Executives
Eric Boyriven - FD
Joe Davis - CEO
Jon Biro - EVP and CFO
Analysts
Charles Strauzer - CJS Securities
Jamie Clement - Sidoti
Jared King - TriplePoint Capital
Consolidated Graphics (CGX) F4Q10 (Qtr End 03/31/09) Earnings Call May 5, 2010 11:00 AM ET
Operator
Good day, ladies and gentlemen. And welcome to the fourth quarter 2010 Consolidated Graphics earnings conference call. My name is [Fab] and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct 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 Mr. Eric Boyriven of FD. Please proceed.
Eric Boyriven
Thank you and good morning. Welcome to the Consolidated Graphics conference call. During the call management will discuss the company’s results for the fourth quarter ending March 31, 2010.
You may receive a copy of today’s press release by calling FD at 212-850-5600 or by visiting Consolidated Graphics website. This conference is being broadcast live on the internet at www.cgx.com and a subsequent archive will be made available.
Before we begin, I would like to remind everyone that remarks made by management during the course of this morning’s call contain forward-looking statements, which involve known and unknown risks, uncertainties or other factors that could cause actual results to differ materially from results, performance or other expectations expressed or implied by these forward-looking statements.
Consolidated Graphics expectations regarding future sales and profitability assume among other things, stability of the economy and reasonable growth and demand for its products, the continued availability of raw materials at affordable prices, retention of its key management and operating personnel, satisfactory labor relations, as well as other factors detailed in Consolidated Graphics filings with the Securities and Exchange Commission, including the Risk Factors set forth in our most recently filed Annual Report on Form 10-KA, Quarterly Report on Form 10-Q, and Current Report on Form 8-K.
Forward-looking statement, assumptions or factors stated or referred to on this conference call are based on information available to Consolidated Graphics as of today. Consolidated Graphics expressly disclaims any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this call to reflect the occurrence of events, circumstances or changes in expectations.
In addition, during the course of this call, management of the company will reference certain non-GAAP financial performance measures. Management’s opinion regarding the usefulness of such measures, together with the reconciliation of such measures for the most directly comparable GAAP measures for historical periods are included in the company’s earlier filings today with the Securities and Exchange Commission.
Now, with these formalities out of the way, I would like to turn the call over to Joe Davis, Chief Executive Officer. Joe, you may begin.
Joe Davis
Thank you and good morning. With me on the call today is, Jon Biro, Executive Vice President and Chief Financial Officer. Sales for the March 2010 quarter were $237 million compared to $247 million for the March 2009 quarter. The 4% decline resulted almost entirely from lower same-store sales.
However, I am pleased to report that adjusted operating income and adjusted operating margins increased in the current quarter, compared to the same quarter last year despite the lower sales level. Adjusted operating income was $10.3 million or 4.4% of sales in this quarter compared to $6.6 million or 2.7% of sales in last year’s quarter.
Adjusted net income for the March quarter increased to $6.2 million or $0.54 per share from adjusted net income of $2.5 million or $0.22 per share last year. All things considered, this was a good year for Consolidated Graphics. We maintained profitability, reduced debt by 42% and continue to improve our already best in class capabilities.
As it turned out, when we began the year, we were near at the bottom of a very severely session. We quickly adapted to the new economic reality by adjusting our cost consistent with the weaker demand environment. We are hopefully exiting this recession, but we have a very strong balance sheet and an improved competitive position.
During the recession, we recognized that our customers were focused than ever on reducing their cost. So, we brought our customers customized solutions to help them achieve that goal, while many of our competitors can only offer printing services, we offered total solutions that reduced costs and improved returns on our customer sales and marketing investments.
From producing print using traditional offset methods to producing print utilizing the world’s largest high-end digital press fleet or providing customers our proprietary software solutions, such as StoreFront, we are able to help our customers lower their costs and grow their business. And since we have 70 companies, we can print close to the ultimate destination reducing freight costs in time to market.
Using our technology, customers are able to streamline their ordering process and ensure consistency of their brand. Our print on demand capabilities allow our customers to order just what they need, when they need it, and where they need it, eliminating warehouse costs and the cost of [all solutions].
We are one of the few printers in North America able to meet all of the printing needs of our customers. That’s from business cards to grand format size matters and everything in between. As an example, Ford Motor Company wanted to produce custom vehicle brochures for more than 3300 Ford dealers across the United States.
Hennegan, one of our 70 companies, developed a solution that combined offset and digital printing, personalization, on demand publishing and fulfillment. This unique web-to-print program utilized of existing ordering process combined with a custom program interface that allows the dealers to check their information, upload photos, choose written content and preview specific brochures. The orders are then automatically submitted to us to print, bind, package and ship. The entire process is managed through a barcode tracking system enabling both Ford and Hennegan to follow each order’s progress.
It is our ability to provide solutions like these that sets us apart from our competitors. We’re continuing to best in our technology solutions. And most importantly, we continue to invest in people. In January, we hired 77 and in June, plan to hire 106 college graduates into our leadership development program for a total of 183 new leadership development program associates in 2010. Today, one third of our company presidents are graduates to this program and their in-depth experience have made them some of our best leaders.
We recently helped to emerge an educational conference focus on our customers. This two-day event brought our customers together with a group of experts in marketing, creative design, printing and procurement. Nearly 800 people attended this educational conference. We held seminars on a variety of topics designed to help our customers take advantage of emerging trends in graphic communications, marketing and printing.
Our customers getting valuable information that will help them achieve better returns for their marketing dollars while at the same time gaining a better appreciation of the complete solutions to Consolidated Graphics has to offer. We believe the conference was a huge success and plan to continue hosting Emerge each year for our customers.
Emerge supports our ongoing strategy to differentiate Consolidated Graphics from the competition by investing in our customers and introducing them to the latest technology solutions.
Our diverse capabilities provide us the opportunity to serve a wide variety of customers, industries and geographical regions. The value of our diverse capabilities is evident in our results, while our sales overall declined 4%, our digital print sales increased 27% year-over-year in the March quarter.
Additionally our strategic sales, technology related sales and sales to national customers served by multiple locations increased 4% this quarter compared to last year. Many of our competitors offer only printing services, we offer much more.
Last, we continue to look for good complementary businesses to acquire. We are a great choice for an owner willing to sell. With our financial strength and diverse capabilities, they can grow their business. We’re talking to business owners every day and expect to continue making acquisitions.
In summary, I’m very pleased with our performance this year. We’ve managed during the recession, maintained profitability, paid-off 42% of our debt and improved our competition advantage during a very severe recession. We used our competitive advantage to grow the company as the economy improves.
I will now turn the call over to Jon Biro, who will provide you with additional financial information. Jon?
Jon Biro
Thank you. Good morning. As a reminder, early this morning, we filed with the Securities and Exchange Commission the basis for our use and reconciliations of certain non-GAAP financial measures that will be referenced on this call. Please refer to this Form 8-K filing for additional information.
Sales in the March quarter declined 4%, $237 million compared to $247 million in the same quarter last year. The sales decline was almost entirely caused by lower same-store sales. The good news is that while we experience year-over-year same-store sales declined in January and February, same-store sales increased in the month of March.
Gross profit margin during the March quarter increased from 21.2% last year to 22.7% this year resulting in a $1.5 million increase in gross profit. We achieved and improved gross profit margin while continuing to aggressively manage our costs and in particular by managing direct labor expenses.
Selling expenses declined year-over-year due to lower revenues and were 9.4% of sales in the current quarter compared to 9.9% of sales last year. General and administrative expenses total $22.3 million for the March 2010 quarter compared to $23.3 million for the prior year, a reduction of $1 million or 4%. These expenses were 9.4% of sales in the 2010 quarter consistent with last year.
Operating income of $1.5 million for the March quarter included charges totaling $7.6 million primarily for the impairment of goodwill as well as the impairment of certain production equipment and litigation. The $16.2 million operating loss in the March 2009 quarter included a $20.8 million goodwill impairment charge.
Adjusted operating income, which excluded all of the charges I just mentioned, improved from $6.6 million in the March 2009 quarter to $10.3 million in the March 2010 quarter, primarily due to the improvement in gross profit combined with lower selling, general and administrative expenses.
Likewise, adjusted operating margin increased from 2.7% last year to 4.4% this year made possible by the cost reduction efforts. Adjusted net income for the quarter was $6.2 million or $0.54 per share, a substantial improvement compared to adjusted net income of $2.5 million or $0.22 a share last year.
Again, we aggressively adjusted our costs early in the year, consistent with revenue decline. We experienced as a result, we maintained profitability and strengthened our financial position and have started out a very tough year.
During the year, we generated EBITDA of $117.7 million, which resulted in free cash flow of $139.8 million and this allowed us to reduce our debt by 42%. We now have debt toting $181.6 million at the end of the year and our debt to EBITDA ratio is 1.5 times.
As of March 31, available credit under our existing credit facilities was $219 million and cash on hand was $6.7 million. Capital expenditures, net of proceeds for fixed assets dispositions totaled $2.5 million for the March quarter and were $21.1 million for the year.
Looking ahead into the next quarter and keeping in mind the economic climate and our limited visibility, we expect sales to come in this the $226 million to $236 million range. This implies a year-over-year improvement in sales of up to 5%. Assuming this level of sales improvement, we would expect that we will again continue to generate improved adjusted net income in the June 2010 quarter compared to the prior year.
I’ll now turn the call back over to Mr. Davis.
Joe Davis
Thank you, Jon. We’ve managed in the recession and put the company in an excellent position to benefit from an improving economy. We will continue to manage our costs, if necessary, and we will find attractive investment opportunities that allow us to grow our business.
Operator, we are now available for any questions anyone might have.
Question-and-Answer Session
Operator
(Operator Instructions)
And your first question will come from the line of Charles Strauzer from CJS Securities.
Charles Strauzer - CJS Securities
Good morning, Joe and Jon. How are you? Quick question for you on the quarter, obviously the sales were a little bit below where you were kind of forecasting them to be. Were there any one or two areas that were particularly disappointing and are you seeing an improvement in those areas?
Joe Davis
I think, as we said, January and February were down from the prior year and March, we have seen some improvement with little churn into the economy. But also to some of our technology solutions that our customers are [announcing]. So, we’re seeing a number of things that are improving but really no specific geography. Mostly improvement is in areas where we have some technology advantage.
Charles Strauzer - CJS Securities
And where there’s some areas that you thought might have been little bit better, kind of going into the end of the quarter that maybe didn’t materialize that maybe led to the disappointing results?
Joe Davis
Well, it is very difficult to project revenues in this particular economy. And I don’t know that we can pinpoint any particular thing.
Jon Biro
We’re pleased with the trends, we saw over the course of the March quarter. Joe mentioned the technology sales; digital sales in particular were very strong. So, we’re pleased with that.
Charles Strauzer - CJS Securities
Great. And then, obviously, I wasn’t able to attend the Emerge and I assume that was a pretty good success. But were there any major themes that came out of there from your customers that you hear kind of over-and-over again that they are looking from you and the tone of the economy improving and getting more enthusiastic about their end customers?
Joe Davis
Well, certainly, as I said, we believe Emerge was a great success. We had a lot of really strong customers there, large customers, large prospects. They were exposed to two days in San Antonio of really professionally run conference and they were able to see the technology that we had to offer firsthand. They heard from other customers, who are using our technologies. So, we think that we’re going to have increased, sales over a period of time resulting from their exposure to technology and learning what other customers are doing with our technology, to improve their turn on their marketing budgets.
Charles Strauzer - CJS Securities
Great. And Jon just one quick question, as you look into Q2, what is kind of the expectation on the cost side from both a gross margin and a selling expense level? Should we see further improvement there in terms of percentage revenue and overall dollars, basically kind of assuming kind of flattish?
Jon Biro
Yes, we should, we’ll leverage our fixed cost assuming that we see the sales growth. We think we had our labor cost pretty well in line. So, I think, the majority of improvement that you’ll see if we’re successful going with sales we’ll leverage our fixed cost. Selling expense should pretty well be in line on a percentage basis versus the prior year.
Charles Strauzer - CJS Securities
And sequentially from Q4, I see pretty much flattish, or kind of come into high-end range of assume or maybe a little bit better?
Jon Biro
What do you mean by flattish what?
Charles Strauzer - CJS Securities
Well, if you look at the expenses, the selling expenses and G&A line from Q4, you have roughly $237 million of sales, your SG&A was basically fixed at $22.3 million of selling expenses, $22.3 million of G&A. If you hit the high-end of your revenue assuming the high-end of your revenue guidance, should we assume kind of flattish expenses on those same two lines or do you think…
Jon Biro
Yes, absolutely. Absolutely you should assume those. If we come into high-end of the range, you’ll see that.
Charles Strauzer - CJS Securities
Excellent. Thank you very much.
Operator
Your next question will come from the line of Jamie Clement from Sidoti.
Jamie Clement - Sidoti
Joe and Jon, good morning. A couple of questions. On quality of revenue, and this is something that has come up in years past. Correct me if I’m wrong, but the way you guys look at your business at the plant level, I mean, don’t you focus on gross profit dollars? And I guess what I’m curious about just with the market reaction with your stock this morning, to the extent that you fell short of where you thought you were going to be in revenue, I mean, your gross margin held up very, very well. So, what was the kind of revenue that you were sort of missing here, because it didn’t really seem to be, I mean, it seems like to me, hit your revenue guidance, I mean, would have absolutely blown the doors off the quarter from a bottom line perspective, or was this just kind of low margin revenue that wasn’t there and you’re getting just a higher quality of mix with your work? I’m just kind of curious about your thoughts there.
Joe Davis
Jamie, as far as where the stock goes, I don’t manage the business for the stock moving, we manage our business to run it to service our customers, we know what we do. The stock market overtime takes care of itself. I mean, we had $117.7 million of EBITDA currently 12 months, which was the worst recession we’ve seen in the history of this company. So, our revenue, will hope, in January and February. These are tough economic times, but we’ve managed in our individual locations or operating income percentage that includes gross profit as well as operating income, is what we really manage at the company level.
Jamie Clement - Sidoti
Right.
Joe Davis
And we have targets there. Very set targets. But we are really seeing mixed demands from customers. But in the printing business, it is easy, and I look at a lot of companies. We look at a lot of companies every day in the acquisition business. Anybody can have sales. I could have 10%, 15% more revenue. Did we make any money doing it? For growth and profitability, not just growth.
Jamie Clement - Sidoti
Joe, yes, that is helpful. And I don’t know if you can kind of comment over the last six to nine months, are you seeing, I mean, it sounds like some of the auto guys are certainly coming back to you. Are you seeing some of the high-end work start to come back at all? Because and again, I’m sort of getting to the revenue line item. The profitability was there, so, should the takeaway be that you’re actually seeing kind of a mixed improvement out in the marketplace?
Joe Davis
I think what I would characterize the marketplace as being, you stabilize. Certainly, some areas of our business are growing very well. We saw an increase in digital printing of 27%. So, all there is or somewhat flat. But we are seeing, I think, a sense in our companies of increase marketing efforts by our customers. You know, a year ago, why would a customer launch a big campaign to sell some high-end product, consumer product, when the market, you know, the economy is going South. Now, the economy is improving. We’re seeing a lot of customers, who are starting to market their products more aggressively. A lot of new products being introduced into the marketplace and when that happens, that benefits our business. So, I believe that we’re seeing a continual picked up in our business going forward.
We’re going to be pretty cautious and say, up to 5% quarter-over-quarter but we have short lead times, we had somebody come in today and give us big order, we will take it 5%. It is hard to predict those things.
Jamie Clement - Sidoti
Absolutely. And Jon, I apologize if I missed you. Did you guys give a CapEx budget, a rough CapEx budget for the year?
Jon Biro
We haven’t at this point, no.
Jamie Clement - Sidoti
Okay. A couple of years ago, you had a big spend on digital equipment or should we expect more of a normal kind of year? Are there specific growth CapEx plans?
Joe Davis
This year was a net CapEx is $21 million. And I think we’re still finalizing our CapEx budget for the next 12 months. But I would say something in the $20 million; $25 million is probably an appropriate range.
Jamie Clement - Sidoti
Okay. That’s fine. I thought, believe it was it two years ago I think you spent 70, right?
Joe Davis
Yeah.
Jamie Clement - Sidoti
No, I just, just because there have been some swings. So, I was trying to get a sense there. Joe, I mean, it sounds like the priority is to reinvest in the business, look at acquisitions, that kind of thing. With your credit facility, do you have the ability to buyback stock if you don’t see a magnitude of, if you don’t see acquisition you like and your stock is trading in the four times EBITDA range?
Joe Davis
We have some ability today to repurchase stock. We don’t and doing that. We will be reviewing and are reviewing our credit facility. And if we should seek an amendment to our credit facility, our new crediting facility, we would probably get an increased allowance for buying back our own stocks.
Jamie Clement - Sidoti
Okay. Alright. Thank you very much for your time.
Operator
Our next question will come from the line of [Jared King from TriplePoint Capital]
Jared King - TriplePoint Capital
Hi, guys. Can you comment on the competitive environment? And specifically now the economy is rebounded a bit, do you see some of the pressure coming off a lot of your smaller competitors?
Joe Davis
Well, the printing business is always competitive. I’ve been in the business 25 years; actually, April of this year was our 25th year in business. It is always a competitive industry. We have to do something better than our competition. We have to have better service, better technology, better people, better equipment. We have to be better. And I think over a period of time, we’ve proven that we have a pretty good handle on that. So, I think that our business will always be competitive. But our customers are looking to do something better. We are not selling a commodity. We are not selling a bushel of corn at a price or a pound of paper. We’re selling a finished product to help our customers’ increase, improve their marketing efforts primarily. And when we do that it is not nearly as it is always somewhat competitive. As long as we have got a better mouth said, and we deliver quality products on time the market is what the market is. But we have a lot of very, very loyal customers who we providing better technology to.
Jared King - TriplePoint Capital
Well, several quarters ago …
Joe Davis
Hold it. There are a number of smaller companies who I will say are in financial difficulty today. Our competitors and it’s been my experience over a long period of time, seeing several severe recessions, that when a company is in a financial crisis in a recession, it is very, very difficult in our business for them to get out of that. So, I would predict that over the next 12, 18, 24 months that a lot of our competitors will not be around. They don’t have the capital to invest in the technology. They don’t have the capital to invest in new equipment, technology and people to improve their service over to their customers. That’s what we have. That’s our real advantage.
Jared King - TriplePoint Capital
I guess along those lines, do you have any idea to what extent you’re planning on reducing your debt, whether you want to run it as a net cash position going forward or if there’s some specific level that you’re happy with.
Jon Biro
Well, we’re fairly comfortable with our balance sheet at this point. Depending on the investment opportunities we care to take our debt levels up from here. EBITDA to interest is basically 10 times. So, we feel comfortable. We’ve got the flexibility to make investments as they become available going forward.
Jared King - TriplePoint Capital
Alright. Thank you.
Operator
There are no further questions at this time. I would now like to turn the call back over to management for closing comments.
Joe Davis
Thank you. I’m very excited about the future of Consolidated Graphics. We have great customers and best in class commercial print capabilities, outstanding employees and financial strength. We certainly appreciate your continued support of all our customers, hard work, dedication, financial and other sacrifices our employees have made particularly during this recession. We also want to thank our shareholders and look forward to reporting to you our June quarter result, which we’ll report in early August. Thank you for your interest today.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.
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