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Courier Corporation (NASDAQ:CRRC)

Q2 2013 Earnings Call

May 01, 2013, 02:30 pm ET


James Conway - Chairman, President & CEO

Peter Folger - SVP & CFO



Good day ladies and gentlemen and welcome to the Quarter Two 2013 Courier Corporation Earnings Conference Call. My name is Patrick and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. James Conway, Chairman, President and Chief Executive Officer of Courier Corporation. Please proceed sir.

James Conway

Thank you, Patrick. Good afternoon and welcome to Courier Corporation’s second quarter earnings conference call. I am Jim Conway, Chairman and Chief Executive Officer. Thank you for joining us. We released our earnings at about 08:30 this morning. I hope you have all had a chance to see the results.

We had a typical second quarter in fiscal 2013 coming in between our busy seasons in the education market. It’s our slowest quarter of the year. Our sales were up 1% from last year and our earnings per share of $0.03 per share were down a $0.01. However, for the year-to-date, our net income is up 46% over the first half of fiscal 2012 and we ended the second half of our fiscal year with our new four-color digital plant in Kendallville, Indiana ready to take advantage of the upcoming textbook season and the increasing demand for customized textbooks at the nation’s colleges and universities.

Last November, our Board of Directors authorized a $10 million stock repurchase program and so far we’ve used about $2 million of that amount, leaving approximately $8 million available as of the end of the quarter. Also this morning, we declared our regular quarterly dividend of $0.21 per share.

In addition, yesterday we announced our acquisition of FastPencil, a California based developer of end-to-end cloud based content management technology. FastPencil’s products serve both traditional publishers and the rapidly expanding universe of self-publishers giving us a position in one of the most exciting growth areas in our industry.

Courier’s Chief Financial Officer, Peter Folger is here with me today and Rajeev Balakrishna, Courier’s Senior Vice President and General Counsel is also here. Peter will begin with an overview of financial results for the quarter. I will then discuss the key issues driving our business. I will also provide an outlook for the balance of the year. Peter, please go ahead.

Peter Folger

Thank you, Jim. Before I begin I should point out a couple of things. First, during this call, we will be making forward-looking statements relating to the company’s financial goals and business environment that are subject to uncertainty. Information about the factors that could potentially impact our financial results and guidance are included in today’s press release and in our filings with the SEC.

Second, we will discuss certain non-GAAP financial measures including EBITDA and adjusted operating results. These adjusted operating results exclude restructuring charges as well as certain non-recurring items. Specifically, adjusted results for the first half of last year excludes severance and post-retirement costs of $1.6 million or $0.08 per share and a gain of $587,000 or $0.03 per share from the sales of our lease-hold interest in two cell-towers.

You will find additional disclosures regarding these non-GAAP measures in our press release, including reconciliation of these measures with the comparable GAAP measures. These non-GAAP measures should be considered in addition to, not as a substitute for superior to GAAP financial measures. Also, during this call whenever we refer to earnings per share, it will be on a diluted basis.

Now let’s turn to results. Sales for the second quarter of fiscal 2013 was $62 million, down 1% from last year. Net income in the quarter was $336,000 or $0.03 per share compared to $440,000 or $0.04 per share last year. For the first half of the year, sales were $127 million, up slightly from a $125 million last year. Net income for the first half of the year was $2.8 million or $0.24 per share compared to adjusted net income of $2.5 million or $0.21 per share last year.

Now we’ll discuss each of our two business segments. I will start with our publishing segment, which includes Dover Publications, Research and Education Association, or REA and Creative Homeowner. Publishing sales were $9.4 million in the second quarter, down 3% from last year. Sales were marginally ahead of last year at Dover, but down at both REA and Creative. Publishing sales for the first half were $18.5 million also down 3% with the decline split among all three businesses. Despite slow sales, the segment was able to narrow its operating loss substantially for the quarter to $368,000 versus a loss of $1.1 million last year.

For the first half of this year, the segment lost $1.5 million down from $2.3 million for the first half of last year, excluding severance expense related to last year’s cost cutting measures. Factors contributing to this improvement included several well received new products, continued reduction in operating cost, a significant decrease in inventory obsolescence expense, an increasing revenue from ebook sales through the retail channels of Amazon, Apple, Bans & Noble and Google.

Now let’s look at our book manufacturing segment. Second quarter sales in the segment were $56 million, up slightly from $55 million last year. While sales for the first half for a $113 million up 2% from the same period in 2012. In this segment we focus on three markets, education, religious and specialty trade. Sales for the education market in the second quarter were down 8% from last year to $20 million. However they were up 4% to $45 million for the first half of fiscal 2013 compared to the same period of last year. The year-to-date growth in this market came primarily from higher sales of college textbooks and reflects an increase of over 50% and revenues from our digital print capabilities including sales of customized textbooks produced by Courier Digital Solutions.

As Jim mentioned, we completed the previously announced build-out of a second digital facility. This one adjacent to our four-color offset plant in Kendallville, Indiana. This new operation came online in April, in time to meet the seasonal demand in the education market which is typically highest in the second half of our fiscal year. In the religious market, second quarter sales were even with last year at $18 million, while sales for the year-to-date were up 3% to $35 million, with sales to our largest religious customer up 4%. In our third key market, specialty trade sales were up 11% to $15 million in the second quarter, reflecting an increase use of digital printing; but were down 2% for the first six months, reflecting tight inventory management among publishers and the impact of certain of ebook sales and certain [titles].

Overall the book manufacturing segment second quarter operating income was $1.4 million down from $2.3 million from last years second quarter. For the first six month of this year, operating income was $6.9 million down 8% from last year’s adjusted operating income of $7.5 million. These results reflect a competitive pricing environment, reduced recycling income and start-up costs related to the new Kendallville digital facility. These factors impacted our gross profit which was $8.4 million or 15% of sales in this year’s second quarter versus $9.1 million or 16.5% of sales last year. For the first half of this year, gross profit as a percentage of sales was 18.9%, 50 basis points lower than the 19.4% for the first six months of last year.

Moving on to taxes; our effective tax rate for the first half of fiscal 2013 was 37% comparable to the 36.6% for the same period last year. Now I'll shift gears and talk about cash flow and our financial condition. Cash provided from operating activities was $15.4 million in the first six months versus $14.4 million last year. Investment activities for the first half of the year used $10.5 million of cash including approximately $1.6 million of prepublication costs and $8.8 million for capital expenditures. Capital expenditures for fiscal 2013 are expected to total between $17 million and $19 million, with approximately $13 million dedicated to our digital offerings including the additional digital capacity in Kendallville. Pre-publication costs are expected to be lower than 2012 levels, as we tighten our focus at Creative Homeowner.

As Jim mentioned, in November the Board authorized and do $10 million stock repurchase program, of which we have now used about $2 million to purchase shares. We ended the quarter with $17.2 million of debt, $1.6 million higher than the start of the year, and we have a committed credit facility of $100 million spread among four leading financial institutions and maturing in 2016. So to sum up, it was a typical second quarter for Courier with revenues hovering at essentially the same levels a year ago. In book manufacturing, sales were down 8% in the education market, flat in the religious market, and up 11% in specialty trade market helped by continued growth at Courier Digital Solutions. The segment’s operating income was down from a year ago, reflecting the competitive pricing environment, reduced recycling income and start-up costs associated with our additional digital facility in Kendallville. This facility is now up and running and available for the coming textbook season.

In publishing, we continued to cut cost including inventory obsolescence and began to see meaningless revenues from ebooks. As a result, our sales were down 3%, the operating loss was down sharply. We announced our regular quarterly dividend. We still have authorization for an additional repurchase of up to approximately $8 million of Courier stock. We have a healthy balance sheet that leads us well positioned to pursue further growth, and yesterday we made an important acquisition with the purchase of FastPencil, which Jim will have more to say about soon.

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

Jim Conway

Thank you, Peter. When we say it was a typical second quarter for Courier that is in between our busy seasons, it may sound as if we spend the whole second quarter just waiting for the third one to get started. Let me assure you that’s far from the case. While the textbook business retains a seasonal character, the seasonality continues to evolve as the whole industry adapts to a dynamic, competitive environment that includes physical plus digital content delivery, semester by semester ordering to minimize warehousing and inventory cost and the continuing movement towards customization of course content for individual (inaudible) and classes.

At the height of our peak season, our resources are routinely stretched year after year to meet growing demand. Fortunately, we have excellent content and process management systems to keep things moving. By having our resources in place and ready to go for that peak season is one of the critical tasks that gets our attention during our slower second quarter. Still approved in fiscal 2013; as we brought our second digital production facility in to operation in Kendallville, Indiana. By placing this facility in Kendallville as part of our four-color offset operation, we're making it easier than ever for customers to execute multi-print strategies from a single source at a convenient central US location. At the same time, we're building on the experience of our original Courier Digital Solutions facility in Massachusetts to meet a broader range of customer needs with an even larger HP Digital Inkjet Press.

And by the way, we will also be demonstrating our ability to replicate the exceptional quality and service level of our Massachusetts facility in different settings. That achievement alone made our second quarter highly productive in terms of the work we have to do in the quarters and years to come, and not only for textbook publishers, before a growing range of applications in the diverse market we call specialty tray.

Of course we also met our customers’ current needs including maintaining our momentum of steady year-over-year growth with our largest religious customer, for whom we not only run the most advanced integrated scripture production facility in the world, but also manage scripture distribution to more than 100 countries.

As Peter noted, year-to-date we are up 4% with this customer in line with historical growth trends. And while doing all these things, we also look further ahead into the future of our industry and made an acquisition which we completed and announced yesterday and which promises to enhance our ability to serve both our current customers as well as vast and rapidly growing constituency that we have never served before.

FastPencil based in Campbell, California is an exciting young company that has quickly made a name for itself as a developer of end-to-end cloud-based content management technology. FastPencil serves office and publishers with full featured, open platform solution that reach all the way from content development, workflow and production to marketing, licensing and distribution. It also provides simple automated systems to help self publishers get to market quickly and effectively in both print and e-book form.

With our announcement yesterday, FastPencil takes an important lead forward for its customers, while Courier takes out a strong position in one of the fastest-growing segments of our industry. Since 2010, our in-house combination of content management software and state-of-the-art digital printing has made us a nationwide leader in customized textbook production.

The FastPencil platform brings the similar degree of flexibility and control to general trade publishers, authors and the rapidly expanding universe of self-publishers. At the same time of its acquisition, FastPencil had relationships with more than 60,000 sales publishing content creators involving over 50,000 active projects.

Our current publishing customers will appreciate the extra options presented by FastPencil’s cloud-based collaborative platform, integrated development tools for print and e-books and sophisticated use of social media at every stage of the process. Meanwhile FastPencil’s self-publishers who gained tremendous added value in print production through our ability to deliver top quality books in virtually any one [like], not to mention access to our nationwide publishing sales force and its relationships with thousands of retailers.

I will tell you more, but this story is just beginning. We have more to say in coming quarters. Now let's move on to our publishing segment. While publishing sales were down about 3% from last year, there were several positive forces at network which combined to enable us to reduce the segment’s operating loss sharply both for the quarter and for the year-to-date.

In fact, Creative Homeowner was profitable in the quarter. The past few years have been challenging for the publishing segment, from the recession to Hurricane Sandy to shrinking sales channels. We have responded with cost cutting measures and targeted new product offerings.

Let me give you a couple of examples. The first is our growing success with e-books. Last year we converted thousands of existing print titles into e-book form and established relationships with the leading retail platforms of Amazon, Apple, Barnes & Noble and Google. Having done that groundwork, we are now starting to reap the rewards. While the majority of our e-books have still only been available for less than six months, e-books accounted for 5% of Dover sales this quarter and are clearly having an impact on the segment’s improved bottom line.

We are also continuing to come up with new products matched to the needs of specific audiences. After surveying its culinary book customers, Dover recognized that many adult colorists valued Dover content. The result is a product line called Creative Haven, which led to people express themselves in a variety of forms from floor designs to complex mosaics. And as these colorists have shown interest in an even greater range of content, Dover has now expanded the line to dozens of titles.

With that, let's go to our outlook. As we enter the busiest part of our fiscal year, we are well-positioned to serve our customers more effectively than ever. Educational and trade publishers increasingly appreciate our distinctive combination of digital and offset capacity in end-to-end content management expertise. We also continue to attract new customers, who are still discovering that offset quality four-color digital can be a game changer. And with our acquisition of FastPencil, our content management capabilities now reach out to even broader constituency among traditional publishers as well as self-publishers.

As in the past, we expect our performance in fiscal 2013 to follow a seasonal pattern, with a larger portion of our earnings coming in the second half and we now have the additional digital capacity in Kendallville to meet the demand we expect. In line with our past practice, today's guidance including comparisons to prior performance excludes impairments and restructuring charges.

Overall, we expect fiscal 2013 sales of between $266 million and $281 million, an increase of between 2% and 8% over the 53-week period of fiscal 2012. We also expect earnings per share of between $0.75 and $1.05, which compares with our fiscal 2012 earnings of $0.91 per share. And in fiscal 2013, we expect EBITDA to be between $39 million and $45 million compared to $42 million in fiscal 2012, excluding restructuring charges.

So at this point, I'll turn the call back over to Patrick to see if there are any questions.

Question-and-Answer Session


(Operator Instructions) Currently showing that there are no audio questions in queue. I would now like to turn the call back over to Mr. James Conway for any closing remarks.

James Conway

Patrick, thank you very much for your help and folks thank you very much for listening in. Look forward to chatting with you again at the end of our third quarter. Bye for now.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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