Courier Corporation (NASDAQ:CRRC)
F1Q 2014 Earnings Conference Call
January 21, 2014 02:30 PM ET
James Conway - Chairman, President and CEO
Peter Folger - Chief Financial Officer
Good day, ladies and gentlemen. And welcome to the Q1 2014 Courier Corporation Earnings Conference Call. My name is Ben and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.
And I would now like to turn the call over to Mr. James Conway, Chairman, President and CEO. Please proceed, sir.
Thank you very much, Ben. Good afternoon. And welcome to Courier Corporation’s first quarter earnings conference call. I’m Jim Conway, Chairman and Chief Executive Officer. Thank you for joining us. We released our earnings at about 9 o’clock this morning. I hope you have all had a chance to see the results.
We started fiscal 2014 with a solid quarter, with sales up 12% and earnings per share up 10% over last year. We had double-digit growth in all three of our principal book manufacturing markets and strong demand for color work at both our offset and digital facilities.
In the education market in addition to healthy sales of college textbooks we were encouraged by our second straight quarter of rising demand at the elementary and high school levels. At the same time, we did well in the religious market, while sales to the especially trade market were boosted by growing demand for digital print and four-color books. Our publishing segment reported sales even with last year, but cut its quarterly loss almost in half. Thanks to improved performance at Dover Publications.
During the quarter, we made plans to bring our customized textbook technology to South America in partnership with Santillana and Digital Page, leaders in textbook publishing and digital print in Brazil. Our debt rose during the quarter, reflecting our investment in Brazil as well as an additional new press at our digital plant in Kendallville, Indiana.
And this morning, we declared our regular quarterly dividend of $0.21 per share. 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 quarter; 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 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, earnings before interest taxes depreciation and amortization as an additional indicator of the company’s operating cash flow performance. You’ll find additional disclosures regarding these non-GAAP measures on our press release, including reconciliations of these measures with the 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.
Now let's turn to the results. Sales for our first quarter were $73 million, up 12% from last year’s first quarter. Net income in the quarter was $2.6 million, up 9% from last year and net income per share was $0.23, up 10% over last year.
Now I’ll discuss each of our two business segments. I’ll start with our publishing segment which includes Dover Publications, Research & Education Association or REA and Creative Homeowner.
Publishing sales are $9.1 million comparable to last year’s first quarter. Sales were up 3% at Dover but lower at the other two publishing businesses, which continued to suffer from the loss of bricks-and-mortar retail channels over the last few years. However, the performance improvement at Dover was enough to enable the segment to reduce its operating loss of the quarter by nearly half to $600,000 versus the loss of $1.1 million in last year’s first quarter.
Several successful new products increased online sales, both print and ebooks and continued attention to operating costs enabled Dover to breakeven in the quarter versus a loss of $400,000 for the same period last year. In response to continuing soft sales at REA, we took action during the quarter to reduce overhead and focus new REA product investment on a few key test preparation markets such as AP, CLEP and GED. Severance and other costs related to this move amounted to approximately $100,000.
Now let’s look at our book manufacturing segment. First quarter sales in this segment were $66 million, up 14% from last year. In this segment, we focus on three markets, education, religious and specialty trade.
Sales of the education market in the first quarter were $28 million, up 14% from last year, as we continue to benefit from increased sales of college textbooks. Sales of the elementary and high school level also increased in the quarter as the improving economy appears to be easing the textbook funding strings which have hindered the [all high] market for the past several years.
Within the higher education market, demand for digital print continued to grow and in response, we added another HP digital press in Kendallville, Indiana. We also saw increased demand for longer production runs of four-color textbooks in both the higher ed and in the [all high] markets which made for a very strong quarter in our Kendallville offset plant as well. Also during the quarter, we embarked on a new program to bring our customized textbook technology to Brazil, South America’s largest education market. Jim, will have more to say about this in few minutes.
In the religious market, sales were up 14% to $19 million with sales to our largest religious customer up 8%, with some of the increase due to order timing. Over the longer term, we expect growth with this customer to return to the lower single digits, in line with historic norms.
In our third key market specialty trade, sales were up 12% to $17 million, reflecting increased demand for digital printing and four-color books.
Gross profit as a percentage of sales decreased to 21.9% for the quarter from 22.7% last year, reflecting a continued highly competitive pricing environment and increased depreciation expense related to the expansion of the Kendallville digital facility. Overall, the book manufacturing segment’s first quarter operating income was $5.3 million, down slightly from $5.5 million in last year’s first quarter, reflecting the tight pricing environment as well as cost associated with our investments in domestic and international growth opportunities. Specifically further expansion of our digital capabilities in Kendallville, our investment in Brazil and approximately $900,000 of expenses related to the April 2013 acquisition of FastPencil including acquisition accounting costs for amortization expense and the change in fair value of contingent consideration.
Moving on to taxes, our effective rate was 38% compared to the 37% for the first quarter of last year, reflecting non-deductible costs associated with the acquisition of FastPencil. Now, let’s shift gears and talk about cash flow and our financial condition.
Cash provided from operating activities was $10 million in the first quarter comparable to last year’s level. Investment activities for the quarter used $11 million of cash including approximately $700,000 for prepublication costs and $6 million of capital expenditures. The remaining $4.5 million of cash investment was made in connection with the October agreement to acquire 40% interest in Digital Page at Sao Paulo based digital printing company. Under the terms of the agreement, we will invest approximately $9 million for the 40% interest in Digital Page, with the initial funding of $4.5 million occurring in the first quarter. The transaction is expected to close by the end of March.
Turning now to capital expenditures, we expect spending for the fiscal year 2014 to total between $14 million and $16 million, with approximately $10 million dedicated to our digital offerings, including the additional digital capacity in Kendallville. Prepublication costs are expected to be approximately $3 million, down slightly from 2013 levels.
In November, Courier’s Board of Directors authorized a new $10 million stock repurchase program. However, we did not purchase any shares during the quarter. We ended the quarter with $29.5 million of debt, up $4 million from the start of the quarter. And we have a committed credit facility of $100 million spread among four leading financial institutions and maturing in 2016.
So to sum up, we began fiscal 2014 with a strong quarter with double-digit gains in both sales and earnings per share. Our book manufacturing segment did well in all three of its major markets of education, religious and specialty trade. And within the education market, we had our second straight quarter of renewed sales growth at the elementary and high school level in addition to strong college sales.
Our publishing segment improved its overall performance substantially from the year earlier, cutting its loss nearly in half due to improved results at Dover. We continued to invest to meet the needs of our customers and take advantage of further growth opportunities. These investments included the expansion of our digital print capacity in Kendallville, Indiana; product development at FastPencil and our pursuit of opportunities in Brazil. We continued to experience strong cash flow. We announced our regular quarterly dividend. We have authorization to repurchase up to $10 million of our stock. And we have a healthy balance sheet that leaves us well positioned to pursue further growth.
Now I'll turn the call back over to Jim.
Thank you, Peter. Starting the year with this kind of a quarter is energizing. And we see some good prospects for the year ahead. But while the economy is starting to help, we've been doing our part too, delivering exceptional service to our customers, while investing in our future and theirs.
The growth we experienced this quarter is at least partly the award for our consistent adherence for this approach. Our customers know that we not only have some of the most efficient plants in our industry, but that we are leading the way with forward looking technologies that will help them continue to succeed as the marketplace continues to evolve.
Our leadership in digital print and textbook customization is only part of this picture. We had an excellent quarter at our Kendallville offset plant as well. And in our Philadelphia plant that serves the religious market. What ties them all together is our trademark combination of customer focus, process management expertise and willingness to invest for our future benefit.
Of course implementing this approach requires patience and persistence, chances are we won't have double-digit growth across the board for the whole year. We are still dealing with economic uncertainty, which intensifies competition and makes every job price sensitive. In addition to which, our investments in innovation, whether in California at FastPencil, in Kendallville with our digital expansion or in Brazil with Santillana and Digital Page inevitably constrain earnings in the short-term, but they’re worth it. That’s how we’ve become a valued partner for so many of our customers. A complete one-stop resource for producing and distributing top quality print in whatever quantity they need across the entire life span of every title.
Now to some specifics; our growth in digital continues as more and more customers realize how good our four-color digital really is. They also like the convenience and certainty of being able to obtain consistent four-color results with a cost effective combination of digital and offset that helps minimize their inventory and warehousing costs. And these benefits are over and above the trend to customized textbooks, which is driven so much in the digital growth in the recent years.
And with this combination of opportunities that led us to take our Massachusetts digital operation and replicated next to our offset plant in Indiana last spring. And the new facility has more than lived up to our expectations. Now we are leveraging our expertise and technology in custom publishing and digital print to expand into new markets.
As we reported last quarter, we found an excellent opportunity in Brazil, which has both the largest economy and the largest student population in Latin America. In October we took our first steps to capitalize on that opportunity. One of them was our investment in Digital Page, as Peter has described. The other was our agreement to license a version of our proprietary textbook 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 not only drive increase print volume for Digital Page, but will enable Santillana to offer text books customized for individual schools.
Our agreement with Santillana and Santillana’s agreement with Digital Page are both complete and in place. As Peter said, we expect to close the remaining transaction between Courier and Digital Page by the end of this current quarter. All told, it’s been a pleading opportunity and a natural expansion of our text book customization business here in the United States.
And now a few words about our publishing segment. Overall this was a good quarter in the segment. As Peter described, we took some difficult steps in REA to bring cost in line with current and anticipated revenues. But just as REA’s brand is strongest in certain core markets such as AP, GED and CLEP, we think its prospects will be best if its focuses on delivering the best for its students in those markets.
Dover too has gone through a process of focusing on key opportunities and this quarter we saw some impressive results. Its top and bottom-lines were both up, helped by the availability of 1000 of titles in ebook form, but also by the strong performance of several key titles.
Over the last several months, Dover’s Creative Haven line of adult coloring books has gained a sizable following. In its wall it contributed over a quarter million dollar in sales. Another winner was Alice Starmore’s Tudor Roses, a gorgeous book and Dover’s Calla Edition series, highlighting the hand-knitted designs inspired by England’s Tudor Dynasty.
These two examples and its large digital library of ebooks and images should tell you that Dover has come through the challenges of recent years alive and well and is increasingly in tune with the needs and interest of today’s and tomorrow’s consumers.
And with that, let’s go to our outlook. With a solid quarter behind us and increasing signs of economic recovery, we are well positioned for the year ahead in our major markets. We continue to read the benefits of our disciplined investments in technology and service. Yet even as we add to those investments and/or to expand our opportunities, we still face intense pressure on print pricing.
As a result, while we expect revenues to continue to outpace the overall U.S. Education Market and maintain the historic growth rate with our largest religious customer, we expect growth and net income to be constraint by those continuing factors, 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.
Overall we expect fiscal 2014 sales of between $280 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 share. And we expect EBITDA in fiscal 2014 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.
At this point, I would like to turn the call back over to Ben to see if there might be any questions. So Ben, it’s back to you.
Thank you very much. (Operator Instructions). The first question comes from the line of (inaudible) from Sidoti Company. Please proceed.
Hi guys, how are you doing?
Very well (inaudible), how are you?
I am good. My question has to do with Brazilian market opportunity. Could you talk a little bit about the size of the market, how is the competition there? And just how will this work, when will you see revenue coming from that particular market?
Well, we can tell you that the student market that we are in, in our customized product for is a market of 50 million students comparable to the elementary and high school market here in the U.S. and that’s both public and private schools and the product that Santillana, the publisher would like us to help them produce or create would be customized textbooks for that particular market. As Peter and I both explained, we’ve got two legs of this three-legged store, three way deal complete. And we're still waiting to close that third leg of the store which would be our agreement with Digital Page, which we expect will take place within the next 30 days to 60 days hopefully within this quarter, the second quarter of our fiscal year. So, to make projections about revenue and revenue streams would be premature at this point in time. So, I hope you understand a portion of the question I have been able to answer.
Yeah. And (inaudible) relative to revenue, we will enjoy some revenue associated with the licensing arrangement that Courier has with Santillana. However with respect to Digital Page, we have a 40% interest. So the accounting rules of such that we won't be consolidating, our interest in Digital Page will be recording on an equity method. So we will be recognizing 40% of the earnings at Digital Page from the point in time that we close the transaction. And therefore we won't be actually including revenue in our results, just our interest and their earnings. Okay?
And are year looking to… sorry.
Does that answer your question?
No, it does.
Are you looking to increase the interest in it eventually?
Well, we don't have any intention at this point in time to increase our interest in it.
And have you looked at other market opportunities in Latin America?
Well, what we did in this case (inaudible) is we were able to identify an opportunity where a customer namely Santillana was looking for a custom education textbook opportunity and came to us, because of the success we've had here in the States and we identified their supplier down there namely Digital Page that we’re able to invest in to provide additional capacity for them to meet the needs of Santillana. So, should a similar situation occur, will we have an enabling customer that whether it would be in Latin America or South America or elsewhere, we certainly would look at how we might be able to help that customer and opportunities in all of the areas.
So the manufacturing will be done by Digital Page, am I correct?
That’s correct, that’s correct.
But nothing will be done let’s say in the States and then shipped to Brazil?
It’s more be all done there. Okay.
It will be all done in Brazil.
Okay. And do their equipment at equal level to yours or will you have to -- will there be additional investments required?
Yeah. The thing that was really attractive to us and HP was helpful in this endeavor is that their equipment is exactly the same that we’re using here in the States for doing our short one digital inkjet production. So it’s the exact same level of equipment that we’re producing similar products here in United States.
Okay. Well, that’s all for me. Thank you for answering my questions.
Thank you (inaudible).
Thank you very much for your question (inaudible). There is no more questions that we have in the queue at this time. I would now like to turn the call back over to James Conway for closing remarks.
Well Ben, thank you very much for your help and folks thank you very much for listening in. And we look forward to talking to you at the end of next quarter, the second quarter of 2014, so good bye for now.
Thank you very much James. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining. And have a very good day.
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