Courier Corporation (NASDAQ:CRRC)
F4Q 2013 Earnings Conference Call
November 21, 2013 02:30 PM ET
James Conway - Chairman and CEO
Peter Folger - Chief Financial Officer
Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Courier Corporation Earnings Conference Call. My name is Philip and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting 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 your host for today, Mr. James Conway, Chairperson and CEO. Please proceed.
Thank you, Philip. Good afternoon. And welcome to Courier Corporation’s fourth quarter earnings conference call. I’m 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 finished fiscal 2013 with a strong quarter, with sales up 9% over last year and earnings per share up as well. Our digital print business continues to drive sparking a better quarter in the education market. Total textbook sales were up more than 25% in virtually all our presses both digital and offset were in close capacity.
For the full year, we're also up in both revenue and net income. Again, led by growth in the education market and specifically growth in sales of customized college textbooks where we continue to be the technology and service leaders.
As you may have heard a few weeks after the close of the year, we entered into a pair of agreement that will enable us to apply the same digital customization expertise to a large market in Brazil. I have more to say on this later in the call.
Overall, our cash flow and financial condition have remained strong. And I am pleased to report that at this month’s meeting of our Board of Directors, the Board not only approved our regular quarterly dividend of $0.21 per share, but also issued a new authorization for the repurchase of up to $10 million in Courier stock.
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 with us. Peter will begin with an overview of financial results for the fourth quarter and full year. I will then discuss the key issues driving our business. I will also provide an outlook for the upcoming year. Peter, please go ahead.
Thank you, Jim. Before I begin I should point out a couple of things. First, during this call we’ll 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 impairment and restructuring charges, as well as certain non-recurring items.
Specifically, adjusted results for fiscal 2012 exclude a fourth quarter write-off of $1.5 million or $0.08 per share primarily for an unutilized press following last year's consolidation of one-color printing operations. In addition full year results for last year reflect adjustments earlier in fiscal 2012 for severance and post-retirement costs of $1.8 million or $0.09 per share, as well as a gain of $587,000 or $0.03 per share from the sale of our lease-hold interest in two cell towers.
You will find additional disclosures regarding these non-GAAP measures in our press release, including reconciliations of these measures with comparable GAAP measures. These non-GAAP measures should be considered in addition to, not as a substitute for or superior to GAAP financial measures. Also during this call, whenever we refer to earnings per share, it will be on a diluted basis. Lastly, fiscal 2013 was a normal 52 week year, but our 2012 fiscal year had 53 weeks, with the extra week included in the fourth quarter.
Now let's turn to the results. Sales for the fourth quarter were $84 million, up 9% from last year. Net income in the quarter was $6.8 million or $0.59 per share compared to adjusted net income for last year's fourth quarter of $6.6 million or $0.58 per share.
For the full year, Courier revenues were $275 million, up 5% from $261 million for the 53 week year of fiscal 2012. Net income for fiscal 2013 was $11.2 million or $0.98 per share compared to adjusted net income of $10.9 million or $0.91 per share for fiscal 2012.
Now I will discuss each of our two business segments. I will start with our Publishing segment which includes Dover Publications, Research & Education Association and Creative Homeowner.
Publishing sales were $10.3 million in the fourth quarter, up 2% over last year’s 14 week fourth quarter. For the full year, sales in this segment were $38 million, down 2% from last year, but essentially even given last year’s extra week. Equally important, we continue to reduce the segment’s operating losses through a combination of strict cost controls, reduced inventory obsolescence cost and growing revenues from ebooks.
We now have well over 4,000 titles available in ebook form on all the major retail platforms. Also Dover ebooks which have a vast majority of those 4,000 titles are now available for direct download from a brand new upgraded website which premiered this fall with several exciting new features. Jim will say more about this in a few minutes.
Overall the Publishing segment reported fourth quarter operating income of $324,000 versus a loss of $426,000 last year. For the full year of fiscal 2013, the segment’s operating loss was $2.1 million, much improved from last year’s adjusted operating loss of $3.7 million.
Now let’s look at our book manufacturing segment. Fourth quarter sales in this segment was $76 million, up 10% from last year. For the full year, book manufacturing sales were $247 million, up 6% from fiscal 2012. In this segment we focus on three markets; education, religious, and specialty trade.
Sales to the education market in the fourth quarter were $39 million, up 26% over last year. For the full year education sales were $112 million, up 14% from fiscal 2012, with most of the growth related to sales of college textbooks, but also renewed growth in sales of elementary and high school textbooks.
Demand for customized college textbooks continue to grow as professors are increasingly choosing to create customized versions of academic textbooks to fit their in core schedules more closely. Because of this demand, sales of digital print were once again up for both the quarter and a year.
Both our regional Massachusetts and digital facility and our new facility in Kendallville, Indiana, ran out or near capacity for much of the quarter. And between a healthy college market and renewed growth and sales of elementary high school textbooks, utilization was high at our Kendallville offset plant as well.
During the quarter we also took steps that later culminated in two agreements we announced in October, which will enable us [acquire] our technology and expertise to Brazil’s education market, the largest in South America. Jim will describe this opportunity in more detail.
In the religious market sales were down 3% and $19 million in the fourth quarter due in large part to last year’s extra week. For the year as a whole, religious sales were up 4%, accounting for the additional extra week last year, which is in line with our historic trend of low single-digit growth in this market.
In our third key market specialty trade, sales were $16 million down 4% from last year’s exceptionally strong 14 week fourth quarter. For the full fiscal year, specialty trade sales were $59 million, down 2% from fiscal 2012. The order flow was generally consistent with last year; sales dollars were lower as a result of tight inventory management by publishers leading to smaller print quantities.
The segment’s gross profit was $20.6 million or 27.1% of sales in the fourth quarter versus last year’s adjusted gross profit of $19.6 million or 28.4% of sales. Gross profit for fiscal 2013 as a whole was $53.9 million or 21.8% of sales versus fiscal 2012 adjusted gross profit of $51.7 million or 22.2% of sales. The reduction in gross profit margins resulted from intense price competition, reduced recycling income and increased expense associated with the LIFO method of accounting for certain inventories.
For the book manufacturing segment as a whole, fourth quarter operating income was $10.8 million versus adjusted operating income of $11.7 million in last year’s fourth quarter. For the full year, the segment’s operating income was $22 million versus adjusted operating income of $23.4 million last year.
In addition to lower gross profit margins, other factors affecting the segment’s overall profitability included increased performance-based compensation cost and over $1 million in expenses related to our April acquisition of FastPencil and our more recent investment in Brazil. These expenses include transaction cost and purchase accounting expenses such as amortization of intangibles and fair value accounting for contingent consideration.
Moving on to taxes, our effective rate was 37% compared to 37.9% last year, reflecting a lower overall effective state tax rate which was offset impart by non-deductible transaction cost related to the acquisition of FastPencil and the investment in Brazil. We expect the effective tax rate for fiscal 2014 to be approximately 38%.
Now shift gears and talk about cash flow and our financial condition. Cash provided from operating activities for fiscal 2013 was $32 million, down from $39 million last year, reflecting an increase in accounts receivable associated with sales growth. Investment activities for the year used $31 million of cash including $5 million for the acquisition of FastPencil, $3 million of prepublication cost and $23 million for capital expenditures. Further expansion of our digital capabilities accounted for approximately $19 million of the $22 million of capital spending in fiscal 2013.
Capital expenditures for fiscal 2014 are expected to be between $14 million and $16 million with approximately $10 million dedicated to our digital offerings including the remaining spending on the second digital press in Kendallville. Prepublication costs are expected to decrease slightly in 2014 as we continue to focus our publishing programs.
And as Jim mentioned earlier, the Board just authorized a $10 million stock repurchase program. During fiscal 2013, we repurchased approximately 123,000 shares of our stock for a total of $1.6 million under a similar program which expired yesterday. We ended the year with $26 million of debt, up $10 million since the beginning of the year with the debt-to-equity ratio below 20% and a committed credit facility of $100 million spread among four leading financial institutions and maturing in 2016, we are well positioned for any cash requirements over the next year.
So to sum up, in keeping with past year’s we finished fiscal 2013 with our strongest quarter, highlighted by outstanding performance in the education market. Our publishing business continued to reduce their operating losses helped by reduced inventory obsolescence costs and growing sales of ebooks. We now have well over 4,000 titles available in ebook form.
In book manufacturing, education sales were up across the board. In the college market, demand for customized textbooks drove digital sales to new highs. And for the first time in several years, demand for elementary and high school textbooks was also up. Religious sales were down for the quarter, but up modestly for the year, while sales of specialty trade market were lower as a result of tight inventory management on the part of publishers.
As always, we continue to invest to meet the needs of our customers, including our new digital plant in Indiana, our acquisition of FastPencil and the opportunity in South America that Jim will talk about. We experienced another year of strong cash flow. We have a healthy balance sheet that leaves us well position to pursue future growth. Our Board of Directors issued a new authorization for the repurchase of up to $10 million of Courier stock. And once again we announced our regular quarterly dividend.
Now I'll turn the call back over to Jim.
Thank you, Peter. It’s been a busy year. We started strong in the first quarter and used seasonally slower second quarter to bring a new digital print facility up to speed in Indiana and acquired a software developer in California.
We launched a strategic relationship with Ingram Content Group in the third quarter and finished by running a full capacity in the U.S. education market, then [lean] the ground work for a new partnership to bring customized text books to the largest student population in South America. At this point, it’s probably only reasonable to ask where are these initiatives taking us? And the answer is further on the path we're already on.
In an era of dramatic changes everywhere from printing and publishing to virtually every aspect of commerce and technology, this 189-year-old company has repeatedly shown itself able to not only move with the times but anticipate customer needs and create systems and structures that will work in a changing marketplace. We did this a decade ago in the world of four-color offset and read significant gains for our customers, ourselves and school children across the United States.
We did it again when we combined text book customization with digital print enabling college professors to deliver materials specifically tailored to the needs of individual courses. And of course, we've been doing it for our largest religious customer for over 75 years combining a whole array of specialized technologies into an integrated continually evolving scripture manufacturing and distribution operation unmatched in the world.
[Document] we’ve always done in our publishing segment to bring valuable brands into the 21st century to meet the demands of today’s consumers. So we used the ‘14 ahead to see new opportunities while maintaining the highest standards throughout our existing businesses. We've been helped by years, by the course cooperation with equally forward-looking customers, but we've also become increasingly adapt sorting through opportunities on our own, maintaining our focus and building on our successes in technology and service.
We don’t do everything for everyone, but the things we do, we do at a very high level that our customers appreciate. Our partnership with our largest educational customer is over 50 years old and today we're doing more than ever together to deliver powerful, integrated learning experiences for today’s media savvy students. This customer was a key factor in our decision to replicate our Massachusetts digital print operation in Indiana and our success in doing made it all but inevitable that we would look for additional opportunities to adapt our technology and business model to new markets.
We saw an excellent opportunity in Brazil. And in October, we entered into a pair of agreements that we expect to close by the end of this year. Under the first agreement, we will acquire 40% ownership of Sao Paulo-based Digital Page Gráfica E Editora, one of the leading digital print providers for Brazil’s education market.
Under the second, we will license a version of our proprietary text book customization platform to Santillana, the largest Spanish/Portuguese educational publisher in the world, which already has a long-term print agreement with Digital Page. This additional capability will drive increased print volume for Digital Page. It will enable Santillana to become the first publisher in Brazil to offer text books customized to the needs of individual schools and place Courier in a fast growing segment of Latin America’s largest economy.
In coming quarters, I’ve more to say as these agreements close, but we already have a presence in Brazil and I’m excited at the prospects for ourselves, our partners and the millions of students who stand to benefit from this technology for the first time.
I’m also excited by our relationship with Ingram Content Group. Ingram is an important customer in sales channel for our publishing segment. It’s also a provider of valuable services such as distributed print, which will help our publishing brands reach new markets. And finally, Ingram is an important partner for our book manufacturing segment with offerings that complement us to serve our publishing customers. All told, it’s a relationship that has the potential to help both of our segments play on a larger stage.
Now I’d like to turn to Dover, I can’t leave without drawing your attention to the terrific upgrade of their website that launched last month. There has always been a wealth of information there, but accessing it hasn’t been as easy or as much fun as we would like. But now they solve both [problems] with a refreshing new look and lots of new features. Not only is every Dover ebook right there to download, but you can bundle ebooks and print in a single order.
And whatever you are looking for you can find the titles and the deals faster, I encourage you to check it out, it’s a perfect illustration of what I said earlier about transforming a great 20th century brand for the marketplace of today.
And actually I have one more illustration to offer you, not specifically about Dover, but about Courier as a whole. We’ve just added a new Director, John Kilcullen. John is the former Executive Chairman of FastPencil, which is where we met him last spring. But his experience stands the whole landscape of 21st century publishing and digital media technology. I firmly believe he is great fit for Courier’s past, present and future. And I welcome him.
And with that, let's go to our outlook. We entered fiscal 2014 with exciting prospects but also challenges. We continue to reap the benefits of our investments in customization and content management and we are adding to those investments in order to expand our opportunities both domestically and internationally. Yet at the same time, we face the same pressures on print pricing as the rest of the industry. As a result, while we expect revenues to continue to outpace the overall U.S. education market and maintain our growth pace with our largest religious customer, we expect growth in net income to be constrained by these continuing pressures, even as EBITDA rises. As in the past, we expect our performance in fiscal 2014 to follow a seasonal pattern, with the larger portion of our earnings coming in the second half of the year.
Overall, we expect fiscal 2014 sales of between $275 million and $295 million, compared to $275 million in fiscal 2013. We expect earnings per share of between $0.70 and $1, which compares with our fiscal 2013 earnings of $0.98 per diluted share. And we expect EBITDA to be between $41 million and $46 million, compared to $42 million in fiscal 2013. Factors not incorporated into this guidance include the possibility of future impairment or restructuring charges.
So at this point, we will turn the call over to Philip to see if there might be any questions. So back to you Philip.
(Operator Instructions) At this time, we have no questions coming in from the audio queue. So I'd like to turn the call back over to James Conway.
Philip, thanks very much and folks thank you very much for listening. We look forward to talking to you again at the end of our first quarter in January of 2014. Again thank you for listening in. Bye now.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a wonderful day.
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