Compass Diversified Holdings Q2 2009 Earnings Call Transcript

| About: Compass Diversified (CODI)

Compass Diversified Holdings (NYSE:CODI)

Q2 2009 Earnings Call

August 10, 2009 9:00 am ET


Joe Massoud – CEO

Jim Bottiglieri – CFO

[Michael Sammini] – IR Consultant, IGB Group


Larry Solow - CJS Securities

Vernon Plack - BB&T Capital Markets

Greg Mason - Stifel Nicolaus

Henry Coffey - Sterne Agee

Robert Dodd - Morgan Keegan

John Rogers - Janney Montgomery Scott


Good morning and welcome to Compass Diversified Holdings 2009 second quarter conference call. (Operator instructions) At this time, I'd like to turn the conference over to IR consultant, [Michael Sammini], of IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead sir.

[Michael Sammini]

Thank you, and welcome to Compass Diversified Holdings second quarter 2009 conference call. Representing the company today are Joe Massoud, CEO; and Jim Bottiglieri, CFO. Before we begin, I would like to point out that the Q2 press release including the financial tables is available on the company's website at

In addition, management expects to file the Form 10-Q for the quarter ended June 30, 2009 with the SEC later today. Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or the company.

Now allow me to read the following Safe Harbor Statement. During this conference call, we may make certain forward-looking statements including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements.

These statements are subject to inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K filed by CODI with the SEC for the year ended December 31, 2008 and well as other SEC filings.

In particular, the domestic and global economic environment has a significant impact on CODI’s subsidiary companies. Furthermore, we are uncertain as to our ability to consummate acquisitions, which are accretive to shareholders either in 2009 or beyond. CODI undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

At this time, I would like to turn the call over to Joe Massoud.

Joe Massoud

Thank you Michael, and welcome everyone to today’s call. I’ll begin today by offering some general comments on CODI’s performance during the second quarter as well as talk about how we are positioning the company for future performance. After that I’ll turn the call over to Jim to discuss our operating results on a subsidiary by subsidiary basis.

During the second quarter we generated cash flow in excess of our expectations due to a number of factors. First, each of our subsidiary management teams continued to aggressively manage costs while retaining the infrastructure necessary to be well positioned for future growth.

These efforts have been focused on materials and direct labor costs as well as SG&A expense levels at each of our companies. Second, at a number of our businesses we were able to achieve tangible increases in customer penetration and market share.

And third as a general comment we believe overall business fundamentals began to stabilize across our family of companies. We were pleased by the operating performance of our subsidiaries relative to their competition.

We believe the [dividable] economic times present an outstanding opportunity for strong companies like ours to grow and take market share. This is a time of opportunity. Our businesses are leaders in their various industry niches, and they are not being manned for short-term performance optimization.

And our strong balance sheet allows some significant financial operational flexibility. As a result we have confidence that each of our companies will emerge from the downturn substantially stronger than they entered.

With regard to the proactive cost containment measures I just mentioned these are broad and vary across our subsidiaries. At a number of companies including American Furniture, Anodyne, and Fox our management teams have successfully worked on materials costs, established addition sources of product and gained efficiencies resulting in higher gross profit as a percentage of sales during the second quarter.

Management of SG&A expenses including compensation was also at focus at each of our companies. For example Staffmark was able to reduce SG&A by a whopping 35% in Q2 as compared to a year ago while Halo, Advanced Circuits, and Anodyne also made notable progress in this area.

In addition to managing costs we continued to draw upon our financial strength to make attractive add on acquisitions. A specific example during the past quarter, Advanced Circuits completed a tuck in acquisition of Circuit Board Express. This type of acquisition is truly win, win, win for us, the seller and for the seller’s historic customers.

Going forward we will remain focused on consolidating this industry with further acquisitions. This strategy is also one we continue to pursue aggressively at Halo. The important strides that we have made to effectively manage the downturn from both an operational and financial standpoint bode well for Compass Diversified Holdings to continue to deliver stable results for shareholders and to grow through this difficult environment.

We remain on track to meet or potentially exceed our previously stated guidance of CAD between $21 million to $24.5 million for 2009. We also expect to grow CAD year over year in 2010 even excluding the impact of future acquisitions any of which we would expect to be highly accretive.

As you are aware we paid a second quarter distribution of $0.34 per share. Since going public in May, 2006 we have paid cumulative dividends to our shareholders of approximately $4.00 per share. Our Board declared distributions to shareholders based upon its evaluation of the normalized cash flow generation power of our company.

While for the current quarter or year as a result of the economic environment as well as the sale of two of our businesses in the second quarter last year, and our conservative approach to redeploying that capital we may generate less cash flow then our total distributions. However, over the cumulative period since our IPO, we continue to have earned excess cash flows over distributions paid to date.

Additionally and separately we have realized gains to date of approximately $109 million from monetization of our interest in subsidiaries including the sales of Aeroglide and Silvue in June, 2008, none of these gains or the results from those monetizations are included in the way we think about CAD as you know.

Looking forward as I mentioned we expect that any acquisitions we consummate whether new platform businesses or add ons to our existing subsidiaries will be highly accretive to our cash flow. We’re excited about the current and coming acquisition environment and believe that the substantial bid ask gap that exists in the private company sale market, continues to narrow.

We are in an unusually advantageous position to deploy capital without the need for third party debt financing utilizing cash on hand or availability under our revolving line of credit. In support of this long-term growth strategy we further strengthened our balance sheet by completing a 5.1 million share offering in June resulting in net proceeds of approximately $42 million and demonstrating the continued confidence the capital markets have in our future prospects.

As of June 30, 2009 as a result we had $241.5 million in total liquidity comprised of $58.2 million in cash on hand and approximately $183.3 million of available under our $340 million revolving credit facility.

In terms of debt currently outstanding as of quarter end we only had $77.5 million outstanding with no material maturities until 2013. So we feel very good about our liquidity. With those introductory comments complete, I’d like to turn the call over the Jim Bottiglieri for his comments on company by company second quarter financial results.

Jim Bottiglieri

Thanks Joe, today I will discuss our financial results for the quarter and six months ended June 30, 2009 including a review of the operating results of each of our subsidiary companies and a brief mention of some of the factors effecting each of the businesses.

On a consolidated basis revenues for the quarter and six months ended June 30, 2009 was $287.5 million and $398.9 million respectively. Net income attributable to the company for the quarter was $0.6 million or $0.02 per share, for the six months ended June 30, 2009 we recorded a net loss of $26.7 million or negative $0.83 per share.

As a reminder during the first quarter of 2009 we recorded a $59.8 million non cash impairment expense of the Staffmark subsidiary partially offset by the associated tax benefit of $22.5 million, $12.7 million for the minority shareholders portion of this [interim] expense and an $8.2 million supplement [expense] reversal.

Now turning to results of each of our individual businesses beginning with Advanced Circuits, for the quarter ended June 30, 2009 Advanced Circuits revenue was $10.8 million compared to $14.3 million for the quarter ended June 30, 2008. The decrease in sales was primarily attributable to a $2.4 million decline in long run and subcontracted production sales resulting from the economic slowdown.

Income from operations for the second quarter was $4.4 million compared to $4.5 million for the same period in 2008 due to the lower sales volume largely being offset by $1.3 million of lower loan forgiveness accruals expected to be granted to the Advanced Circuits’ management for achieving such high [inaudible] in fiscal 2010.

For the six months ended June 30, 2009 Advanced Circuits revenue was $22.8 million compared to $28.6 million for the prior year period due primarily to $3.8 million of lower sales on long run and subcontracted production sales stemming from the overall economic slowdown. Income from operations was $8 million compared to $9.2 million for the prior period.

Operating income decreased due to lower sales volume partially offset by $1.2 million of lower loan forgiveness accruals. Overall we are pleased with Advanced Circuits’ performance during the second quarter. We continue to see strong demand for our core prototype and quick turn PCBs and expect sales for these categories for the remainder of fiscal 2009 to be only slightly down from the prior year.

As we maintain our focus on controlling costs, we continue to add to our customer list with accretive acquisitions of Circuit Board Express as Joe had mentioned earlier on the call. By taking advantage of the current weakness in the broad circuit board market, and successfully consolidating the industry we intend to further strengthen Advanced Circuits’ leadership position and long-term growth prospects.

Now I’d like to turn the call over to American Furniture Manufacturing or AFM, for the quarter ended June 30, 2009 AFM’s revenue increased to $34.1 million compared to $31.3 million in the prior year quarter due to a notable performance in stationary products sales which climbed approximately $4.3 million in the quarter.

Operating income for the second quarter of 2009 increased to $2 million compared to operating income of $1.2 million for the same period last year. This increase was attributable to a decrease in raw material prices, particularly foam and steel, as well as increased efficiencies realized in the manufacturing recovery process following the fire in February of 2008.

We also benefited from lower fuel costs in 2009 compared to last year. For the six months ended June 30, 2009 revenue increased to $75.6 million compared to $68.4 million in the year 2008 period. Operating income was $4.2 million compared to $4.9 million for the six months ended June 30, 2008.

This decrease in operating income was largely due to the recognition of approximately $2.9 million of lower business interruption insurance proceeds than were recorded during the six month period ended June 30, 2008. AFM demonstrated tremendous resilience since the fire last year and continues to gain market share in the current downturn.

As we stated on our previous conference call AFM has benefited from a retail drop down effect as retail sales at the lower end of the pricing pyramid outperformed those at the higher end. At the same time we have increased sales to our top customers which reflect our ongoing commitment to providing high quality service during a challenging market.

In addition we have added a number of potentially large customers seeking to expand the breadth of their product offerings or to work with a more financially stronger supplier of furniture. On the cost side we are pleased by our continuous efforts to control cost in line with the soft retail environment and believe AFM’s leading presence in the promotional furniture niche positions the company well for growth in 2009.

Moving on to Anodyne Medical Device, for the quarter ended June 30, 2009 revenue was $14 million compared to $13 million for the same period last year. Once again Anodyne’s strong quarterly performance was due to the company’s new product offerings which totaled $2.6 million in the second quarter partially offset by a decrease in sales of power products as a result of reduced spending among healthcare institutions.

The company’s income from operations for the second quarter increased to $1.7 million from $1.1 million for the same period in 2008 due to higher sales as well as lower manufacturing overhead and labor costs. For the six months ended June 30, 2009 revenue increased to $25.6 million compared to $24.4 million for the same period last year largely due to sales and new product rollouts.

Income from operations increased to $2.9 million compared to $1.6 million for the same period in 2008. The increase in operating income is primarily due to higher sales and greater operating efficiencies. We are very pleased by Anodyne’s ability to post record results during the second quarter.

The successful rollout of new product offerings has largely offset the difficult macroeconomic conditions as planned. Going forward we expect to experience continued growth in this business based upon a diverse set of leading product technologies that is unmatched in the medical support circuits industry.

Fox Factory, for the quarter ended June 30, 2009 the company’s revenue was $29.9 million compared to $34.4 million in the prior year period. The decrease in revenue is primarily a result of lower net sales to original equipment manufacturers. Income from operations was $2.0 million during the second quarter of 2009, compared to $3.2 million for the quarter ended June 30, 2008.

The decrease was attributable to the decline in sales partially offset by a favorable sales mix as a larger portion of our sales were in after market categories and more official reduction and procurement. For the six months ended June 30, 2009 revenue was $50 million compared to $57.9 million in the prior year period.

Income from operations was $1.2 million compared to $3 million for the prior year period. Fox continues to benefit from strong brand recognition as we seek the profit from entering into new verticals including military and new off road applications such as partnering with Ford on the F150 Raptor.

Demands among market enthusiasts remain strong despite the weak economic conditions. By leveraging our brand equity and realizing the gains from our operation initiatives we intend to drive future performance in this business.

Moving on to Halo for the quarter ended June 30, 2009 the company’s revenues decreased to $29.5 million compared to $35.8 million for the same period last year principally due to lower spending in advertising merchandising by its corporate customers. The reduction in net sales was partially offset by $2.5 million in net sales to accounts acquired since June 30, 2008.

Loss from operations was approximately $0.1 million versus income from operations of $0.5 million for the prior year period which is primarily the result of lower net sales. For the six months ended June 30, 2009 Halo’s revenues were $56.2 million compared to $64.6 million for the same period last year.

The loss from operations was $2.1 million versus a loss of approximately $0.2 million for the prior year period. As we have stated in the past the distribution of promotional products is seasonal. Typically Halo realizes more than three fourths of its annual EBITDA during the second half of the year due principally to calendar sales and corporate holiday promotions.

That said we believe this trend will reduce spending on marketing related products will remain throughout 2009. We expect the combination of net sales from recent add on acquisitions and the recruitment of new account representatives to mitigate the decline in spending by our customers as well as position the company well for the strong growth once the economy turns around.

Staffmark, formerly CBS Personnel, for the quarter ended June 30, 2009 the company reported revenue of $169.4 million compared to $270.2 million for the same period last year. The reduction is primarily the result the decreased demand for staffing services as Staffmark’s clients were deeply impacted by weaker economic conditions.

The loss from operations was $1.5 million for the second quarter of 2009 compared to income from operations of $4.3 million for the second quarter of 2008 due principally to lower sales offset by approximately $1.1 million and lower transition integration expenses related our Staffmark acquisition and by lower costs from the achievement of plan synergies.

For the six months ended June 30, 2009 revenue was $332.4 million compared to $537.2 million which was prepared on a pro forma basis to include the acquisition Staffmark [add] that was completed on January 1, 2008. The loss from operations was $59.9 million which includes previously discussed impairment charge as compared to income from operations of $5 million in the year 2008 period.

For Staffmark while we have seen strong sequential revenue performance on a quarter over quarter basis the industry is still suffering a large decline as compared to the prior year. Our focus here is on maintaining our presence with our customer base which simultaneously taking out as many costs as possible.

We are pleased by management’s efforts on this front as well as in the company’s maintenance of its customer base and the positive impact of large geographic density. While we expect results to be significantly lower from a year ago, we are still anticipating this business to generate positive cash flow in 2009.

We expect Staffmark and the entire staffing industry to continue to be the leading indicators of the economy and expect performance of the company to strengthen substantially as the economy improves.

Turning now to our balance sheet, we had $58.2 million in cash and cash equivalents on hand and net working capital of $151.7 million as of June 30, 2009. Subject to borrowing base restrictions at June 30, 2009 CODI had $340 million under its revolving credit facility to be used to fund acquisitions and working capital requirements.

I will now turn the call back over to Joe.

Joe Massoud

Thanks Jim, before opening the call to questions I’d like to reiterate that we’re pleased by the steps that we and our subsidiary management teams have taken in this challenging environment to stabilize the results of our [inaudible] further strengthening their ability to benefit from an economic recovery.

Again over a longer period of time than one or two or three quarters, we really believe that the way strong companies must view this downturn as an opportunity to grow and we feel like our companies are capitalizing on that.

Our company has a very strong balance sheet, well capitalized to allow our existing subsidiaries to prosper as well as to allow us the ability to acquire businesses at attractive points in the economic cycle.

Our past and current experiences make us confident in the CODI business model and we look forward to continuing to work for you to drive future performance and enhance long-term shareholder value.

With that said I’d like to thank everyone again for their time this morning, and we’ll take any questions anyone might have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Larry Solow - CJS Securities

Larry Solow - CJS Securities

Maybe if you could just discuss some sequential trends through the quarter, I know you gave guidance in early June and it appears like considering you beat your guidance it looks like June was much better than expected, is that more of a cost driven phenomenon or what are you seeing out there.

Joe Massoud

I would say again, vary subsidiary by subsidiary, June was a good month. We had some revenue I’d say upside performance notably at Anodyne and AFM. And I think our costs responded to some of the efforts we’ve been taking early in the year, our management teams have been taking both on the SG&A and the cost side.

So I think it’s a little of both. I was caution, I think we beat the number. I think we’ll meet or potentially even beat our number of the year but I don’t think anyone is declaring big victories here.

Larry Solow - CJS Securities

And then just in some of your more economically sensitive businesses, particularly AFM and Staffmark, it sounds like AFM had an up year over year, I imagine that is skewed somewhat because of the fire last year.

Joe Massoud

Yes, there’s no doubt that we entered the second quarter last year with reduced finished goods inventory and so were hamstrung, so that’s clear that that’s true that there’s a skewing there. Having said that I think our performance quarter over quarter is better, second quarter versus first quarter at AFM, feels better than the industry compares we track and we also just know factually that the team down there has done a superior job of adding SKUs at its most important customers and in some cases adding new potentially important customers that they didn’t have before.

That team has really worked very hard to outperform. So I think its kind of a, clearly the comps are impossible to use because of the fire last year both on the revenue side but also on the income side where we booked all this business interruption. So really the best thing we can do to get a sense of the business is to compare it to its competitors and also just look at the core operational data which for us revolves around how many SKUs are we selling to our customers, how are we performing our largest customers.

And just to give you a sense one of the things that the company did last year after the fire was ensure that it served its top 50 customers in a sort of totally committed way, meaning if we didn’t have enough finished goods inventory to serve someone it wasn’t going to be the top 50 or 75 or 100 customers that were going to suffer from that. So in that case we do have kind of a purer ability to look at how did this year’s sales look to the top 100 customers as compared to last year.

And I would suggest that that comp actually looked pretty favorable too in addition to just how did we do across the whole company where it might be skewed by the fact that we were unable to fully provide product to certain of our smaller customers. It’s a little bit of a complicated explanation but does that make sense.

Larry Solow - CJS Securities

Yes it does, absolutely. And then—

Joe Massoud

You said AFM and something.

Larry Solow - CJS Securities

And Staffmark, I was just looking at it, obviously the industry is still struggling and your sales were down 35%, 37%, how did that compare to other temporary staffing companies and are you seeing any—

Joe Massoud

Yes, the best I can say is that I think its comparable, I’m not going to say we’re outperforming and there’s a couple of reasons why its difficult. First when you look at the other staffing companies you got to try to strip out foreign earnings which may be better or worse then the US and in some cases that’s possible and some cases its not.

Then other companies have more or less permanent placement. I can tell you the permanent placement business has gotten hurt worse than the, if you look at our actual temp staffing decline its less than our overall decline that we report here so businesses have a different mix, geography is a big player. We’re up not just non-US and US, but even within the US kind of where you sit in terms of geography, I believe, I don’t want to overstate the company’s performance despite the fact that we think they’re doing well and anecdotally we don’t appear to be losing customers.

In fact customer list total customer numbers increased. I think it would be a stretch to say we’re doing anything but performing with the market right here because its hard to get the data and all the data we can get looks like we’re performing. When I say with the market, I’m talking about, there’s a comps out there, I’m talking about people who are more mainline temporary staffing companies as opposed to kind of permanent placement or say day labor, or say IT staffing.

If you just took a look at clerical and light industrial staffing companies, our feeling is that we’re probably performing in line with those companies right now. Now that’s from a revenue basis. I think from what we’ve seen and what analysts are saying a number of our larger competitors, there’s talk about going sort of cash flow negative and EBITDA negative for the year, we don’t think that’s going to happen here at all.

And what I would say is that our ability to take out I think its 35% of SG&A costs on a year on year basis is to some extent driven by the business model. One of the advantages that we’ve always believed in having kind of a very dense business model is the ability to rein in costs, while still serving your customer base. You’re not really abandoning markets, you can stay within a market and still cut back costs.

The other thing is you can still sell through. You’d need a certain number of people who are regional sales people to serve a specific area, and if that’s supported by more dense business model or by more revenue driven through that particular geographic area, your ability to sustain that sales person and not lighten up and feel like you need to terminate them is strengthened.

So we believe, and that’s what happened in the last recession but last recession, this recession are all different but we really came out of the last recession with quite a nice bump in customer count and revenue growth. But this business will not generally rebound in revenues until the entire industry comes back which ought to look like a few months to a year before employment in general comes back.

It’s a leading indicator but no one knows when that’s going to sort of kick in I think.

Larry Solow - CJS Securities

And month to month declines, I know there’s some seasonality, so maybe looking at it year over year obviously the comps probably ease—

Joe Massoud

Its getting better, there’s no doubt the month to month declines are better. I would caution again, the sequential Q1 Q2 improvement story which we have which all the staffing companies have, you have to understand its part of also a normal seasonal business so a little bit sometimes we chuckle when we hear people talking look how much Q2 was then Q1 for the staffing industry.

Well that’s supposed to happen. Having said that if you look at year over year which might be a better analysis, that’s clearly moderating and declining. Our year over year declines month to month have consistently since the end of the first quarter gotten better and that trend continues.

Larry Solow - CJS Securities

Just looking at the acquisition of, you touched on the acquisition environment briefly, but just maybe a little more color and would it be reasonable to expect you get something done by end of calendar year 2009.

Joe Massoud

I think that’s a reasonable expectation. That’s certainly something that we would like to accomplish as well. That’s something we’re working towards. That’s something that was on our mind obviously as we did the follow on. Whether the fact that that’s a reasonable expectation means that it occurs or it spills over into early next year, I don’t know. But its certainly reasonable for one to think, look you’ve got a lot of economic strength, you’re saying that results are stabilizing, you’re saying that the bid ask gap is narrowing, certainly one would add those things up and that’s a reasonable conclusion.


Your next question comes from the line of Vernon Plack - BB&T Capital Markets

Vernon Plack - BB&T Capital Markets

How much availability do you have on your revolver.

Jim Bottiglieri

As of June 30, we’ve got about $183 million. We also have $58 million of cash on our balance sheet as well.

Joe Massoud

The only other thing I would add to that is then the math becomes a little bit, because that’s availability based on existing EBITDA. So the calculations of pro forma, you’d have to say well you deployed that and you pro forma bought more EBITDA so then you could draw on that, the spreadsheet that actually shows how much you can draw is iterative and includes the benefit of any cash flow that you might acquire.

Vernon Plack - BB&T Capital Markets

And given that you had a reversal on your supplemental put line that tells me that you believe the value of your business is actually either stabilized or gone up a little bit.

Joe Massoud

No the reversal actually would be the other way because that means that at one point we had booked the expectation that if the businesses were monetized we’d have a certain amount and then the reversal means that we think that that certain amount would be lower.

So its our expectation that as of June 30 because of the market multiples and our cash flow the businesses are worth less fair market value then there were the quarter before—

Jim Bottiglieri

Its about $250,000, so its not a very big number.

Vernon Plack - BB&T Capital Markets

Right it was essentially insignificant which tells me that you feel the business is, the value of the business—

Joe Massoud

I think that’s right, I think that’s a fair comment.


Your next question comes from the line of Greg Mason - Stifel Nicolaus

Greg Mason - Stifel Nicolaus

Could you tell us when you say the bid ask spread is narrowing in the market, could you tell us which one is coming in. Are bids coming up or asking prices coming down. What’s driving the narrowing.

Joe Massoud

That’s one of those chicken and the egg questions, largely I think just to try not to give too confusing an answer, I think the ask are coming down meaning when we’re talking to intermediaries, they’re leading with the commentary, look we know this business is not worth what it was worth a year ago, or we know its not worth X times so I think its mostly the ask.

If you’re saying why isn’t it 100% the ask, I think three months ago when, or six months ago when people were talking about is this going to be a multiyear depression and is it going to look like Japan, by definition all the models that acquirers built on companies probably had even more pessimistic cases then they have today.

And so to the extent that you’re thinking about the future of a business and you’re taking 1929 through 1933 kind of a scenario and laying it over the business it impacts your bid. So I do think there is a slight increase in the bid but from a multiples point of view, which is what I interpret your question to be, I think that most of that compression has happened because on the ask side there are more realistic expectations or there’s a little more urgency on the part of the seller.

At least those are the situations we’re looking at.

Greg Mason - Stifel Nicolaus

And then looking at Staffmark, I wanted to take a little longer view, we had heard an interview with an executive at Manpower expressing concerns that some of these job losses in the temporary staffing may be gone permanently as businesses realize they can run even leaner or maybe outsource to foreign sources even more, what’s your, I know you think it’s a lead indicator it will come back, but do you think it can come back to the level that it was or is there some permanent impairment there.

Joe Massoud

My personal view and we’ve talked about this extensively I think the view across our company is that it will come back to its level or stronger but I think there’s sort of layers to that meaning. I think that many of the jobs in the US economy that have been lost whether temporary or permanent, may not come back so rapidly either because they’ll be outsourced, I’m less concerned about that, or because of productivity gains or quite honestly demand levels may not return across the economy to the point they were at three or four years.

It might just be that we have too much capacity in a lot of these industries. So I think that a lot, there’s going to be to some extent the comment that you’re saying that Manpower executive said is true across all jobs. I don’t think that’s specifically true for temp jobs. I think that’s true across all jobs.

Having said that, so take some percentage of the jobs that that might apply to, 55 or 10%, I don’t know what that percentage is, but that’s true. When we then look at the bigger picture which is the ability and tendency of this industry to respond to downturns with greater market share meaning if you look at the BLS statistics and you realize that contract labor represented like a half a percent in the early 70’s of the total workforce, and it got up to almost 3% here in the last several years, its because coming out of downturns, employment managers have been cautious or nervous or quite honestly relieved to be able to manage their workforce in a more lean way and then shifted their employment force towards temporary.

So our outlook on this is that there may be jobs lost throughout the US that don’t come back but that that will be a small impact compared to the number of jobs that, to me it wouldn’t be shocking at all to see in 2020, 5% of the US labor force be contract or 4.5%.

And the impact of that kind of a movement on the industry as a whole would overwhelm, not good for the US economy maybe because maybe net, net there is job loss in the US economy but for the temporary staffing sector the impact would overwhelm. That’s one point.

The second point I think is that if you look specifically at our business we’re reasonably heavily skewed towards a logistics business and so to some extent one of the things that’s helped our company over the last decade as jobs have already been lost to manufacturing overseas is our ability to sort of add people in distribution centers and logistics and there’s a strong element of the Staffmark business that’s actually driven by distribution of product manufactured overseas.

So there’s a little bit kind of a bumper there. Its impossible to make a direct correlation but my view and we, never know until it plays out, but my view is that the shift towards contract labor will bode very well for this entire industry not just for Staffmark, notwithstanding any potential kind of overall loss of jobs due to productivity gains during this downturn as a result of layoffs.

Whether or not you agree, does that answer make sense.

Greg Mason - Stifel Nicolaus

Yes it does. One more thing about acquisitions not going away from the new business acquisitions, but what kind of acquisition opportunities are available in your current businesses, some more of the Advanced Circuits kind of acquisitions that you made this quarter.

Joe Massoud

Advanced Circuits I think is working on a number and the kinds of acquisitions look like they are acquisitions of equipment and customer list and what we do with the equipment will depend on what the equipment is and in many cases it will be to try to sell those but most importantly its got to be a customer base that looks like its going to blend well with our customer base. Its going to tuck well into our facility.

And we think there’s a large handful of those that ought to be available. On the Halo side, our company is very good at what it does there and its very well known in the industry and to the extent there are people who want to think about divesting of their businesses I think that we get the first or second call because our team there and our CEO in particular spent a lot of time focusing on this over the last decade more or less.

And so we’re well known in that business and we’re known to pay very fair price and then we think we run an efficient machine so we think as I say that that becomes a win, win, win. It’s a win for the seller, it’s a win for us because of our ability to achieve efficiencies, and it’s a win for the sellers’ customers which a lot of times is just as important to the seller as well. So we think there’s a lot of opportunity there.

On the Anodyne side, not sure its add ons necessary but we have a very interesting joint venture that we’re looking at that will allow us to capture sort of capitalize on our product channel. We’re pretty excited about that. And that’s really, at this point I think those are the three where we’re looking at situations.

I know that at American Furniture there’s be consideration of certain facility types of expansions where rather than buying a business you might buy facilities but I think our growth there is going to be organic. So there’s a number, but the two drivers of that I expect to be Advanced Circuits and I expect to be Halo and both our teams there know that we’re fully behind them and capitalized to support them.

Greg Mason - Stifel Nicolaus

Hire to make additional staffing acquisitions.

Joe Massoud

I wouldn’t rule that out because I think that there could be a time here in the next several months when these things are being bought for a very low price. There’s nothing that we’re looking at particularly now and we think that there’s a lot of opportunity to grow organically. To the extent that there are weaker competitors out there, its not clear to me that that business can’t be approached through internal sources as opposed to kind of actually paying a price for it.

So there’s nothing on the cooker now in that space. But I will say this though because people say, well are you going to more staffing acquisitions and you’ve got a lot of exposure as it is, one we don’t because we’re going to produce I think a pretty healthy level of EBITDA here without a lot of contribution from CBS.

Number two I think when this thing, when the economy comes out whether its kind of next year or 2011, any student of kind of historic staffing results, even if there are some job losses, this thing will kind of motor out I think pretty quickly so if we saw the right staffing acquisition opportunity we wouldn’t be afraid of it.

But there’s nothing on the burner now.


Your next question comes from the line of Henry Coffey - Sterne Agee

Henry Coffey - Sterne Agee

I take it from your comments that you’re expecting all of your businesses to generate some sort of level of basic operating or EBITDA profitability including Staffmark this year.

Joe Massoud

Yes, clearly. And for the others I think its, Staffmark is the only one I think if there was ever a question in first quarter how deep it was going to get, now we’re very confident on Staffmark as well.

Henry Coffey - Sterne Agee

I think that’s a major change and how does that leave you thinking about the dividend for the fourth quarter. Is there any risk there.

Joe Massoud

Our Board makes that decision and its heavily discussed ever since we went public the first quarter so its not really my decision to make. Having said that I think our view is certainly not more pessimistic then it was last quarter when I said given our outlook for this year and what we think is going to happen next year which should be some material improvement even without acquisitions we feel good about paying our distribution.

Our outlook on that has not changed. Our outlook on that has not changed, clearly there’s no increase in distribution.

Henry Coffey - Sterne Agee

The overall tone of the call just simply sounds better.

Joe Massoud

Yes, well, yes maybe that’s right. I think you’re probably, each of our businesses I would say in the second quarter, each of the six, every single one of them, I think showed reasons to believe that there is light at the end of the tunnel and in some of the cases we’re kind of emerging from the tunnel.

So I think that’s a fair comment. Having said that, for a number of them still in the tunnel.

Henry Coffey - Sterne Agee

I know you made some comments about your M&A opportunities, but one thing we’re noticing for good or for bad in every asset class whether its agency mortgages, or whole loans, I could go through the whole list, that just the large volumes of fire sale deals, they don’t seem to be happening in those assets classes even with companies like [Acats] and Allied pretty badly strapped—

Joe Massoud

And that’s absolutely right, look and we, when I think my partner [Alias Stabo] is on the phone, I don’t know how many times Alias and I have talked about the, not particularly on [Acats] I’m sure I actually know nothing about it, I’m sure it’s a very well run company, but to be honest with you I don’t know anything about them, so I’m not going to make any comment at all.

But we’ve said, at what point does [Acat] sell all these businesses and we’ve lobed in calls to them repeatedly and I think that they’re not getting pressured to sell. They’re probably being smart to hold because the business is probably going to be worth more in a couple of years then they are now.

And we don’t see LBO firms being pressed by the banks as much as we expected and maybe that’s because the banks have other issues and maybe the banks are being smart. Maybe the banks don’t want to own the businesses and they’re thinking, hey you know what if I can just modify this and jack up the interest rate and take a fee, I’m going to be happier in two years so maybe that’s a smart decision.

So there’s not a deluge of, we’re not sitting around going, I can’t believe we’ve got 15 transactions on our desk that are all being sold at three to four times capital. Having said that our business model is involved acquiring one to two to three businesses every year or two that are ones that we’re going to work with management to grow that we can build.

We don’t, unlike a BDC we don’t need to book a lot of transactions. For us making a couple acquisitions here over the next 12 months sets us up extraordinary well to continue paying our dividend and potentially growing it over time and enjoying the economic up tick.

So I totally agree with your comment that there’s not a huge deluge of these transactions but the trickle is heartening particularly given that there aren’t a whole lot of people who have the cash to respond to the trickle.

Henry Coffey - Sterne Agee

And I’m sorry I caught all of the numbers except the ACI, just for the June quarter what was the revenue and operating profitability.

Jim Bottiglieri

The revenue was $10.8 million and the operating income was $4.4 million.

Henry Coffey - Sterne Agee

Thank you very much. It seems like things are moving in the right direction.


Your next question comes from the line of Robert Dodd - Morgan Keegan

Robert Dodd - Morgan Keegan

Just one question, you’ve had a lot of success so far with new product introductions, you know obviously we know we’ve got the Raptor Fox coming still, is there any other new products, any of the other businesses or anything that’s just been put on the drawing board at Fox that we can expect in the next six to nine months.

Joe Massoud

Let’s go through this almost company by company because its something we focus on, that ones easy and its somewhat, depends on what you think of off road vehicles, but I consider that example somewhat sexy. But that may just be me. So its easy to talk about because you can picture it, but its something that every one of our companies, I think we’re very hesitant to squeeze down to such an extent that there’s not product introduction and I would say we kicked in a year an a half ago into the mode with most of our companies to talking about how do we gain additional customers.

So if you go through it, company by company you’ll see many examples and I’ll just give you a few. For example at American Furniture, well what kind of a product can you introduce. Obviously we’re not inventing some new key piece of furniture that you’ve never heard of right, but in that particular case we’re talking about new designs, new patterns. In that case we’re talking about a situation which we responded to our customers’ needs to supply entire room packages.

And so we’re sourcing case goods like tables and rugs to put with room packages to give our customers the ability to kind of source an entire room package. We’re talking about larger sofas but its talking about response to customers’ needs and product introductions and I think if you were to talk to our guys at AFM they’d give you a litany of product introductions and they might just not be kind of as obvious as here, we’re now on a truck when we formerly were only on bikes.

If you look at Anodyne, similar thing. We have customers there who were saying to us, here is a specific product that we need. It’s a product that has some type of a foam component and some type of an air component or how can you make this product more functional for us or easier to transport. And I would say in that particular case a significant amount of the revenue growth has been driven by what the company would consider to be new and very exciting product introductions.

And then Fox, you know Fox is pretty clear. They were working on personal watercraft where we’re constantly developing. Every year there are material improvements in the core bike product line where if you are an off road enthusiast you might think that the next advance from 2009 to 2010 was as material as me saying to you now we’re going to be on a military vehicle or we’re going to be on Ford.

So my broad commentary on this is and I think those are probably the three where I think R&D if you will has been most significant over the past 12 months. I think that product innovation is a constant here. If you want to talk about Fox specifically, we’re very optimistic. We were in a bid package on a large military program which was awarded to someone else but we learned a lot through that process.

And it was one of the first times that we’ve been involved in that kind of a program. We’re optimistic over the next couple of three years, and we’re adding infrastructure from a personnel point of view to pursue those opportunities so we feel good over the next two or three years about what military opportunities would look like. We certainly see the Ford F150 as a springboard to similar opportunities.

So I think Fox is, the next five years should involve a number of if not entirely new product categories but sort of new product innovations. And I can tell you we’ve added significantly into this company’s management team. We’ve hired an extraordinary CFO, COO, we’ve now brought on heads of, person to work on military specifically. We’ve rearranged the management team to make it more responsive to new product opportunities.

So that’s a company that we’re attempting to position for significant growth over the next three to five years. And there should be a lot of exciting things coming out of that.


Your next question comes from the line of John Rogers - Janney Montgomery Scott

John Rogers - Janney Montgomery Scott

I’ve got a couple of questions here, on ACI some of your competitors have talked about an improving environment. I understand that you don’t have a lot of visibility, if its about two weeks, but have you seen any indications that this market may be improving.

Joe Massoud

I wonder who those competitors are. Yes, clearly our sort of our number looks like orders per day in bookings and I think that those have firmed up in the last couple, three months versus what they looked like at the end of the first quarter. I think our favorite thing about what’s happened at ACI in my view and then Alias I give you a chance to sort of prep some thoughts and then I’ll turn that over to you because maybe you follow the competitors or the company more closely, to me it feels a little more predictable.

There was a point in the first quarter when the orders per day varied to a greater extent day over day or week over week then we had historically ever seen and it was [inaudible] unnerving, but it was strange. And so what we liked the best is not only has the volume returned to some extent but its feeling a little more predictable and stable which is what a company with 10,000 customers, none of which represent more than 1% should be.

That company ought to be the model of stable demand and so when you get kind of fluctuations its interesting in not a positive way. So I would say that there has been some firming and there has been some stabilization.

Alias, how you respond to that.

[Alias Stabo]

I would say JT we’re probably seeing a little bit more increased order activity but what we’re seeing is that the orders are smaller in size then what we had seen over the last call it 18 months. And I think that’s consistent with a lot of the longer lead time, larger production runs, continuing to be under pressure based on kind of the economy being squeezed and some of those longer lead runs are going overseas maybe at a faster clip then what they had been over the last couple of years.

So we are encouraged that the number of orders are picking up a little bit, that being said, I would echo some of Joe’s comments. This is a pretty consistent business given the large customer base, it doesn’t move radically in one direction or another but it kind of moves over time a little bit more slowly and we’re seeing more stability and not as wild a swing but the increase in the number of orders is encouraging and that’s really our bread and butter which is the quicker turn, higher profit margin orders that are coming in.

John Rogers - Janney Montgomery Scott

And then on ASM, I think one of your customers recently said that they’re seeing slowing sales on home furnishings, have you kept up the momentum that you saw in the second quarter. Obviously the results were really strong, given all things considered. And then do you expect the margin improvement to continue with steel looks like its starting to rise again, steel price is starting to rise again.

Joe Massoud

Yes, that’s a, okay two parts, yes, actually the third quarter looks like its doing okay. So far so good. You’d have to tell me which customer and then we could sort of peel it apart and try to figure out what segment of their business they said it about. But yes we feel pretty good and we feel again particularly good about some of our new SKUs and some of our new lines are doing particularly well and I think the drop effect, the drop effect is so material in fact that we are performing more strongly in stationary then we are in motion furniture which we attribute to the fact we’re performing well in both, but we attribute that to the fact that the stationary furniture is actually even lower priced, more value component of the line then the motion side.

In terms of margins, that’s a very good question. The momentum that we are got we being all people involved in manufacturing things in general, in the first half of the year in our particular case because of declining foam prices may be driving by some declining oil prices and declining steel prices, I don’t think there’s a lot more there because I agree with you that it looks like commodities are going to flatten out [inaudible] increase.

I think our company has done a particularly good job of doing some forward sourcing and forward contracting particularly on the foam side so I think we should be okay there for awhile. We’ve also worked very hard on our transportation costs and feel pretty good about that. So we expect margins to stabilize but I don’t think there’s a lot more room in terms of margin growth.

We’re always working on it but I mean, its not clear to me where that next step comes from.

John Rogers - Janney Montgomery Scott

Is there any difference in the margins between your stationary and motion, do you see a benefit or would you be hurt by the changing mix.

Joe Massoud

You know interestingly, no we wouldn’t be hurt. Interestingly, if you broke it down, stationary is slightly higher in fact but let’s say there’s not much. For purposes of the analysis that you’re going to do, there’s not much difference. We’re just as happy to send, sell a recliner, a motion piece of furniture at $100, $200, $400 whatever it is, $800, as we would be a stationary.

John Rogers - Janney Montgomery Scott

And then on Anodyne, it looks like there are good results here, do you think that this is more from a growing end market or are you taking market share and then if it’s a market share gain, is this you’re building Anodyne inventories at your distribution customers as your replace some of your competitors who are losing share.

Joe Massoud

Our belief is, I think end markets it would be hard to characterize the end markets, hospital markets as being strong. Our belief is that our revenue growth is greater than the overall pace of growth of support services. And so we believe we’re taking market share, we have anecdotal evidence with a number of our customers where we think we’ve replaced people, we know we’ve replaced people, so we think we’re taking market share.

I wouldn’t over emphasize this whole notion of, its not really a razor blade razor model like where particularly where some of our growth has occurred in the reactive line as opposed to the active line of our business so the reactive being primarily foam based. To me that doesn’t necessarily mean, therefore we have more beds in the hospital and that’s going to be recurring and now we’ve taken permanent market share if that’s what you’re suggesting.

I don’t think it quite looks like that but I think its market share growth and again I think its because of the number of products we’ve been working on for the, in some cases many years, but a year plus to develop. And again Alias if you have any comments to clarify that would be great.

[Alias Stabo]

No I think you’ve hit it. We’ve got some new products that have taken share but I would say that it’s a combination that the end markets are stable to growing a little bit and our, we think our growth has been a little bit stronger by virtue of some new product introductions that have taken share.

Joe Massoud

I guess that was the second part of your question like now we’re replacing them in the market, I think we have to constantly innovate. The hope is that customers become accustomed to the increased technology that we bring this product and they like it and they’re more likely to reorder but its not a razor, razor blade kind of thing.

John Rogers - Janney Montgomery Scott

I guess to clarify my question a little bit, you say you’re selling more Anodyne reacted services through [Hillron] because they move exclusively to you or they’ve eliminated another supplier, is there any kind of inventory build component that you benefited from in the second quarter.

Joe Massoud

You wanted to know if these are stocking orders basically, I don’t think so. Its hard to know but in general these companies don’t carry a lot of inventory. They run pretty lean businesses that are reasonably inventory less, so its not my perception that are sales are up because we’ve gained market share now basically they’re I’ll call them stocking orders which I know is a retail term, but that sounds like what you’re describing and Alias, would you agree with me on that or is there—

[Alias Stabo]

Yes to a large degree I think most of the product that we’re selling right now is sold through to the end customer. There is a little bit that goes into the rental market where we’re selling to customers that are then renting, but the vast majority of our business is going to be for end market sales and then some of our business and the business is actually performing best right now at Anodyne, is the truly consumable business and that’s where we have a lot of stabilizer products, if you get in an accident and you need to stabilize a knee or something, those are one use foam products.

That business has seen extraordinary growth, less sensitive because its not a capital equipment type of purchase to the economy and so that business is clearly a one time use and there isn’t inventory issues but by and large most of our sales are to end customers and there’s not a material amount of I would say inventory building for our rental customers that took place throughout 2009 so far.

John Rogers - Janney Montgomery Scott

On Staffmark, again I hear commentary from other, some other staffing providers are saying they’re seeing slight improvements, I think Manpower said that they’re actually, some of their customers are actually talking about adding staff, is this really just normal seasonal improvement or are you seeing any stabilization.

Joe Massoud

Well I think its both. I think there’s definitely a normal seasonal improvement. I do think that in this economy people cut very effectively, very quickly more than we were used to in the past and kudos to all the American companies for being leaner than we historically have been in terms of responding. I do think that any up tick in business even if its in response to inventory stocking issues throughout the general industrial markets, may lead to people, again subject to the question asked earlier about are they going to try to do more with fewer people, of course they will.

But there’s some things you just can’t do with fewer people and I think that any increase in production levels is in fact driving opportunities. So by way of example, we have some auto customers, clearly that business has been decimated and what we’ve seen over the last several weeks is as sort of the US manufacturers are kind of getting back on pace, to even restart at some level of production, forget that they’ll never reach the old level of production, but at least they’re sort of kick starting above an extraordinary low base line, we’re starting to see some demand come from the sort of secondary Tier 2 or Tier 3 suppliers that may be we supply because they’re getting a knock on effect.

To the extent there’s a stimulus package that’s begun to create some sort of jobs in the middle of the country, we’re seeing some come back from that. My point wasn’t to say that we aren’t seeing some stabilization and we aren’t seeing some customers come back, because we clearly are, it was more of a cautionary that in this industry sequential is not what its about.

Unless you know the sequentials really well, one shouldn’t just blindly look at it and so Q2 is better than Q1, no brainer, things are going well. Its really more about how are we doing versus prior year and how are we doing with specific customers. So its both.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Joe Massoud

Thank you all for your time. We’re very excited about what’s going on here. We just concluded our week of meetings with our management teams and I think we emerged pretty pleased with the people we have running the subsidiaries and the actions that we’ve worked together on to kind of manage through the downturn and very importantly, position for growth.

None of these businesses are being managed kind of for this quarter’s cash flow or next quarter’s cash flow, they’re each being managed to emerge as even stronger, higher cash flow generating businesses out the back end of this downturn and we really think we’re making good traction on that.

So, appreciate your time and appreciate your support and look forward to talking to you again in about three months.

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