Consolidated Graphics F1Q10 (Qtr End 6/30/09) Earnings Transcript

Consolidated Graphics Inc. (CGX)

F1Q10 (Qtr End 6/30/09) Earnings Call

August 05, 2009 11:00 AM ET

Executives

Alexandra Tramont - FD

Joe R. Davis - Chairman and Chief Executive Officer

Jon Biro - Executive Vice President, Chief Financial and Accounting Officer

Joe Davis

Analysts

Charles Strauzer - CJS Securities

Jamie Clement - Sidoti and Company

Presentation

Operator

Good day ladies and gentlemen and welcome to the Q1 2010 Consolidated Graphics Earnings Conference Call. My name is Keisha and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operators Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Alexandra Tramont of FD. Please proceed.

Alexandra Tramont

Thank you and good morning. Welcome to the Consolidated Graphics Conference Call. During the call, management will discuss the company's results for the first quarter ended June 30, 2009. You may receive a copy of today's press release by calling FD at 212-850-5600, or by visiting Consolidated Graphics' website. The conference is being broadcast live on the Internet at www.cgx.com, and a subsequent archive will be available.

Before we begin, I would like to remind everyone that remarks made by management during the course of this morning's call contains forward-looking statements which involve known and unknown risks, uncertainties or other factors that could cause actual results to differ materially from results, performance or other expectations expressed or implied by these forward-looking statements.

Consolidated Graphics' expectations regarding future sales and profitability assume, among other things, stability of the economy and reasonable growth and demand for its products, the continued availability of raw materials at affordable prices, retention of its key management and operating personnel, satisfactory labor relations, as well as other factors detailed in Consolidated Graphics' filings with the Securities and Exchange Commission, including the risk factors set forth in our most recently filed Annual Report on Form 10-K, quarterly report on Form 10-Q, and current report on Form 8-K.

Forward-looking statement, assumptions or factors stated or referred to on this conference call are based on information available to Consolidated Graphics as of today. Consolidated Graphics expressly disclaims any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this call to reflect the occurrence of events, circumstances, or changes in expectations.

In addition, during the course of this call, management of the company will reference certain non-GAAP financial performance measures. Management's opinion regarding the usefulness of such measures, together with the reconciliation of such measures for the most directly comparable GAAP measures for historical periods are included in the company's earlier filing today with the Securities and Exchange Commission.

Now with these formalities out of the way, I would like to turn the call over Joe Davis, Chairman and Chief Executive Officer. Joe, you may begin.

Joe R. Davis

Thank you and good morning. With me on the call today is Jon Biro, Executive Vice President and Chief Financial Officer.

This morning we released financial results for the June quarter. Revenue for quarter were 225.9 million, down 21% compared to the prior year. Operating income was 0.9 million compared to 20 million last year. And the net loss was just over 300,000 or $0.03 diluted loss per share compared to net income last year of 9.6 million or $0.84 diluted earnings per share.

We continue to be challenged by the extremely weak U.S. economy which is having a major impact on the printing industry. Most of our customers and buyers in general are buying less prints than they were last year and therefore our sales are down.

Additionally, due to the sales decline, our fixed cost are a higher percentage of sales and therefore our profit margins are under pressure.

While a number of our operating companies are growing, even in this environment, most turned out and many, which I consider to be some of our better companies with exceptional leadership are experiencing year-over-year revenue declines of over 40%.

During the June quarter, we continue to manage our cost aggressively and particularly during the quarter, we continue to reduce our labor costs through headcount reductions and salary and wage cuts throughout our organization.

I have taken along with our Board of Directors a voluntary 15% reduction in pay and our Executive Management Team put a 10% cut. The reduction in labor cost however, which took place throughout the quarter did not keep up with the declining sales.

We will continue to respond to the realties of the current environment and to adjust our cost where appropriate.

Looking forward, the weak economy will not last forever, and while we are working hard to maintain profitability while the business climate is depressed, we are at the same time continuing to make improvements in our business that will provide a solid foundation for growth in revenues and profits beyond the recession.

I would like to take a few minutes to discuss these initiatives.

Strategic sales as we define as sales to national customers and technology related sales held up better than the rest of the business but still declined 12%.

The current economy continues to influence our customers to do more with less. Our ability and expertise in delivering end-to-end print production and management solutions have delivered sustainable cost savings is at the center of our overall branded proposition.

The solutions we are recommending for customers today deliver sustainable cost savings, by focusing on improving the print management process and transitioning work to a more efficient work flow.

We continue to see significant interest in our state of the art digital footprint which now includes five large digital print centers, strategically located throughout the United States and in France. 7.09

Toady, we have the largest and most technologically advanced digital press fleet in the world. We repeat that. Today we have the largest and most technologically advanced digital press fleet in the world.

The major print and distributed product utilizing a just in time model in stead of a just in case model enables our customers to reduce inventories and more importantly, respond quickly to changes in their markets.

In fact, we've had a 2% year-over-year growth in our digital business which is now 12% of our total revenues. We continue to see a significant increase in number of existing and potential customers enquiring about our print and technology solutions. And we are increasingly becoming a recognized name in the U.S. marketplace.

Customers are looking for new suppliers that can deliver cost savings and help them improve their marking results and at the same time, reduce their total cost of ownership.

We are in a position of strength to capitalize on these expectations and we look forward to delivering on our promises and investing in the success of our customers now and in the future.

Our financial strengths and our strong balance sheet are definitely a competitive advantage in this economy. Customers are looking for strong vendors. They can count on long term and employees are looking for the same thing.

In the current business environment, we continue to hire good sales people from struggling our sale competitors. We expect that trend to continue.

Beginning with our Annual Shareholders Meeting on Thursday this weak, we have our Annual Associates Meeting.

This meeting is part of our leadership development program which we remain very committed to even in this economic environment. Every year we hire recent college graduates to put them through a three year training program to teach them the printing business.

These technology-savvy, hardworking and well educated associates are instrumental to our long term growth and represent a significant competitive advantage for Consolidated Graphics, particularly in the digital environment.

Today we have 394 associates in this program including 40 we hired this summer.

As we mentioned in our press release, we recently amended our credit facilities. We now have greater financial flexibility to not only ride up the recession but also make attractive acquisitions as appropriate.

I will now turn the call over to Jon Biro to provide you with additional financial information.

Jon Biro

Thank you and good morning. As a reminder earlier this morning, we filed with the Securities and Exchange Commission the basis for our use and reconciliations of certain non-GAAP financial measures that would be referenced on this call. Please refer to this Form 8-K filing for additional information.

Revenue in the June quarter was 225.9 million, compared to 285.2 million in the prior year, a 21% decline. The revenue decline was primarily due to a year-over-year same store revenue decline of 19% and lower election related business which had the effect of lowering revenues 2%.

Gross profit declined 25.8 million or 37% to 44.8 million in the current quarter from 70.6 million in the June 2008 quarter. Operating income was just under $900,000 in the current quarter, a decline from just under 20 million in the June 2008 quarter.

Both gross profit and operating income declined primarily as a result of the decline in same store sales, lower election related business and a more challenging pricing environment.

Further, the decline in revenue had the effect of increasing fixed cost as a percentage of revenues thus reducing the gross profit margin from 24.8% last year to 19.8% this year as well as our operating margin from 7% last year to 0.4% in the current quarter.

In particular, expenses such as facilities costs, depreciation and overhead salaries among others increased as a percentage of revenue.

Selling expenses declined 5.6 million or 20% from the prior year quarter due to the decline in revenues and were essentially unchanged as the percentage of revenues from the prior year.

General and administrative expenses declined 1.1 million or 4.8% to 21.2 million in the June quarter compared to last year. G&A expenses as a percentage of sales increased from 7.8% last year to 9.3% this year due to the fixed nature of many of these expenses.

The effective tax rate of 80% increased from the prior year's 39%, primarily for two reasons. First a lower state income tax rate mostly due to favorable tax planning implemented in the quarter and secondly, a larger percentage impact of somewhat fixed permanent differences.

Diluted loss per share was $0.03 in the quarter compared to diluted earnings per share of $0.84 in the prior year quarter. Free cash flow was very solid in the current quarter at 29.8 million compared to 29.5 million in the June 2008 quarter. At June 30, 2009, our total debt outstanding was 285.1 million, a reduction of 29.1 million from March 31, 2009.

As of July 31, 2009 our available credit under existing credit facilities was a $173 million. Cash on hand was 9.3 million at the end of June and capital expenditures totaled 4.5 million in the June quarter.

We currently expect 2010 capital expenditures to be $20 million.

On July 30, 2009, we entered into an amendment to our primary bank credit facility. Under the terms of the amendment, the commitment amount of 335 million and the maturity date of October 6, 2011 remained unchanged.

Most notably the amendment significantly increased the maximum leverage ratio and increased the interest rate that the company pays LIBOR based bonds by 1% at our current leverage ratio.

While we believe this amendment wasn't absolutely required, we felt that it was prudent to obtain additional financial flexibility in light of current market conditions and opportunities.

The current credit facility lasts for a maximum leverage ratio of 3.75 to 1 through March 2010, then 3.5 to 1 through September 2010, then 3 to 1 through March 2011 and finally 2.75 to 1 through the expiration of the agreement in October 2011.

For more information regarding the amendment, see the company's current report on Form 8-K we filed earlier today.

Based upon the borrowings as of June 30, 2009 interest, fees and amortization expenses are expected to increase $2.7 million annually, that's a pre-tax number as a result of the amendment.

On an all-in basis, we are currently paying less than 3% interest on borrowings. The actual impact this amendment will have on our future borrowing costs are dependent upon a number of factors including the balance of related debt outstanding and the company's leverage ratio as defined.

Lastly, the company was and continues to be in compliance with the financial covenants contained in all of our debt agreements.

In closing, as I said in recent conference calls, due to the very poor visibility we have today, and the resulting difficulty actually forecasting future results, we will not be providing specific earnings guidance for the September quarter.

What I will say, is that for the quarter ended September 30, 2009, we expect to generate revenues of between 225 million and 240 million, which implies a year-over-year same-store sales decline of between 17 and 22%.

In addition we expect at least breakeven adjusted net income.

I will now turn the call back over to Mr. Davis.

Joe R. Davis

Thank you, Jon. The business environment we're currently operating in remains difficult. We believe we are making decisions that are necessary in this environment, while at the same time positioning ourselves well for the future.

Operator, we are now available for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Charles Strauzer with CJS Securities. Please proceed.

Charles Strauzer - CJS Securities

Hi good morning John and Joe. How are you?

Joe Davis

Good morning

Jon Biro

Good Morning.

Charles Strauzer - CJS Securities

Two questions for you. When you with just the information that you gave for Q2, and if you assume the low end of that guidance range of 225 of revenue and I was assuming that a least breakeven is basically kind of where you are saying you're coming at that range?

Jon Biro

That's fair to say.

Charles Strauzer - CJS Securities

Okay. So now is that, so if you're coming at breakeven on the same revenue we had in Q1, does that imply some additional cost benefits from some of the things that you were doing in Q1 or is it the low interest expense or a combination of both?

Joe Davis

Yeah it is a combination of all these things. I mean we're trying to operate the business at this level at least breakeven, if we're little below or little above is not going to be bothering a lot (ph).

Charles Strauzer - CJS Securities

Got you. And then Joe, you can a little bit more about the actions you are taking on the cost front, you mentioned headcount and salary reductions and wage fees and et cetera, can you talk a little bit more...

Joe Davis

We said wage cuts -- I said wage cuts.

Charles Strauzer - CJS Securities

Wage cuts, I am sorry. Can you talk little bit more or help maybe quantify that a little bit more about how aggressive you are being on that front?

Joe Davis

Well, I think we have taken wage cuts starting as I said with 15% at my level, 10% at other level, and throughout the company from up to 10 to 15% in some cases. And in some cases perhaps more. Well again in specific situation, very significant cuts throughout the company.

And I will say this that our employees certainly understand the situation, and they are very, very supportive. In fact we're overwhelmed to how supportive all of our employees have been. And they understand what's going on in the marketplace and they understand that in some cases in order to get printing jobs, we're having to reduce our price. And at some point if you reduce your price well enough, you can reduce your costs. And that's what we're forced to do.

Charles Strauzer - CJS Securities

Got it. And at any point of that in the facility closures, was most of it just the mechanisms you've been talking about?

Joe Davis

We've merged couple of facilities. But that's not a focus for us.

Charles Strauzer - CJS Securities

Got it. And then just lastly you have talked of liquid, the kind of where the top-line end, and kind of order quoting activity, have you seen any kind of a pick up at all in July versus what you've seen in Q1?

Joe Davis

No, that's very, very difficult to measure. Quoting activity can vary all over of the Board, some of not a job getting quoted 18 times. So we don't really measure that on an overall basis. So we don't -- I don't think we've a hell a lot of change in the printing business firstly.

Charles Strauzer - CJS Securities

Got it. Okay, thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Jason Williams with Emerald Capital. Please proceed.

Unidentified Analyst

Hi, it's actually John Bardy. But I'm just a little confused on interest expense because if you take your full -- your quarter end total debt times 3%, it ends up being $8.5 million...

(Multiple Speakers)

Joe Davis

That 3% is only credit facility element.

Unidentified Analyst

Okay.

Joe Davis

The other debt has an average interest rate of 5.5% or so.

Unidentified Analyst

Okay, so for the...

Joe Davis

It's longer term debt too, fixed rate debt.

Unidentified Analyst

Okay, and the...

Joe Davis

More print paper sold, more debt (ph).

Unidentified Analyst

Okay. And, when you say, its going to go up by 2.75 million that's from what, that's from what you paid in the 2009 year?

Jon Biro

That's what when what we're paying today or as let's say as of June 30th.

Unidentified Analyst

So, take our...

Jon Biro

Our interest is up about a point and then there is some season fees and so forth and they were ...

Joe Davis

(inaudible)

Unidentified Analyst

Okay, so...

Joe Davis

Divide by four and add that to the June quarter.

Unidentified Analyst

Say that one more time.

Joe Davis

Take 2.7, divide by four.

Unidentified Analyst

Okay.

Joe Davis

And add that to the June quarter interest expense.

Unidentified Analyst

Got it. And then multiply it by four?

Jon Biro

Right. 2.7 million. 2.7...

Joe Davis

If you don't divide by 4%, I guess we have to divide by four...

Unidentified Analyst

Yeah. Got it.

Joe Davis

We get in 2Q there.

Unidentified Analyst

Yeah, okay. Thanks very much.

Jon Biro

Sure.

Operator

Your next question comes from the line of Jamie Clement with Sidoti. Please proceed.

Jamie Clement - Sidoti and Company

Joe, Jon, good morning.

Joe Davis

Good morning, Clement.

Jamie Clement - Sidoti and Company

Joe, let me ask you a question, it seems like over the last couple of months, the like the scrap paper or the waste paper, that market has basically collapsed. Has that -- is that something that has affected your profitability?

Joe Davis

Certainly it's affecting our profitability.

Jamie Clement - Sidoti and Company

Okay. And like any....

Joe Davis

We're getting the rate per ton around the 98 million a year before, and top of that – (inaudible) hope at least 21%.

Jamie Clement - Sidoti and Company

Okay so what, I mean any sense on like quarterly basis versus last year, how much that's cost you?

Jon Biro

Yeah probably about a half a point 50 basis points on our margins.

Jamie Clement - Sidoti and Company

On the margin you recognized that as a offset cost to paper and not as revenue?

Jon Biro

Yeah, yeah, that's not an exact number but that's order of magnitude...

Jamie Clement - Sidoti and Company

Okay. So you expect...

Jon Biro

And that is having an effect.

Jamie Clement - Sidoti and Company

Okay, okay. And the other thing with respect to paper, I've heard this from some others. I don't know if its really impacted you but these paper directed purchases where the paper companies are going and I know you guys have obviously pretty big national accounts business. Have you been seeing of that -- any of that among your customers?

Joe Davis

Certainly, certain larger customers have directed by us. Some of them is available to them and work deal. But I would say the percentage of our total revenue, that's a pretty small number.

Jamie Clement - Sidoti and Company

It is, okay, okay. And Joe obviously, one of the strengths to your story historically is been you don't have any significant enormous exposure on a national level to any one particular industry group. But -- and the flip side is, I would imagine, over the years you've done some auto works, you've done some financials work, et cetera, et cetera.

Any sense in terms of big retail auto financials, those kinds of industries that have just been hit brutally hard over the last year? Any sense of those people kind of coming back to the marketing table a little bit yet?

Joe Davis

Well you know, our second largest company -- a significant company in Cincinnati, Kentucky. Cincinnati (inaudible) is I believe recognized as the highest quality printer or high fashion automobile industry work in the country.

I think we're recognizing that we won awards for that on and on and on. Well if you might have imagine you could have feel revenue, with all of major retail change and some of the wholesale we do a lot of work for them. That business is off and continues to be off.

The automobile business we, do a lot work for there, that business is off. However, I have seen some pickup certainly in the automotive business, we discontinued some big projects. We have others on the committed to. So we're seeing some pickup in that business and we're seeing some slight pickup in the high operation business.

Some of that is seasonal as well. So I think it's early to say that what their attitudes are. I think our automobile business is certainly they've decided to sell automobiles and got to do some marketing and we're benefiting from that.

Jamie Clement - Sidoti and Company

Okay. Changing gears...

Joe Davis

Let's say in the automobile business, there are fewer competitors in that business now.

I mean there are only a few companies around the country who have the capability to print the volume in the high end that are required for automobile brochures. And we're one of the few who can do that.

Jamie Clement - Sidoti and Company

Joe and changing gears a little bit there and I guess its somewhat related, I know that kind of mid to late 2008, you guys tightened up your credit department if you will and your receivables and that sort of thing and you saw the danger that was coming in. It seems like actually during that stretch of time, it almost seems like you turned away some business. How do you feel or may be this question to Jon.

Jon how do you feel about the state of your receivables and also do you think that as may be conditions economically across the border, at least we're seeing what the bottom looks likes. I mean they are -- can you actually bring back some former customers into the fold, do you think it withstood the test time?

Jon Biro

I feel pretty very good about our receivables. We're still extremely cautious. I think it's too early to get aggressive. As far as that's concerned. But we are certainly not seeing the deterioration that we were concerned about here in this last quarter.

Jamie Clement - Sidoti and Company

Okay. And Jon final question, with respect to the credit facility amendment are you, if actually, if you see an opportunity on the acquisition front and you are buying a business that presumably is -- had their earnings deteriorate, you guys obviously write off the back and to lower the cost structure through purchasing and that sort of stuff.

Are you going to be able to get kind of a pro forma credit in your leverage ratios, if you would decide to do a deal?

Jon Biro

We certainly do, we always have, and that has not changed. We do get pro forma credit for the EBITDA of the business that we're buying, yes.

Jamie Clement - Sidoti and Company

Okay, very good. Thank you very much for your time.

Jon Biro

Sure.

Operator

We have a follow up question from the line of Charles Strauzer with CJS Securities. Please proceed.

Charles Strauzer - CJS Securities

Hey Joe just thinking about what Jamie was touching upon about M&A and obviously its been a dramatic change in the thoughts of people who are looking to sell companies versus in the past maybe they were playing with the idea or if they get the right price now, it's getting a little bit more desperate as shops are closing kind of left and right, given some of the -- the nature of their product lines.

Are you seeing pricing coming more rational where you might want to get more active again?

Joe Davis

Well Charlie in this particular economy, we are in contact with a number of printers. And our acquisition criteria has not really changed.

We are looking for good customers, for good companies with good customers, good employees and good reputation.

So when we find those all in the situation and hopefully management who wants to stay on and run the company after being associated with us. When we find those ingredients, we're very interested in expanding our footprint with the companies.

So we haven't changed our criteria at all. We're still looking for acquisitions. We have -- Jim Cohen is fulltime in that effort and he has some financial analyst type he works with. And we are probably looking at more opportunities today than we have historically.

When it comes to pricing and those sort of things, you just have to look at facts and circumstances and then see what that yields.

Charles Strauzer - CJS Securities

But, sufficed to say that you wouldn't be paying the same level that you paid say two year ago...

Joe Davis

I would hope not.

Charles Strauzer - CJS Securities

Of course because you don't need to make those acquisitions, obviously, its more of buyers market I would imagine at this point.

Joe Davis

Well, I don't know that the market has changed a lot -- we haven't changed our criteria. We're still looking for good companies but with good customers, good employees and a good reputation for quality and service.

And we don't really have any need geographically necessarily. We don't need to fill in any places. A few years ago, we did something in St. Louis and Minneapolis and we certainly have that now, demand from customers.

We don't really get much demand from customers that have a location in Salt Lake City for instance. But if the right opportunity presenting itself in Salt Lake City, we'd probably look at it.

Charles Strauzer - CJS Securities

Got it. Thank you very much, Joe.

Operator

And please stand by for your next question. There are no further questions in queue.

I will now like to turn the call back over to management for any closing remarks.

Joe Davis

Okay thank you. As I said before, we believe we are making decisions that are necessary in this environment while at the same time positioning ourselves well for the future.

We appreciate the continued support of our customers. We also appreciate the hard work, dedication and financial and other sacrifices of our employees.

We also want to thank our shareholders and we look forward to reporting to our shareholders on our September results. Thank you for your interest today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Comments

[Indiscrepen...:]

I work for Consolidated Graphics and researched Mr. Davis's compensation for 2009. AFL-CIO reported that Mr. Davis took a 427% pay increase ( from $2,423,632 in 2008 to $12,780,981 in 2009). At the same time people working here are receiving pay reductions and layoffs. Consolidated graphics used to make $20,000,000 in profit per year but is now making $50,000,000 in profit per year. Why are people taking pay reductions at the same time that Mr. Davis is taking a 427% increase in compensation, at a time that he is already receiving $2,423,632 a year. If the economy is already sruggling because people cannot support their families, why are C.E.O.s taking drastic pay increases which take away opportunities, for people who work their asses off, to receive any kind of raise whatsoever.

Oct 07 12:14 AM