Courier Corporation (NASDAQ:CRRC)
Q2 2010 Earnings Call
April 22, 2010 2:30 pm ET
James Conway – President & CEO
Peter Folger – SVP & CFO
Robert Story – EVP & COO
James Clement – Sidoti & Company
Good day ladies and gentlemen and welcome to the second quarter 2010 Courier Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. James Conway, Chairman and Chief Executive Officer.
Good afternoon, and welcome to Courier Corporation’s second quarter earnings conference call. I’m James Conway, Chairman and Chief Executive Officer. Thank you for joining us.
We released earnings earlier this morning. I hope you have all had a chance to see the results. We had a solid quarter with both segments profitable and net income up over last year. In book manufacturing, our four-color sales continued to grow and in fact, we have just ordered our fourth big [Manrollin] press for our plant in Kendallville, Indiana, even as we completed the installation of a new digital print facility here in Massachusetts.
In book publishing Research & Education Association, REA, had a terrific quarter and while Creative Homeowner sales were down, its reduced cost structure helped Creative trim its operating loss sharply from the previous quarter.
Courier’s Chief Operating Officer, Robert Story, is here with me today. And Peter Folger, Courier’s Chief Financial Officer is also here with us. Robert will begin with an overview of financial results for the second quarter and the first half of fiscal year 2010. I’ll then discuss the key issues driving our business.
I will also provide guidance on what to expect for the full fiscal year. Robert please go ahead.
Thank you James, before I begin, I should point out three things. First, effective with this call we are moving to a slightly different format for our quarterly conference calls. In the past I’ve used my portion of the call to guide you through our financial performance in extensive detail including detailed profit and loss information on each of our business segments. We now include detailed segment financial statements in the tables at the end of our press release. And as we mentioned last quarter we shifted the timing of our earnings release and conference call back a week, to more closely match the timing of filing of our Form 10-K with the Securities and Exchange Commission.
Our 10-Q filing early next week will contain detailed disclosure about each of our business segments so I won’t repeat all that information here. Instead I’ll be providing some brief highlights of our performance from my perspective so that we can then move on relatively quickly to James’ perspective on our strategy and direction.
This brings me to my second point which is our traditional reminder that during this call we may make forward-looking statements relating to the company’s financial goals and business environment. Actual results may differ materially. Information about factors that could potentially impact our financial results are included in today’s press release and in our filings with the SEC including our 2009 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.
We encourage you to review those factors in conjunction with any forward-looking statements we make today. During this call we will discuss certain non-GAAP financial measures including EBITDA. 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. Finally one other note about my comments today, as James said in his opening remarks we had a good quarter with some of our gains attributable to the cost reduction steps we took in last year’s second quarter as reflected in the restructuring and impairment charges that resulted in a net loss for that quarter.
But even if we take those charges out of the equation, we still did better this time with earnings of $0.12 per share in this year’s second quarter as compared to $0.10 per share in 2009. And so in the next few minutes in order to give you the most accurate comparison of how our business has performed this year versus last year, I’ll be excluding those charges from last year unless I specifically mention them.
Now let’s talk about the results, you may recall we had a very solid first quarter with strong performance across most all businesses, and earnings up sharply. In the second quarter some of our markets that did well in the fall, softened. As a result our second quarter sales were down slightly compared to a year ago.
Yet despite lower sales we were able to produce another quarter of earnings growth with earnings per share up 20% over last year. Sales in the second quarter were $59 million, down 1% from last year with net income of $1.4 million or $0.12 per share versus $1.2 million or $0.10 per share last year on a comparable basis.
For the first half of the year sales were $122 million, up 3% with net income of $4.2 million or $0.35 per share, more than double last year’s comparable first half income of $2 million or $0.17 per share. EBITDA in the first half was $17 million, up 23% over last year’s comparable figure of $14 million.
Now let’s look briefly at our two business segments, I’ll start with the specialty publishing segment which includes Dover Publications, Research & Education Association, and Creative Homeowner. Specialty publishing sales in the second quarter were $12 million, down 3% from last year while sales for the first half were $23 million, down 1%.
Creative Homeowner, which publishes books on home improvement, decorating and design, continued to work through the effects of the housing slump with sales down 14% in the second quarter as a result of continued weakness in home center sales. However sales to non-home center retailers were up in the quarter as were sales of home plans to new homebuilders. We hope both of these positive developments will be followed by gradual improvements at home centers as the recovery takes hold.
There were other encouraging signs at Creative Homeowner too, thanks to its reduced cost structure Creative’s second quarter loss of $259,000 was substantially less than its first quarter loss of $1.2 million. And Creative’s second quarter EBITDA was a positive $300,000.
REA sales were up 22% in the second quarter and up 32% for the first half of the year with growth driven by a strong list of new titles and a robust test prep market. Dover sales were down 4% in the quarter with inventory reductions at large retailers outweighing gains among smaller retailers, online stores, and direct to consumer sales. For the first half of fiscal 2010 Dover sales were up 7% over last year.
Operating income in the specialty publishing segment was $13,000 in the second quarter compared to a loss of $267,000 last year. For the first half of this year the segment lost $500,000 compared to an operating loss of $2 million last year. The improvement reflects sales growth at Dover and REA, combined with the benefits of the cost reductions last year.
In book manufacturing, second quarter sales were $500 million, flat with last year while sales for the first half were $105 million, up 4% for the same period last year. In our largest market, education, sales were down 2% from last year’s second quarter but up 6% for the first six months primarily from sales of four-color college textbooks.
The second quarter started off slow but orders picked up sharply in March indicating strength in the upcoming third and fourth quarters. James has already mentioned our plan to add another four-color press in the first half of fiscal 2011. He’ll have more to say about that in a few minutes.
In our second key market, religion, sales were flat with last year’s second quarter and up 7% for the first half of the year. Sales to our largest religious customer were up 1% in the quarter and up 10% in the first half.
In our third key market, specialty trade, sales were up 6% from last year’s second quarter and up 3% for the first half of the year. During the quarter we acquired Highcrest Media, a software and solutions provider, specializing in customized textbooks, one of the fastest growing segments of the education market.
We also installed a new digital printing system from HP. For the balance of fiscal 2010 we expect start up costs related to our new digital print operation to reduce earnings by $0.05 to $0.10 per share.
Operating income in the book manufacturing segment was $2.8 million in the second quarter compared to an operating loss of $652,000 last year. Most of this difference reflected severance and restructuring costs incurred in last year’s second quarter as we closed our smallest plant and consolidated some operations elsewhere.
Through the first six months of our 2010 fiscal year operating income was $8.5 million compared to $6.2 million last year excluding last year’s restructuring costs. Now I’ll shift gears and talk about cash flow and our financial condition.
Cash provided from operating activities was $14.6 million in the first six months of the fiscal year, up $4 million from the same period last year. Depreciation and amortization expense was $10.3 million, down slightly from last year. Working capital used $1 million this year, down from $1.8 million last year.
Investment activities for the first half of this year used $8.3 million of cash including $3.9 million for the acquisition of Highcrest Media. Capital expenditures used $2.9 million, compared to $4.5 million for the same period last year. In April we ordered a fourth [Manrollin] press to expand four-color capacity in our Kendallville, Indiana plant.
We expect to spend approximately $12 million on this project in fiscal year 2010 out of a total project cost of approximately $17 million. As a result capital expenditures for fiscal year 2010 are now projected to be between $24 and $26 million. This includes approximately $6 to $8 million for our new digital print operation.
We ended the quarter with $11.7 million of debt, down approximately $2 million from the end of the fiscal year and we have a committed credit facility of $100 million spread among four leading financial institutions with a maturity in 2013.
So to sum up, both of our segments produced improved earnings amid mixed sales in the quarter. In addition we acquired Highcrest Media, we established a new digital print operation, we placed an order for a new [Manrollin] press to add much needed four-color capacity for next year, we declared our regular quarterly dividend today, we continue to have strong cash flow, and we have a healthy balance sheet that leaves us well positioned to pursue future growth.
Now I’ll turn the call back over to James.
Thank you Robert, while no one said it would easy, but we’re making progress. At the global level the ash cloud may or may not dissipate but people are cautiously beginning to take to the skies again. At the national level, there are finally some signs that the economy is starting to gain traction, though clouds still hover over state and local budgets and the real estate market.
At the industry level the early hysteria about e-books and I-pads is giving way to a more recent assessment that acknowledges their consumer appeal but affirms that for many kinds of content and learning there’s still nothing like a book.
And here at the company level Courier has come through a decent, if not stellar quarter, beating last year’s income numbers for both the quarter and the first half of our fiscal year. We saw our publishing segment return modestly to the black for the quarter despite the weak housing economy and the lingering effects of a very serious recession.
At the same time we took important steps to build our strength in our largest book manufacturing market. Recent news reports are suggesting that in several industries the recession is giving way to solid growth. It’s a little more complicated in ours but things are better than they were. Our task our Courier, as always, is to gain share by outperforming our peers in service, while also insuring our readiness for the opportunities a stronger economy will bring.
I’m as disappointed as anyone about Creative Homeowner sales, but the pieces are more in place for a recovery than they’ve ever been before. One piece is building relationships with other channels besides home improvement stores and we’re seeing signs that our effort is starting to pay off.
This quarter Creative had its second straight quarter of growth in sales to non-home centers including lawn and garden shops and other specialty retailers. And this time it was double-digit growth as our unified publishing sales organization continues to open new doors, helped by several recent Creative Homeowner titles that are striking a cord with a broader range of consumers.
A second positive sign is the increase in direct to consumer sales of home plans, an ancillary product line that had been hit hard by the housing collapse. This is also Creative’s second straight quarter of increased home plan sales. Third, within the home center arena itself, as you may have seen, the outlook for major change is finally starting to improve based on their comments and actions over the last couple of months.
And finally, Creative Homeowner is operating well in its leaner, low cost mode, still bringing out award winning titles but with a sharper focus on the needs of today’s retailers and consumers. Elsewhere in our publishing segment Dover had mixed results following a weak holiday season at the major bookstore chains but good growth in direct to consumer sales and sell through at online retailers.
Meanwhile REA delivered its second outstanding quarter in a row thanks to its combination of new titles and new eye-catching cover designs. REA now stands up 32% from the first half of last year. In book manufacturing there are two big stories.
One we are once again leveraging all our capacity to keep up with demand for four-color books, particularly college textbooks. Unlike the elementary and high school segment, the college textbook market proved to be relatively recession proof this year. It has also historically been our major focus in the education market.
So we have a lot of experience working with publishers to help them make the most of their opportunities. In recent years our orderly build up of state of the art four-color capacity has strengthened those relationships as textbook production has increasingly shifted to four color.
And while there has been a lot of talk about electronic textbooks, the reality is that today’s laptop carrying students are also buying four-color textbooks in print because they’re easy to spread out, easy to highlight, and comfortable to share. Not to mention they are in four color.
The trends at four-color production also extends well beyond the world of educational publishing. We’re seeing it among numerous specialty trade customers as well. For most people color is a vital dimension of every day life whether you’re planting a garden, cooking a meal, or reading to your kids.
And publishers know that four-color books help connect with that experience, especially in hands on categories like gardening, cooking, crafts, and children’s books in a way that e-books still do not. Put these factors together with the exceptionally high utilization, high forward bookings, and high performance of our three [Manrollin] four-color presses in Kendallville, Indiana, and the case for adding a fourth press has become compelling, with our without an early recovery in the elementary and high school textbook market.
So last week we ordered the press for delivery in the first half of fiscal 2011 in plenty of time for next year’s education season. The other big story in book manufacturing as Robert and I have mentioned already, is our installation of a new system from Hewlett Packard that gives us a complete digital printing solution for short-run book production, from one color to four.
This new facility represents a quality and cost breakthrough that can help a wide range of book publishers at every stage from test marketing new titles to squeezing more revenue out of their back list. It also dovetails beautifully with our recently completed Highcrest Media acquisition, which comes with its own complementary customer base in the field of customized textbooks.
As we begin marketing our new digital operation to publishers everywhere, rest assured that we’ll also be using the system ourselves to achieve the same benefits for our own publishing businesses, reducing inventory and capital needs, reducing obsolescence, yet still delivering Courier quality.
And with that let’s go to our outlook, with the economy finally starting to work its way out of the trough, we are cautiously optimistic but we are taking nothing for granted. In publishing we are leaving no stone unturned to attract readers and retailers with well targeted products and excellent support.
And we look forward to gradual improvement in home center sales as the recovery reaches that sector and retailers start restocking to take advantage of it. In book manufacturing we are building on a good first half in the religious market, working around the clock to meet demand for college textbooks and encouraged by the continuing shift to four-color production in both education and specialty trade.
At the same time we recognize the budget squeeze is still effecting local and state school boards and the fundraising challenges for religious organizations in today’s economy. As always, our response to an uncertain environment is to redouble our efforts to distinguish ourselves through quality, service, and delivery.
We’re confident that when our new four-color press is up and running in Kendallville, the market will be ready for it. And we also believe that over time a growing number of book publishers will see our digital print operation as the solution to several long standing cost and obsolescence problems.
In the meantime while our own publishing businesses take advantage of the system the start up costs will likely reduce income in the second half of fiscal 2010 by between $0.05 and $0.10 per share. These costs have been factored into our guidance. As happens frequently in our business we expect the second half of our fiscal year to be stronger than the first, with sales of between $133 million and $144 million versus sales of $130 million in last year’s second half.
That would result in total fiscal 2010 sales of between $255 million and $262 million compared to $249 million in fiscal 2009. We expect full year earnings per share of $0.80 to $1.00 compared to $0.86 per share in fiscal 2009. That is excluding restructuring and impairment charges.
And we expect EBITDA to be between $38 million and $42 million compared to $37 million in fiscal 2009. Again, excluding restructuring and impairment charges. Factors not incorporated into our guidance include the potential impact of continued weakness in the credit markets, on customers, competitors, and vendors in both of our business segments and the possibility of future impairment or restructuring charges.
At this point we’ll turn the call over for questions.
(Operator Instructions) Your first question comes from the line of James Clement – Sidoti & Company
James Clement – Sidoti & Company
I didn’t get the specific timeline exactly of when the digital operation would be revenue generating, could you kind of go back over the timeline of getting that up and running.
We’re still in a stage of testing now, but I’d certainly believe that there will be revenue in the fourth quarter of this year.
James Clement – Sidoti & Company
But really more of, from a revenue and profitability standpoint, its really next fiscal year, right.
James Clement – Sidoti & Company
Is the, currently is most of the equipment actually installed and you’re just going through testing right now, is that the right way to interpret it.
Yes, it is installed and it is in its test stage now.
James Clement – Sidoti & Company
How do you, this is a relatively new service option for you, so how do you go about actually marketing that to your customers.
Well in many respects it will be the same customers, particularly in the education space that will be using it for the first titles or the first prints when they come out and want to test market a particular product, and also for end of life. So as titles come out they will be able to produce them competitively in shorter run [inaudible].
James Clement – Sidoti & Company
And the timeframe for the additional four-color press I think you said the first half of next fiscal year.
Yes it will be installed in the first half of fiscal year and will be up and running in plenty of time for the busy education season in the second half of the year.
James Clement – Sidoti & Company
That was going to be my follow-up question, so thanks very much James.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Folks, thank you very much for listening in and we look forward to chatting with you again at the end of the third quarter. Good afternoon everybody.
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