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Bowne & Co. Q4 2008 Earnings Call Transcript

March 19, 2009 | about: BNE

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Bowne & Co. (BNE)

Q4 2008 Earnings Call

March 19, 2009; 11:00 am ET

Executives

Dave Shea - Chairman & Chief Executive Officer

Bill Penders - President

John Walker - Senior Vice President and Chief Financial Officer

Pamela Blum - Director of Corporate Communications

Analysts

Kevin Goldstein - Great Gable Partners

Presentation

Operator

Greetings and welcome to the Bowne & company 2008 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I’d now like to turn the floor over to Pamela Blum, Director of Corporate Communications for Bowne. Thank you Ms. Blum, you may begin.

Pamela Blum

Good morning and thank you for joining us today as we discuss our 2008 results. With me this morning are Dave Shea, Chairman and CEO; Bill Penders, President; and John Walker, Senior Vice President and CFO, all of whom are available to answer your questions at the end of your prepared comments. After commentary by Dave and John, we’ll move on to your questions.

I would like to remind everyone that the matters discussed on this conference call contain comments and forward-looking statements based upon current plans, expectations, events and financial and industry trends, which may affect the company’s future operating results and financial position.

Such statements involve risks and uncertainties, which cannot be predicted or quantified and may cause future activities or results of operations to differ materially from those discussed. Historical results achieved are not necessarily indicative of future profits of the company. For further information, refer to the company filings with the SEC.

We will also discuss pro forma financial information. We believe the presentation of pro forma results provides shareholders with useful supplementary information concerning the company’s ongoing operations and are an appropriate way to evaluate the company’s performance. However, they are provided for informational purposes only. Please refer to the earnings release and related footnotes for a reconciliation of GAAP to pro forma information.

In accordance with SEC regulations, the earnings release has been filed on Form 8-K and both the release and Form 8-K can be found in the Investor Relations section of our website at www.bowne.com. For further detail and analysis, our 10-K which was filed Monday, can also be found on our website.

Now, I’d like to turn the call over to Dave Shea. Dave.

Dave Shea

Thank you Pam and good morning everyone. Welcome to our 2008 earnings conference call. John and I will provide you a brief summary of our 2008 results, an update on our strategy, the status of our credit facilities and our 2009 outlook. 2008 was an extremely challenging year for all companies, especially for Bowne, given our ties to the capital markets. This is one of the most difficult years in Bowne’s history, with activity in the capital markets decline to levels we haven’t seen in over 15 years.

Overall, there were 25% fewer filings in 2008, compared to 2007. 29% fewer M&A transactions and the biggest fall off was in the IPO activity, with only 59 priced IPOs in 2008, compared to 264 in 2007 and only one priced IPO during the last four months of 2008. Bowne completed 15 IPOs last year, as compared to 90 in 2007.

The decline in activity levels had a significant impact on our results. 2008 revenue declined 10% to $767 million, from $851 million in 2007. Transactional revenue was $190 million, versus $304 million at 2007, a decline of 38%; and segment profit was $33 million as compared to $77 million.

Despite the severity of the economic crisis, we are pleased with the progress we’ve made on executing our strategy. We continue to grow recurring revenue streams that are not tied to capital market activities, through the introduction of new products and services, leveraging technology to improve the efficiency, productivity of our operations.

Some of our 2008 accomplishments include shareholder reporting services and marketing communication services that grew over 7% in 2008, and represented approximately 70% of total revenue, our highest level ever. We were awarded seven of the top 10 largest announced M&A transactions in 2008, including Bank of America/Merrill Lynch, Wells Fargo/Wachovia and the Inbev Anheuser-Busch transaction.

In marketing communications, we were awarded a five year contract with USAA, a Fortune 200 integrated financial services company that primarily serves the US military and their families. The estimated $60 million contract, calls for us provide high value operational print and mail services for USAA’s substantial base of over 6 million customers.

In this difficult economic environment, we anticipate that more companies will focus on their core business and outsource their marketing and communication operations to more effectively connect with their customers, while reducing costs and we see this shift as a key growth opportunity for us.

We have also implemented efficiency and productivity improvements. Including, we migrated from a paper based work flow to a digital work flow, automating job scheduling and other routine tasks, which has significantly improved the productivity of our employees, allowing us to do more with less fast.

We established centers of excellence to serve our investment management and compliance reporting clients. We are a small nucleus of employees, with specialized expertise that provides personalized support around the clock. We increased the amount of composition work. We outsourced to 47% in 2008, while continuing to maintain high service levels.

Outsourcing is another vital component of our strategy, as it adds considerable flexibility to our operations, addressing the fluctuating activity levels that are inherent in our business. We launched the new company wide workload scheduling and billing system that accelerates our billing cycle significantly, and provides us with the ability to track and monitor the progress of individual projects, as well as organization-wide activity levels.

We completed several acquisitions during 2008, all of which are meeting our expectations. GCom, acquired in February of last year, positions us as the leading provider of shareholder communication services for investment management firms. RSG, acquired in April, expands our scale and adds new products and services within marketing and communications.

These acquisitions support our strategy to grow revenue stream that are not directly tied to transactional activity in the capital markets. During the fourth quarter, we substantially completed the integration of our 2008 acquisitions, which included the consolidation of five of the acquired digital print facilities as we migrated client work to existing Bowne digital facilities.

In the process, we were able to eliminate 400 positions that were redundant. We expect that these consolidations will result in cost savings of $23 million, including approximately $14 million to be realized in 2009. We have been taking proactive steps over the past several years to improve the efficiency and flexibility of our operations by leveraging technology and developing new solutions, and the impact has been significant.

In 2006 and 2007, a time of growth in our business, we reduced head count by approximately 10%, while increasing revenue by over $180 million, but given the current economic environment, we have taken additional steps to reduce costs and improve cash flow, including a 25% work force reduction over the past 12 months, excluding reductions that were the result of the integration of our acquisitions; suspension of the matching contributions to the company’s 401(k) plan, which will result in savings of $6 million in 2009; elimination of all bonus payments for 2008 and normal merit increases in 2009.

We paid our first quarter dividend in the form of stock in lieu of cash, saving approximately $1.5 million in cash, which suspended the payment of cash dividends until economic conditions improve. We further consolidated our manufacturing resources and integrated our digital and offset print capabilities, as our clients shift towards a more print on-demand environment.

In addition to closing five of the digital print facilities gained through acquisitions, we also consolidated manufacturing operations in Atlanta, Boston, Milwaukee, Wilmington and Sacramento. The cost reduction initiatives I’ve just mentioned are expected to result in annualized cost savings of $70 million. Of that $70 million, we expect to achieve incremental cost savings of approximately $55 million in 2009.

We will proactively evaluate our cost structure in consolidating streamlining operations throughout 2009. At the same time, we’ll continue to create new products and services to drive market share growth and increased revenue. We developed a comprehensive XBRL service offering, including the industry leading XBRL Viewer, which allows filers to upload their financial documents and preview them before filing with the SEC.

Now, large accelerated filers are required to provide their financial statements in XBRL format for the June quarter end and we are pleased, that to-date, more than 120 companies have signed up for our full service XBRL offering.

We launched a new tool for external financial reporting called Bowne Compliance Driver, which automates the traditional manual task of collecting, consolidating and formatting financial data, providing clients with greater confidence in the integrity of their information, as they prepare their annual 10-K and quarterly statements. Additionally, Compliance Driver is being integrated with a robust composition platform, so, client projects can move seamlessly through the entire document lifecycle.

FundSuite, which we’ve gained as a result of our acquisition of GCom, transforms raw investment management data into formatted financials, and we are integrating this application into our composition platform. Clients will be able to access cover-to-cover views of investor compliance documents throughout the creation and editing process and finally, our eProxy solution ePOD is gaining more traction in the marketplace, as more and more companies elect to utilize Notice and Access.

As we look to the future, we anticipate the new administration in Washington will impose additional regulations on the financial services industry. More regulation represents growth opportunities for Bowne and we are ready to assist our clients in meeting new disclosure requirements as they unfold, whatever they may be, as the flexibility of our operations and the deep expertise of our employees, enable us to address new regulations quickly.

For example, when the SEC issued an emergency order requiring hedge funds and other institutional investment managers to report short sales and short positions this past September, Bowne acted immediately, and within two business days, had a filing solution that enabled investment managers to comply with minimal destruction to their routines.

To-date, we have completed 2,500 filings for more than 100 clients. We’re ready to respond with the same agility and speed to whatever new disclosure requirements are adopted in 2009 and beyond.

Finally, our earnings release and 10-K, presented our outlook and annual guidance for 2009. We estimate that total revenue will be in the range of $700 million to $770 million, reflecting the anticipated continuation of the current recessionary environment for the remainder of 2009; transactional revenue in the range of $120 million to $175 million, given the continued uncertainty in the capital markets, and segment profit in the range of $40 million to $60 million, significantly improving over 2008, despite transactional revenues declining year-over-year.

We are comfortable with this range, given the cost saving initiatives that I just discussed, as well as the expected growth of our recurring revenue streams from shareholder and marketing communication services.

Before I turn the call over to John, I’ll comment briefly on our revolving credit facility, which is in place until May 2010. We decided to begin the process early, given the current credit environment, and we are pleased to announce this morning that we received commitments from our bank group to amend and extend our existing credit facility to May 2011.

Our credit facility remains at the $150 million level and we believe this will provide us the flexibility we need, to operate in the current recessionary environment. The renewal will be subject to satisfaction of customary closing conditions and we are very confident it will be finalized shortly.

At this time, I’d now like to turn the call over to John Walker. John.

John Walker

Thanks Dave. Good morning everyone. Our 10-K was filed on Monday evening and our earnings release was filed last night; and both documents cover our fourth quarter and full year results in detail.

In the second half of 2008, we experienced unprecedented levels of volatility and uncertainty in the capital markets. The sharp decline in capital markets activity had a significant impact on our financial performance and cash flow in 2008. Dave has already discussed the impact that this difficult time has had on our business and our operating results in 2008, which by the way, are generally in line with the low end of the range of guidance previously provided.

This morning, I would like to comment on our liquidity position and balance sheet. During 2008, the company experienced and funded several large transactions, which impacted our liquidity.

For example, on October 1 we funded the put of $67 million of our convertible notes. In addition, we utilized $100 million in cash to fund our recent acquisitions in subsequent integrations, which were completed during the year. These investments contributed more than $80 million in revenue in 2008 and will provide the company with additional long term benefits on a go-forward basis.

We also utilized $18 million in cash to fund restructuring initiatives in 2008, including a significant reduction in our work force in the closing of several facilities. These initiatives have allowed us to streamline our operating cost structure, resulting in over $40 million in annualized cost savings and will continue to have a long term positive benefit on a go-forward basis.

Despite these significant uses of our working capital and liquidity in 2008, our balance sheet remains strong and we have a relatively low level of debt outstanding. At December 31, we had $90 million of debt outstanding. We have managed our debt levels carefully, as evidenced by the fact that in the fourth quarter we managed to reduce our debt by $27 million, despite the continued downturn in business.

Further, our overall debt level at the end of 2008 is only slightly higher by $12 million, in comparison to our debt at December 31, 2007. Despite the lower operating performance experienced in 2008 and the significant liquidity transactions that were funded in 2008, as previously noted.

Our $90 million debt level at December 31 is comprised of $79.5 million drawn on our $150 million revolver. Our existing revolving credit facility provides us with ample liquidity to operate our business and does not expire until May 2010. We are also in compliance with all financial covenants and requirements.

Our debt outstanding includes $8.3 million of 6% convertible subordinated notes that have a put and call date in October of 2010 and approximately $2 million in capitalized lease obligations. In essence, the company has a relatively low debt level and operates with a modest leverage ratio.

Reserving and creating liquidity is a high priority for Bowne, especially in this difficult and challenging market. As previously noted, our existing $150 million revolving credit facility does not mature until May 2010 and does provide us with ample liquidity to operate our business effectively.

However, during the last several months, we have been proactive in negotiating an early amendment, an extension of this facility. We’ve had very productive negotiations with our existing banks and members regarding an amendment and extension of our credit facility, and the bank group has been very supportive of the company’s strategy and business plan.

As Dave mentioned, earlier this morning we’ve received commitments from our existing bank syndicate to amend our $150 million credit facility and extend its maturity until May 2011, two years from now. We will issue a press release disclosing the details of the amended and expensed credit facility shortly. In general, the facility will continue to meet our operating and liquidity needs, and as previously noted, its maturity will be extended to May 2011.

The amended facility will be structured as an asset-based loan, and will be comprised primarily of a revolving credit with a small term loan component, for an aggregate facility size of $150 million, thereby maintaining the size of the existing facility.

The interest on the amended facility will be priced at LIBOR, plus 400 to 450 basis points. So based upon current LIBOR rates, we anticipate that the annual interest rate on the amended facility will not be significantly greater in comparison to the annual interest rate on our previous debt structure; given the fact that our $75 million convertible notes, which have been substantially repaid, carried an interest at a 5% annual coupon.

As Dave has discussed in detail, we have been improving the efficiency and flexibility of our operations since 2006, and in light of the current financial downturn, we initiated a number of measures to streamline our cost structure, to maximize profitability, which helps to preserve and create liquidity. We will certainly look for ways to continue our efforts to further streamline our cost structure.

We will also continue to carefully invest our capital dollars wisely, to create new products and service offerings that help our clients, to generate new revenue streams for Bowne, and to create greater efficiencies.

We are optimistic that the measures we have implemented regarding our streamlined cost structure, together with the amended and extension of our credit facility, positions the company to withstand the current economic downturn, and also positions the company to generate strong profitability, when economic conditions improve and the capital markets strengthen.

In summary, we believe that our strategy will enable us to manage through these difficult times and position us to capture revenue opportunities quickly, when the capital markets return. We’ll remain focused throughout 2009 on managing our debt level and improving our liquidity position; growing earnings and increasing our market share through the introduction of new products and services.

Now, I’d like to open up the call to questions. Operator.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Kevin Goldstein with Great Gable Partners. Please state your question.