we need to make in order to reflect these issues in the prior periods as we report future filings.
There's no future impact to our numbers for these matters. They've been taken care of and we have put controls in place at this time to overcome the material weaknesses that contributed or allowed this to happen or be undetected.
The auditor's opinion over prior periods remained unchanged, but their report covering internal controls will change. Their opinion over the numbers and the numbers will not.
So I hope that's an adequate explanation of the issue that we faced late in our closing period and required us to have a five-day extension.
Now jumping into the quarter itself, as we previously indicated, our financial statements are difficult to understand because of the sale of the products division of CSBU. Because we retained a 19.5% interest in CSBU and for other reasons, we're unable to classify their operations as discontinued operations, so we have rather significant decreases to revenue, to margins, to costs, and to operating income as a result of selling this significant division of the company, which happened in July of last year.
So all of the comments that I'm going to make over the next few minutes relate to the remaining business, and I won't indicate again the massive decrease resulted from the sale of CSBU. You can see that in our actual financial statements.
So first in our P&L, as Bob mentioned, we had decreases in sales in the remaining business. Bob mentioned the components; I don't need to say those numbers again relating to the public programs, the beginning inventory going into the year, and our facilitator sales. Those combine to a decrease in sales of $3 million compared to last year.
Our gross margin decreased by a similar amount compared to last year, due primarily to increased amortization expense for capitalized development projects we had in our restructure of the company. While we're going to realize significant savings from that restructure, the mechanics and just the process required us to express mail some of our mailings that we out to customers and to offices and therefore our freight that's recorded in cost of sales increased, and we had the mix of revenue was a little bit different in the first quarter compared to last year. And so those things are primarily what resulted in the decrease in margin compared to last year.
Offsetting that were the decreases in SG&A that Bob talked about which totaled $1.2 million for the quarter compared to last year. The $1.2 million is even after recording the $800,000 of foreign exchange impact that we had in SG&A in the first quarter of this year that increased our costs $900,000 and after considering the fact that in the first quarter of last year we recorded an $800,000 benefit in our SG&A from the reversal of our LTIP, our long-term incentive plan accruals of the prior period.
So considering those things, a very significant decrease in SG&A as a result of the restructuring effort Bob talked about, the public program advertising expenses that Bob talked about, and multiple other changes in SG&A in many other areas.
Quickly on the balance sheet, one thing you'll notice when you look at the balance sheet, in Q1 is when we actually paid the $28.2 million under the Dutch auction tender offer to repurchase the 3 million shares or more than 15% of the outstanding shares under that program. That program closed just before the end of our fiscal year, but the funding was after the end of the year. It was $28 million with a couple hundred thousand dollars of cost. The funding for that came from cash and from our revolving line.
In Q1, you'll notice when you see it that our payables and our accrued liabilities declined as we paid for transaction-related costs that were in our payables and accrued liabilities - we paid yearend bonuses and the timing of our payroll and EDS payments. As a result of all these things, at the end of our first quarter we were into our revolving line about $18 million and had some positive cash that we reported. We expect, as Bob said, for that to decrease significantly over the coming months and quarters.
Notice in one of our slides, Slide 6, we have our share count slide that we had last time. It's an interesting accounting that in a period of loss like we had for the first quarter we're obligated to exclude the management loan shares from our share count. That's 3.5 million shares that are excluded in Q1 but will be added back to calculate earnings per share in periods of earnings.
Slide 7 simply shows our first quarter as reported last year, CSBU excluded, for our first quarter of '08 last year without CSBU, and then the last slide, Slide 8, shows what I've been talking about and that's the EBITDA of FY '09 actual or Q1 of FY '09 actual versus the Q1 of FY '08 without CSBU. And I just showed a couple of differences there that I spoke to, the LTIP reversal of last year and the foreign exchange of this year. These are the types of things that we look at to conclude that operations were pretty comparable to last year and to what we thought.
So thank you and, Bob, that's everything I had on the queue.
Great. I think we turn it back to our moderator to tell us how to go into Q&A mode.
(Operator Instructions) Your first question comes from [John Rolfe] - Argan Capital.
John Rolfe - Argan Capital
This is a little off topic, but I had a question actually from your proxy which was filed not too long ago. There was some detail in there about the short-term incentive plans, and I think the language was that the fiscal 2009 goals for target operating EBITDA and operating income were set at levels considerably above actual results achieved in '08 for the remaining company.
Given that I know that there was a little bit of discrepancy between what is the remaining business and what used to be classified as OSBU, can you just tell us sort of what those '08 numbers would have been for EBITDA and EBIT for what you're calling the remaining company.
Well, when we set our targets for our short-term incentive plan we look at operating income in the calculations for senior management and we look at EBITDA or operating EBITDA for the calculations for some of our units.
Each one of those, we did reflect a significant increase over what our current without OSBU would have been. And the numbers were consistent with the pro forma information that we showed last time, representing $12.4 million of pro forma operating EBITDA, and then just converting that with depreciation and operating income to come to an operating income target that we would increase from.
But the numbers that we compared to were consistent with the $12.4 million presentation that we had as a part of this call.
John Rolfe - Argan Capital
Okay, so the '09 short-term incentive plan payout thresholds then would be per your language considerably above that $12.4 million number?
John Rolfe - Argan Capital
And in terms - again, I know there's a lot of moving parts here - but in terms of the sort of goal to get back to that $20 million plus of operating EBITDA for the remaining business, that is a level that you sort of expect to be at a run rate by in the back half of this year? Is that the right way to think about it or is that a number that you expect to actually hit for the year?
Yes, what we were saying is to hit a number in the $20 million operating EBITDA range in this year would equate to a run rate - it would actually be a little better than a run rate - to get to the $23.4 million of operating EBITDA that we had with the CSBU.
And so if $23.4 million is what we actually achieved last year with CSBU and $12.4 million was what we had on a pro forma basis without it, the idea was that if we could get to an actual number in this year that's close to the $20 million, that would on a run rate basis be back at the $23.5 million on an annualized basis.
I think the actual math would suggest that you could actually get to the run rate at a few million less than that just the way it happens, but we're not talking about a pace just in the back half of the year that would equate to $20 million. I mean, the targets were meant to be trying to get close to that number this year.
John Rolfe - Argan Capital
Okay. And that $20 million number, then, is what you will, all other things being equal, going to be the reported number that's fully loaded for corporate and everything else?
Yes. Even though, as you know, we don't report in our public filings operating EBITDA as such. That's something we'll reconcile in our quarterly calls. But yes, it's all expenses. Yes, so it's everything.
Whenever we calculate that, it will include everything.
Your next question comes from John Lewis - Osmium Partners.
John Lewis - Osmium Partners
If we could separate cash flow into two areas - operating and working capital and just kind of piece together your comments, if you look at 2009 from a working capital perspective, I know you guys are supposed to receive that $7.5 million working cap note. I think you threw out a $5 million number for receivables and you said possibly millions more, and then just on the working cap front, the potential sale of the Canadian building. So, I mean, just penciling it out, if you just take $7.5, $5, you know, it's $15 million. But I think you said the $7.5 million might have to be paid out later than the [16th], but net-net it would be - is that the right way to think about it, about $15 million for '09 would come out of just working capital?
Yes, that's accurate and kind of what our target is.
John Lewis - Osmium Partners
And then from the operating part of cash flow, so D&A should be around, what, $6.5 $7 million? I guess I've got to put together or update our model based on this call, but if you get, you know, I guess EBIT margins in the 6% - 7% range for the year, that's about another $8 million. And then you talked about operating expenses. You said you were shooting for $5 million, but you think it's millions more. And I think you said CapEx is around $4 million. Is that right?
Yes, $3.5 to $4 million.
John Lewis - Osmium Partners
So if we were to look at just cash flow from operations for 2009, kind of putting this all together I guess we were up around potentially $26 - $27 million from working capital reductions and what you could do from operating cash flow. Is that a ballpark number?
Steve can give the - maybe I should let him give his answer first, but just interpreting my comments, I'd say if you take first of all this idea of the operating EBITDA in the ranges that we've talked about, with $4 million of CapEx spending and a couple of million of tax payments actually because we still have NOLs, that's one way to look at kind of cash flow generated just from normal operations. And then you've got on top of that any cash that would be generated from managing the balance sheet.
Is that responsive, John?
John Lewis - Osmium Partners
Balance sheet side what we said is we'd like to be able to eliminate our outstanding balance on our revolving credit facility more or less from just working capital improvements alone or balance sheet improvements alone, which would be in the $13 to $15 million range, and then from operations, as we call it - I mean, not that that isn't operations - but just from EBITDA minus CapEx minus taxes, you'd generate kind of the numbers that we just talked about.
John, so just a couple of thoughts. First, the $7.6 million or $7.7 million from Franklin Covey products, remember what Bob said, that there's a portion of that that will remain all the time because at the end of every month we'll have a receivable from them that has a corresponding offset in payables to EDS.
I know you're building in the interest payment that we classify as interest payments and our tax payments, and I know you're recognizing that we may choose to hold some cash either in international locations or in cash accounts that we could offset against our revolving line, but we might choose rather to have cash at the same time that we have a little bit of revolving line. And also on our payables side you'll notice a fairly significant reduction in our payables and accrued liabilities in this period.
I know you're building all those things in that need to be considered in addition to just the things that we mentioned that we're focusing on to reduce to create cash.
John Lewis - Osmium Partners
Got it. And so I guess the next tie-in here is if you guys end up with paying down that bank line to zero and have excess cash in the $12 to $15 million range by the end of the year, I know you guys have a long history of returning cash to shareholders through, I guess, mainly buybacks and reduction of the preferreds. But I guess I was just interested in your thoughts here kind of maybe considering a dividend or a buyback?
Let me mention on thing first in all of that analysis. I'm sure one of the things you pick up, too, is seeing that historically we've had a very good August every year. And so while all of the cash flow items that we talk about created by operations and so forth, remember that at the end of the year our receivables normally go up a little bit and it takes us a month to a month and a half for that cash to actually flow through from the operations of the fourth quarter.
So with that said, we do anticipate in our future to have cash. And I believe all the things that we've said in the past still apply, including the fact that we have now just announced a little acquisition that will use some of that cash.
I think the debate about whether cash above what's needed in the business would be used, I mean, I think, as you said, we want to find some way to return it to shareholders. In some respects we wish we were more capital intensive because it would be great if we could reinvest the money at very high rates of return in the business, but we don't see that as really being particularly now, with the Consumer Business gone, it's just not a very capital intensive business.
And so the decision whether to buy more shares and reduce the outstanding float that much more, making it harder for investors to own, versus dividending, I think we'll have to balance those two, but I suspect that our future might include both.
John Lewis - Osmium Partners
Great. And then I guess just one last quick question for you. Can you just give, I guess, any kind of color on - I think you did it briefly in the press release - but where you're seeing kind of strength in the business? It sounds like in December, I guess you said November and December you saw strengthening in your business which, I guess, is pretty unusual given the economic backdrop. If you have any more color on any large customers or what they're really interested in, that'd be great.
Yes. In fact, David Covey and Stephan Mardyks - David runs our domestic operations and Stephan runs our international operations - I'm just going to invite them and Jan Colosimo, if she's on, to add any color commentary.
So David, do you want to go first?
Yes. We've had a big focus on what we call booked days. This is where our consultants are delivering the days. And our focus on that has really paid off. We're having some of our consultants who do the delivery, we've involved them as partners and they've helped us increase and add new days.
Our execution offering that Bob mentioned earlier in the call is going very well. It's not really a training offering; it's more of a consulting process that we take clients through, and that's gone very well. In fact, we started off with some meetings where we've had clients say that we can't really spend any money with you but we like you, and at the end we're walking out with a big deal around our execution offering. So that's gone great, and we look for opportunities to continue to expand that.
But I think primarily it's been through our focus, our primary wildly important goal has been to increase our booked days. We have a number of initiatives around that that are paying off. And then our execution business has gone very, very well and continues to do well.
So that would be my comment, at least domestically, as to why we saw some improvements in November and December.
And, you know, there is a lot of bad news and we try to remain realistic but cautiously optimistic about our opportunities. And we know that companies, especially today, need to execute more than ever, and so we believe that our offering will continue to be very popular and sought after.
Thanks, David. Stephan, do you want to add anything to that internationally?
Yes. We echo what David Covey was saying. On the execution offering, we see that very relevant in many places. But mainly some great results on the license fees - you know, we have license fee partners all across the world - and in many places some countries have been less affected by the recession than some others so, for example, in South Africa and some places in the Middle East. We're still doing well in Greater China and specifically in China we are still making tremendous progress on working with local companies, so that would be the type of places where we're making still great progress.
John, is that helpful at all?
John Lewis - Osmium Partners
I'm glad that David mentioned it's not as though we're not feeling this. There are clients who certainly have cancelled training events. There are others who are delaying decisions because they don't know when they'll have the budget; they want to do something.
But I think there has been a really great focus on five to seven key value propositions that seem to make sense to people in this environment, and so we've just said look, if there's going to be 20% or 30% or 40% harder in some of these areas, we just have got to be that much more focused, we've got to make that many more calls. And so I think it's a real testament to the strength of our selling effort and focus that David and Stephan and Jen have brought to our teams this year and the fundamental capabilities of our people and the increasing relevance of our offerings.
Other questions? I know we're down to just five minutes.
Your next question comes from Unidentified Analyst - BWS Financial.
Unidentified Analyst - BWS Financial
Going to international really fast, do you see a change to the plans with respect to new licenses?
No, I don't. I mean, we are very, very happy with our partners, but our plan will be to focus even more on two key markets in the time to come which are, of course, India and China, where we see unlimited opportunities for our solutions.
Unidentified Analyst - BWS Financial
And are you seeing any delaying in employing your services or cancellations in domestic and international with the economy the way it is?
Yes. As Bob said, we definitely have some cancellations and some of our traditional training has probably taken the biggest hit of those cancellations. But at the same time we're seeing in other parts of the business our business substantially grow.
But no question about it, as Bob mentioned at the first of the call, our facilitator business, which is more of our traditional business, has been hit by the economic situation and we've definitely had cancellations.
And overseas in some key financial places like the U.K. or Singapore, we're seeing some good businesses cancel, specifically, of course, in the financial industry.
Unidentified Analyst - BWS Financial
And you guys were mentioning cost savings. How much more in cost savings do you think you need to do and how soon do you think before it's all fully depicted on your income statement.
The first question, in terms of how much more, you never say there isn't a lot more to do, but honestly, we've taken the steps that we think we need to take. We have backup steps if we need them to do more severe things.
But because for years we have been taking costs out of our business - a year ago we had targeted $10 million of costs out of the combined business with CSBU, $5 million roughly on each side; as we've said, we've exceeded that by several million dollars that's already been implemented - we don't have a lot of kind of unimplemented cost reductions to do right now that, as long as things continue to go on in the way they are. On the other hand, we do have a backup plan if we needed to.
Is that responsive? The question I think was that - sorry, Steve, go ahead.
No, I'm just - I'm sorry, Bob. I didn't want to interrupt.
At the same time, we are still investing in strategic initiatives of adding sales people and curriculum development and other things that are going to drive the business long term.
Right. And in terms of when it'll be reflected, as Steve mentioned in his report, I mean, we did have some impact of those cost reductions that showed in the first quarter, but the scale of the cost reductions that have been implemented, because, as I mentioned briefly and probably wasn't very clear about it, I apologize, that we had some transition costs where some of the people, where we closed the Canadian operations and everything - the Canadian office, not operations but some of those people continued through the first quarter, etc., that the bulk of these will be recognized pretty equally in the second, third and fourth quarters.
If there's one last question, I know we're over time. If anybody wants to ask it, we're happy to answer one more and then let everybody go to dinner.
Your last question comes from Patrick Retzer - Retzer Capital Management.
Patrick Retzer - Retzer Capital Management
Just two quick questions. The first one is with regard to all the free cash flow you're generating, did you say you're looking at doing additional stock buybacks or paying a dividend and are likely to do some of both going forward?
Yes, we did say that. And realistically I think we'll probably try to get our credit facility paid off; we'll have sufficient cash sitting by to do that and to make sure that we continue to weather the storm well over the next months. But yes, I think at the point we conclude that we've got a lot of excess cash we would expect that the business just won't require or won't allow us to invest it wisely in the business that we'll end up returning it to shareholders through probably a combination of those two ways.
Patrick Retzer - Retzer Capital Management
And then the last question. On Page 5 of your slides, the one entitled "Sustained Momentum," it shows revenue momentum, whatever that is, running it looks like 6%, 7%, 8% above last year.
Yes. This is kind of a backward looking metric where it looks at the bookings that we put on the books for the latest 12 months. The result, though, would be to say that - what I didn't say is that we've got millions more on the books today to be delivered in the next eight months than we had at this point last time. And so it kind of, it's correlated with this or it's connected to this, but it's not exactly the same metric.
Patrick Retzer - Retzer Capital Management
So it's like what's in the pipeline essentially?
Yes. It's what our pace has been and what we've put into the pipeline over the last 12 months on a rolling basis. And so if that should spike up or turn down, it would just say that most recently that it's changed. And what you see here is that the gap above last year has increased since November, reflecting what we talked about earlier. But it's not per se the measure of the amount to be delivered in the future because some of that may already have been delivered.
I'd like thank everyone for making the time to be on the call today and for your interest in what we're doing. And we're committed to continue to try to execute on this plan, so thanks very much.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.
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