Executives
Joe Davis – Chairman and Chief Executive Officer
Jon Biro, Executive Vice President and Chief Financial Officer
Alex Tramont – Investor Relations, FD
Analysts
Charlie Stauzer - CJS Securities
Jamie Clement- Fidelity
Consolidated Graphics Inc., (CGX) F1Q11 (Qtr End 06/30/2010) Earnings Call August 4, 2010 11:05 AM ET
Operator
Good day ladies and gentlemen and welcome to the First Quarter 2011 Consolidated Graphics Earnings Conference Call. My name is Marissa and I’ll be the lead operator for your call 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 the host for today’s call, Mrs. Alex Tramont of FD; you may proceed.
Alexandra Tramont
Thank you and good morning. Welcome to the Consolidated Graphics Conference Call. During the call, management will discuss the company's results for the first quarter ended June 30th, 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-K, 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 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 filing today with the Securities and Exchange Commission.
Now with these formalities out of the way, I would like to turn the call over Mr. Joe Davis, Chairman and Chief Executive Officer. Mr. Davis, 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. Our results for the June 2010 quarter showed improvements on both the top and bottom lines over the prior year. We grew same-store sales of quarter, we kept our costs in line and improved the profitability of the company.
We achieved these results by effectively managing our costs and the developing best-in-class solutions for our customers’ most critical needs. Sales increased 4.8% to 236.7 million during the June quarter compared to last year. This increase was due to 2.3% growth in same-store sales which was the first year-over-year increase in same-store sales since the March 2007 quarter.
Other factors causing the sales growth included a higher electro related sales of revenue from an acquisition. Adjusted operating income was 9.7 million or 4.1% of sales this year compared to 2.4 million or 1% of sales last year.
Adjusted net income was 4.9 million or $0.43 per share compared to 595,000 or a five fifth per share last year. While demand for our products and services appears to be improving somewhat, the environment in our markets remain challenging. Fortunately, our customized solutions have contributed substantially to our overall performance.
The demand for these customer driven solutions can be seen in our results. Strategic sales defined as technology related sales and sales to national customers served by multiple locations increased 6% this quarter compared to last year.
Sales of digital print, which is used to personalize printing materials and plays a key role in our offerings, increased 26% this quarter versus the prior year quarter. What we do for our healthcare clients is a good example of solutions we provide to our customers.
Health insurance companies which typically have hundreds or thousands members as strong as they are to increase its membership need to communicate frequently with client participants. Marketing materials must also be sent to perfected members. New member kits, reminders to renew the coming year directly to healthcare providers and marketing materials are examples of the kinds of the personalized print healthcare customers require.
In short, an insurance company spends a lot of time and money each year communicating with its members, and with the coming changes in the health insurance regulations, which are sure to come, we anticipate an increase in these types of communications.
We have customized solutions to serve our health insurance clients that have improved the timeliness and effectiveness of their communications, all while reducing costs. For example, we developed an online ordering fulfillment and inventory measured system that reduces the time it takes for agents to receive individualized, personalized sales materials, reduce the time from weeks to the next day. So a salesperson can order one afternoon and it will be on their desk the next day, no matter where they are in the country.
We are producing healthcare providers’ directories for customers that are customized based on where the member lives. Let’s say [inaudible] and increases the relevance of the materials. For these customers we have also automated the process that [inaudible]. All these solutions reduce screening and fulfillment costs, probably because of the other technology allows us to produce consistent great quality at multiple locations, we were able to print the materials at the location closest to the final distribution point to further reduce freight costs and increase time to [inaudible].
Other industries have similar problems that require innovative solutions. We developed a unique solution for customizing new auto sales brochures that are used by auto dealers. We developed a close media campaign for a sports team for their season ticket sales that combines personalized mailing with personalized websites, emails and text messages. We are experts in developing solutions that reduce costs and improve the quality and timeliness of communication.
We have impressive capabilities. We are a world leader in digital print or (inaudible) software products such as (inaudible) and seventy facilities in twenty seven states, we are also involved. Most importantly these capabilities work well together if we do these comprehensive solutions for our customers and address their ever-changing needs then we are continuing to invest in our capabilities.
We are also investing in people, next week three hundred to eighteen associates in our leadership development program will be in Houston for our annual shareholders’ meeting followed by a three day training and development seminar. This annual meeting is on Thursday and the associate meeting is on Friday, Saturday and Sunday. The leadership development program is a good investment for us producing technology savvy leaders throughout all parts of our company. They are almost one third of our company present to graduates in the seminar.
In January we hired seventy eight new associates and in June we hired ninety nine new associates. This is the greatest development we have ever laid into this program and it is just money, wealth that is ultimately wealth investors. Lastly we continue to jet (inaudible). Most recently we formed a new company called Hickory Printing Solutions that obviously required certain assets of the Hickory Printing Group Inc, in North Carolina.
To settle it was in financial distress due to the company in the death of the major stock holder. In the process of completing this transaction our subsidiary was able to preserve one hundred and four new jobs and continued to serve this other discussion. We have many acquisition opportunities in the type load today and many of these possible transactions involve distressed businesses. We are also beginning to see some acquisition candidates that are not in distress. If the company can manage to improve their possible to slightly in many cases they are anxious to achieve some liquidity that eliminate the risk of going through another year or two like the last two we just experienced.
In summary I am pleased with the progress we’ve made this quarter and I am very optimistic about the balance of the year in our long term future. I will now turn the call over to Jon Biro to provide you with additional financial information.
Jon Biro
Thank you good morning. As a reminder earlier this morning we saw with the security hand changed commission, the basis for our use in that reconciliation as certain non-GAAP financial measures that will be referenced on this call, please refer to this Form 8-K filing for additional information.
Sales totaled $236.7 million into the June quarter of 4.8% increase in $225.9 million during the same quarter of last year. The sales increase resulted from a key point of 3% increase in terms for sales at $3.7 million increase in election related sales and 2.1 million in sales from the purchase of certain assets of the Hickory Printing Group in North Carolina. A close profit margin increased to 23% in the June quarter compared to 19.8% last year. The improved gross profit margin resulted from the increase in sales which allowed us to leverage many of our costs that are relatively fixed. Gross margins also improved as a result of our continued cost control efforts.
Selling expenses which included $1.3 million for the emerge conference we held in April increased a half million dollars but declined slightly as a percentage of sales from 10.1% last year to 9.8% this year. The emerge conference which we discussed in our lat call is an annual educational conference focused on bringing our customers together with experts in marketing, creative design, printing and procurement. Nearly eight hundred customers and associates attended this year’s conference.
General administrative expenses totaled $22.4 million or 9 ½ % of sales for the June quarter compared to $21.2 million or 9.4% of sales for the prior year an increase of $1.2 million. The increase in GNA expenses resulted from continued investments in our technology group and hired legal fees related to settlement of the previously reported law suit that I will discuss in a moment.
Adjusted operating income improved to 9.7 million in the June 2010 quarter from $2.4 million in last year’s quarter, primarily due to the improvement in gross profit; the improvement in gross profit margin throughout the increase in the adjusted operating margin to 4.1% this year from 1% last year. Adjusted operating income for the June 2010 quarter is cash related to exclude a $5.2 million positive adjustment resulting from settlement of litigation for amount lower than previously recognized. And also it includes a 1 million charge related to the cost withdrawing from a multi-employer pension plan. Adjusted net income for the quarter was $4.9 million or $0.43 per share compared to 595,000 or $0.05 per share of last year.
On a GAAP basis, operating income which includes the positive litigation adjustment in the charge with a multi-employer pension plan which will raise $12.9 million into the June quarter compared to an operating income of $870,000 last year. Net income for the quarter was $6.8 million or $0.59 per share compared to 314,000 Net loss or $0.03 per share last year. During the quarter we generated the free cash flow of $9.7 million and this compares to $29.8 million in last year’s June quarter. The decline of free cash flow for this quarter resulted; primarily it contains some working capital and in particular a greater decline in accounts receivable in the prior year due to a greater decline on sales in the June of 2009 quarter compared to this year’s June quarter.
Net capital expenditures were $9.8 million this quarter compared to $4.0 million of last year and currently we estimate that 2011 capital expenditures will be between $45 and $50 million. At June 30th I get was a $174 million; a declined at $7.4 million from March 31. With regard to debt, we’re currently in discussions with our bank group to extend our US and Canadian credit bill facilities currently scheduled to expire in October 2011. Thus far these discussions have gone well and we anticipate that we will extend these credit facilities in the coming weeks.
As you all mentioned the economy is improving but it remains difficult to project our future revenues and earnings never the less based on current market conditions, we expect September quarter’s revenue to be in the range of $260 million to $275 million. This forecasted revenue growth is driven by an assumed year-over-year same store sales growth of up to 5% as well as the benefit for higher election related business and the impact of our recent acquisition. This should enable us to again achieve adjacent net income improvement in the September 2010 quarter compared to the prior year. I will now turn the call back over to Mr. Davis.
Joe Davis
Thank you Jon Biro. While we remain somewhat cautious in our outlook, we look forward to continue momentum we saw in the June quarter and we progress throughout the year. Operator we’re now available for any questions.
Questions and Answers
Operator
Ladies and gentlemen if you wish to ask a question (operator instructions).And you have your first question from the line of Charlie Stauzer from CJS Securities. Please proceed.
Charlie Stauzer- CJS Securities
Hi good morning Joe and Jon, how are you?
Joe Davis
Morning.
Charlie Stauzer - CJS Securities
Hey two quick questions; one is when you talk about the (inaudible) services it’s hard to predict given the uncertainty of the economy but you have a pretty wide range there for both the time and kind of bottom line expectations. What would cause it to potentially to be kind of flattish with last year or I think you’re saying that see some net income improvement as the way you kind of word of the profitability. What would cause that to be kind of towards the lower end range of the, the more just kind of declines and how the none election work or would you happen to see something else happen there?
Jon Biro
Well the low end of the range is still an improvement versus last year. We do have the benefit of the recent acquisition that we announced and as well as the election business. So to be on the lower end of that range, we would have to see no growth in same store sales, we certainly believe we we’re experiencing some momentum here but if the economy were to take a turn for the worst then we saw our customer demand decline then that’s what would cause us to be on the lower end of that range.
Charlie Strauzer- CJS Securities
Got it and then Jon talk about the progression from kind of May, April, May, June in terms of the sales trends and talk about kind of where, what was the kind the key drivers to do some of the growth.
Jon Biro
Well Charlie we’ve made a lot of investment in technology, technology in programmer developer software. We made a lot of investment in digital capacity and as you saw our digital sales this quarter were up dramatically at 26% versus the prior year. So a lot of growth has come from our investments in technology and people but if you look at the month, we don’t like to show much but I’ll say that April to June the firm is stronger than May but well I don’t know what trend that is but certainly we don’t want to get too foolish in this economy by predicting big growth.
Charlie Stauzer- CJS Securities
As, I was just trying to get a sense of trajectory that’s all and then (inaudible) and Jon Biro can you talk a little bit about the acquisitions and obviously it’s been some you’ve been pretty fortunate to kind of get your hands on some good assets that what seems to be kind of attractive pricing. Talk about other potential opportunities that you’ve seen, are you seeing more or less of those types of opportunities now than maybe say so six months ago.
Joe Davis
Actually we’re seeing…continuing to see about the same number of opportunities. I think one of the thing that’s happening is a lot of individually owned companies are renewing their bank loans and I think the bankers were in a mode, encouraged by the government to pretend and extend I think therefore to gradually now that mode and asking the owners partially to partially guarantee to that, give me your house as collateral and put some likely the company find it somewhere if you want me to renew the note and those kind of work out situations we get a lot more calls from them. So we’re continuing to get those kind of calls.
Charlie Stauzer- CJS Securities
Got it, excellent. Thank you very much Joe.
Operator
As a reminder ladies and gentlemen (operator instructions).
Joe Davis
What I’m saying Charles as I mentioned is that the (inaudible) to be a low price. I don’t think anything is cheap until you fix it and add some talent to it and make some money with it. So some of these things may appear to be cheap on the surface but they got into some of these situations making some different decisions. So you have to improve this company. So anytime you buy a distress company there’s a certain amount of risk with it. Fortunately for us we’ve had a great track record I might say that myself for once on the back but we had a really good track record of fixing distressed companies and I think that’s one of the things that well the owners are attracted to our company for.
First of all we have the ability to and we know how to complete the transaction we don’t have to go out and get some answers, we got that in place and secondly we bring some technology to the company they don’t have, we bring some buying power and we have a history of being able to fix some of these companies. So just this week I had a prospective acquisition want to talk to, a couple of prior owners; I’m delighted from the talk to a couple of prior owners I could have given them a lots of prior owners I could talk to. When I talked a couple, we came back with very positive report. And one of the things that in our business we probably bought I don’t know 80 companies just over the last 25 years and we have a good relationship with our prior owners. I just talked to one yesterday from Seattle, he had to get up from Rochester, we were together in a wedding this past weekend. They said they gave me a toast he told me for buying their company so they could be retired and enjoying themselves. So we have a good relationship with prior owners and that serves us well in the acquisition business. Next question.
Operator
And your next question comes from the line of Jamie Clement from Fidelity. Please proceed
Jamie Clement- Fidelity
Joe, Jon good morning.
Jon Biro
Morning.
Jamie Clement- Fidelity
Let me just I sort of forget what your, your standard of practice is. Are you excluding election related revenue expectations from your same store sales expectation like is that separate or is that also in the 2.5%of…?
Jon Biro
That is separate from the incremental election than…
Jamie Clement- Fidelity
Business right
Joe Davis
We could have in terms of sales we understand it but profiatbility quarter to quarter a year.
Jamie Clement- Fidelity
Sure absolutely.
Joe Davis
We’ve elected historically to exclude, really we show it separately at that rate.
Jamie Clement- Fidelity
Absolutely, I just wanted to, I couldn’t quiet tell from the language and thanks for that clarification. So what do you see in from the election related work now, I mean obviously the June quarter was probably a little too early but we’re in August now and it seems like, it seems like the election season is going to be darn competitive.
Jon Biro
Well we would certainly hope it is and we think the most effective way to win elections is with political persuasion printing and we have a number of good consulting firms that work with candidates. We were some directing with candidates to get that message across. It is very difficult to tell how much election related business you’re going to have. Sort of we have some ballot business it’s a little more steady but some time that’s variable as well. Things can change in the last minute whatever. We have a base of a ballot business; the political persuasion business is very dramatic. Right now think we clinch this election season in July with put it our, how much total by 20 what?
Joe Davis
I don’t want to talk about it now.
Jon Biro
No but you we had a good strong quarter for election business and we see it improving as we press through the year.
Jamie Clement- Fidelity
Sure, sure. Jon Biro let me ask you a question.
Jon Biro
I guess importantly Jamie; we are building a better track record with election related business as we continue doing it.
Jamie Clement- Fidelity
And that’s what seems to have happened over the last four to six years right I mean it seems like, I mean you can’t really, I don’t think you can necessarily compare it off this year’s elections to a presidential year but it seems like if you consider the four years over four years in those two year increments, you know what I am saying, it seems like the trends are all heading up in the right direction.
Jon Biro
You know in most, the heaviest piece of election related printing would be the month of October.
Jamie Clement- Fidelity
Okay
Jon Biro
Not in our September quarter.
Jamie Clement- Fidelity
Okay. Jon Biro you guys historically have not done a tonne of these asset deal these distress kind of deals and Joe you just, you mentioned in, in response to one of Charlie’s questions in the fact you do have to go in you have fix things and cheap is kind of a relative concept. Jon Biro are there unusually high levels of intense glamorization, is there any purchase accounting stuff that’s goes with these deals which is out of the norm from what you guys normally do with the kind of deals you do?
Jon Biro
Jamie let me address going back to the former question. We have quiet a bit of expertise prior to going public in particular and success just going public of dealing with distress companies. I got into business with Houston in 1985. The first company I bought the economy was going well, I bought a good company. We were public in ‘94 we had six companies. Every company we bought after once you look at the graph, the first one was a distress company
.
Jamie Clement- Fidelity
Okay.
Jon Biro
So we had a lot of experience working with distress companies, the distress financials and since we’ve been public, we’ve bought several including Tuck Ins as well as Angelo acquisitions.
Jamie Clement- Fidelity
Right.
Jon Biro
I mean our company could solely cultivate in Chicago which is a great company, was a busted company when we got it
Jamie Clement- Fidelity
Okay
Joe Davis
Absolutely busted by example. Tulsa…our consolidated printing solutions company in Tulsa, Oklahoma. I said at this table I am sitting at right now and the guy talked to me about how great his company is and I said well you know our, I go to lunch with him and I say I’ll come back over to my office and I said I’ll come up looking my (inaudible) I call, I come up here in a couple of weeks take a look, he say well, this is like Tuesday, he said Joe it’s a little more serious than that, guy said, the bank he said they will not fund our payroll on Friday.
Jamie Clement- Fidelity
Right.
Joe Davis
I said oh, so we changed that and we ended up buying the assets of the company, the employee didn’t have the payroll unfortunately but it turned out to be a good acquisition for us and if he can make this things work you create a lot of value and that’s what we are attempting to do now. We (inaudible) revenues are not horrendous. Sometimes the there’s not as much bargain as you might think but if we can bring some best practices to it and some management and some technology often time we can come up with a very good company.
Jamie Clement- Fidelity
Okay, okay very good and Jon just the…
Joe Davis
And in accounting for it we do the same.
Jamie Clement- Fidelity
Okay.
Jon Biro
All of our acquisitions have been purchased accounting where you allocate the, once you pay to the assets you get and well sometimes we end with little bit will I want to talk to you about.
Jamie Clement- Fidelity
Right, now the quicker questions really like it seems like the accounting standards are like, I mean it almost seems like they’re kind of recreating actually having to expense good will by like plumping up the intangible bases of some of these companies and I was just curious whether if in fact like a lot of what you’re buying is in fact customer less and those kind of thing, I didn’t know if that’s just distorted any of the accounting or some of these deals.
Jon Biro
Not really. It’s pretty stated, it’s pretty straight forward.
Jamie Clement- Fidelity
Okay, okay.
Jon Biro
The accounting is not driving our decisions in some of…
Jamie Clement- Fidelity
Sure. I was just, from a quarter to quarter model building stand point that’s what I was more estimate. Alright so just moving on and it’s pot…
Jon Biro
For an income statement stand point, we pick up the revenues and expenses from the date of acquisition forward.
Jamie Clement- Fidelity
Right.
Jon Biro
And, and in this quarter we had the month of, one month of revenue from our…the assets we bought at Hickory.
Jamie Clement- Fidelity
Okay.
Jon Biro
We bought it at about the end of May midnight actually on Friday before memorial night.
Jamie Clement- Fidelity
I think that sounds, I think that sounds right and Jon and Joe on or as you’re going through the credit facility process, listen I don’t think anybody knows the pace of recovery or how that’s going to play out in your industry but I think probably do a fairly good idea of what the bottom has looked like. You paid down a lot of debt over the last 18 months. Are there priorities in this negotiation that you have such as the ability to be in the market and buy back stock at some point if, if you feel that that’s the right thing to do?
Jon Biro
I think it’s a little early to be very specific about that but our debt is a lot lower, our cash flow is good, we survived what been a worst period and in our history the public company we still had a hundred and about 12 (inaudible) the last 12 months
Joe Davis
About the 125 million
Jon Biro
125…
Jamie Clement- Fidelity
I mean you’re basically below two times now right on a net debt basis?
Joe Davis
We’re below one and half times.
Jamie Clement- Fidelity
Yeah I mean, so it’s, I mean that’s, for your industry that’s…and you guys yourselves have been a lot higher than that in the past. So it’s I was, was just curios because it’s I don’t know if there are a lot of big deals out there for you in the industry but just based on the last five years other than a couple of deals that you guys have done, there haven’t really been a lot of big ones and I just, I mean it doesn’t seem like there that many companies out there. So if you factor $5.00 or $6.00 a share or free cash flow or something like that annually on average the next two years, that’s a lot of money you’re bringing in. I’m not, I don’t even know if you could spend fast enough on acquisitions.
Joe Davis
Well certainly in our new offerings we would expect to get better pricing. We would expect to get some better terms with respect to what we can do about these with more flexibility.
Jamie Clement- Fidelity
Okay
Jon Biro
We are continually looking at where we should spend our money.
Jamie Clement- Fidelity
Sure
Jon Biro
In way of, it includes cut backs, treasury stock, acquisitions on and on. So we’re always looking at what we should do, the cost of constant study here
Jamie Clement- Fidelity
Okay
Jon Biro
So we, we think that the new credit agreement if anything certainly extended we’ll be looking for another three years or so. We’re looking as amendment actually, with a three year amendment, better pricing, more flexible terms and we will be able to continually asses what we do with that extra.
Jamie Clement-Fidelity
Okay, alright. That’s all I needed to hear thank you all very much for your time.
Operator
Once again ladies and gentlemen (operator instructions).And I surely don’t have no further question at this time so I would like to turn the call over to management for closing remarks.
Joe Davis
Thank you, well I’m very excited about the future of Consolidated Graphics. I believe we have the best in class commercial print capabilities, we’ve got an outstanding group of employees and very importantly we have financial strength. We certainly appreciate the continued support of all of our customers and the hard work, dedication and financial and other sacrifices of our employees. We also thank our share holders and look forward to reporting to you our September results. Thank you for your interest today.
Operator
Ladies and gentlemen that concludes the day’s conference. Thank you for your participation.
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