Executives
Alexandra Tramont – Investor Relations, FD
Joe Davis – Chairman and Chief Executive Officer
Jon Biro, Executive Vice President and Chief Financial Officer
Analysts
Charlie Stauzer - CJS Securities
Jamie Clement- Fidelity
Consolidated Graphics, Inc. (CGX) F2Q11 (Qtr End 09/30/10) Earnings Call November 3, 2010 11:00 AM ET
Operator
Good day ladies and gentlemen, and welcome to the second quarter 2011 Consolidated Graphics earnings conference call. My name is Tom, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operators Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to Alexandra Tramont of FD. Please 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 second quarter ended September 30, 2010.
You may receive a copy of today's press release by calling FD at 212-850-5600, or by visiting Consolidated Graphics’ website. The conference is being broadcast live on the internet at www.cgx.com, and a subsequent archive will be 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 the 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 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 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. This quarter we continued our strategy of enhancing our product and service offerings including further investments in our best-in-class technology capabilities. At the same time, we continue to effectively manage our cost. Our results show that this strategy is working.
Sales increased in 264.1 million this quarter, a 3.4% increase. Adjusted operating income increased 59% to 17 million this year. And adjusted diluted earnings per share increase 93%, $0.77 per share.
As stated on prior calls, we are focused on providing customized solutions that allow our customers to improve their return on their print investments, and this focus is producing results.
Digital print sales increased 21% compared to last year and were 14% of our total sales. Sales to national customers served by multiple locations, increased 6% this quarter compared to last year. Investments we are making in people, technology, and equipment are paying off.
Technology is changing the printing business. Demand for personalized printed products in increasing. We have been investing in technology over 10 years. In the last three years, we’ve invested over $100 million in digital, presses, and technology solutions. Currently, we have over 200,000 products that can be ordered by over 250,000 active users utilizing over 420 store front sites.
Store Front are powerful, proprietary application that enables our customers to streamline the way they buy printing. Store Front allow customers to utilize variable data to personalize prints, results at a lower investment and inventory, and enhances the consistency of printed logs, product images, and color quality throughout our customer’s organizations.
Other examples of our technology and products include our cross-media offerings that enable customers to integrate email blasts and personalized URLs into their marketing programs as well as helping our customers utilize Quick Response or QR.
Utilizing our digital press fleets spread across the U.S., Prague and Japan, we print millions of customized printed pieces each year. We plan to continue investing in new technology to enhance our competitive advantages.
As the world leader in sheik and web digital printing, we are enhancing our position by purchasing cutting-edge high-speed digital web presses.
We have installed two high-speed digital web presses in Denver and are in the process of installing another in Maryland. We are one of only a handful of companies in the United States that have high-speed digital web press capabilities. And more importantly, and very importantly, we have the frontend and backend technology to support these presses.
In addition to our digital presses, we have many offset presses; some with sophisticated inline personalization and finishing capabilities. We also have some extensive fulfillment and mailing capabilities. We are one of the few companies that have the breadth of capabilities needed to meet most all of the printing demands of our customers.
Any discussion about our business would be incomplete if I didn’t mention our Leadership Development Program. It is one of our most important strategic advantages.
Today, 433 or 22% of our front-office personnel, are in or are graduates of the Leadership Development Program. One third of our company presidents are graduates of this program. This technology-savvy group of employees is one of the best investments we have made and will continue to make at Consolidated Graphics.
We will also continue to grow through acquisitions. As I mentioned last quarter, we acquired certain assets of the Hickory Printing Group in late May of this year. The added capabilities of Hickory Printing Solutions, creates opportunities for us to increase sales to new and existing customers. We continue to see attractive acquisitions of opportunities and we expect further growth through acquisitions going forward.
In summary, we are confident in our ability to respond to the ever-changing needs of our customers and grow the possibilities of Consolidated Graphics.
Earlier this week, the board of directors approved a stock repurchase program of up to $50 million in common shares of the company. The board approved this repurchase program because we believe Consolidated Graphics has a very bright future and is a good long-term investment.
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 everyone. As a reminder, earlier 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 September 2010 quarter were 260.1 million, a 3.4% increase from the 251.6 million in sales for the September quarter last year. The $8 ½ million sales increase was due to 7.4 million in sales from our recent asset acquisition and a 4.2 million increase in election-related sales, partially offset by a 1.2% decline in same-store sales.
Gross profit margin during the September quarter was 23.9%, a 1.9% increase from the 22% of gross profit margin in the same quarter last year. The higher gross profit margin resulted primarily from improved operating efficiencies. Lower sales commissions due to a change in sales mix, caused selling expenses to decline to 22.3 million or 8.6% of sales this year compared to 23.6 million or 9.4% of sales in the prior year.
General and administrative expenses increased from 22.4 million or 8.9% of sales in last year’s September quarter to 23.7 million or 9.1% of sales this year. The increase resulted from continued investments in our technology group, namely higher technology staffing levels and software license fees.
As a result of high gross profit and lower selling expenses partially offset by higher G&A expenses, adjusted operating income increased 59% to $17 million in the most recent quarter compared to 10.6 million in last year’s September quarter.
The improvement in gross profit margins and lower sales expenses percent of revenues, again, partially offset by the effect of higher G&A expense, drove an increase in adjusted operating margin to 6.4% this year from 4.2% at last year.
The adjusted net income for the quarter was 9 million or $0.77 per share compared to 4.6 million or $0.40 per share last year.
On a GAAP basis, operating income was 15.4 million in the September quarter compared to operating income of 6.6 million last year. Net income for the quarter was 8.1 million or $0.69 per share compared to 2.1 million or $0.18 per share last year.
The GAAP results this year included 700,000 of charges related to certain equipment impairments and lease termination expenses.
During the September quarter, cash outflow was 2.4 million, the cash outflow was due to the growth of working capital, unlike last year when working capital contracted and in particular the payment of $14 million during the to settle previously disclosed litigations.
Additionally, net capital expenditures were 3.6 million in the September quarter with a six-month ended September 30, 2010 net capital expenditures were 13.4 million and we currently estimated that the full-year 2011 capital expenditures will be around 45 million.
At September 30, our debt was 171.7 million, a decline of 9.8 million from March 31, 2010.
Looking forward, based on current conditions, we expect December quarter revenue to be in the range of 290 to 305 million. This forecasted revenue growth is driven by expected year-over-year same-store sales growth of up to 5% as well as the benefit of higher election business, which should total approximately 12 million for the quarter and the recent impact of our recent acquisition. This should enable us to again achieve adjusted net income improvement in the December 2010 quarter compared to the prior year.
During this September quarter we entered into a new credit agreement which amended and restated our primarily bank credit facility. We extended the term of the credit agreement to October, 2014, reducing the interest rate to be paid on borrowings and increased our financial flexibility, including the ability to complete stock buybacks.
Our total debt is now 1.3 times. Trailing 12- months adjusted EBITDA is 37% of total capitalization. And as of September 30, we had 199 million in available credit under existing credit facilities.
As Joe mentioned, earlier this week, the Board of Directors approved a stock repurchase program of up to 50 million in common shares, $50 million in common shares of the company. We approve this repurchase program because we believe that Consolidated Graphic has a bright future, and because we believe our stock is an attractive long-term investment.
Even with the $50 million stock buyback, we believe our credit statistics will remain conservative and that we will have adequate liquidity to make investments, and capital expenditures, and acquisitions to fund our growth.
I will now turn the call back over to Mr. Davis.
Joe Davis
Thank you, Jon. Our capabilities combined with the continuing, challenging environment of our industry provides us distinct competitive advantages that we will use to grow the sales of profitability for Consolidated Graphics going forward.
Operator, we are now available for any questions.
Question-and-Answer Session
Operator
(Operator Instructions) And your first question comes from the line of Charlie Stauzer, with CJS Securities. Please proceed.
Charlie Stauzer - CJS Securities
Hi, good morning, Joe and Jon, how are you?
Jon Biro
Good.
Charlie Stauzer - CJS Securities
Quick questions of you; let’s talk with your guidance for Q3 with the – talking about sales of growth of up to 5% on the same-store, that’s without the election business, correct? Or is that with the election business?
Jon Biro
That’s without the election business, right.
Charlie Stauzer - CJS Securities
That’s obviously to be a little bit more obviously with the election. When you look forward to kind of the rest of the year, what do you see in terms of some visibility? Is it visibility improving from your customers in terms of them being more open with spending on marketing programs? What are you kind of seeing out there?
Joe Davis
Well, certainly in the December quarter we have some recurring business that we have a little bit better visibility on. But the nature of our business is most of our customers we don’t have much visibility. So December quarter, I’d say we probably had more visibility there than in most quarters, but still, limited visibility.
Charlie Stauzer - CJS Securities
And then some of the inputs that we’re looking at for next quarter in terms of expenses, are we seeing, anything out of whack that you might see in terms of the selling expense or G&A, in terms of percentage of revenues that we haven’t seen in the past? Anything that we should be looking out for?
Jon Biro
No, I think if you use history as a guide you’ll come out pretty good shape.
Charlie Stauzer - CJS Securities
Got it. And what are we looking at in terms of interest expense with the change of your lines?
Jon Biro
Yeah, interest expense should be down a little bit sequentially, perhaps a couple hundred thousand dollars lower in the December quarter.
Charlie Stauzer - CJS Securities
Okay, great. And then G&A?
Jon Biro
G&A should be fairly consistent.
Charlie Stauzer - CJS Securities
Got it, and great. And just to touch upon the $14 million cash settlement that was paid out, can you maybe expand a little bit more on what happen there and also are there any other potential cash payments that are going to be due coming forward?
Jon Biro
Yeah, the litigation, we settled it for less than we had accrued and there was an adjustment that flowed through the September quarter. We sequentially paid that amount, $14 million – excuse me, there was an adjustment in the June quarter that came through, and we sequentially paid that amount in the September quarter.
Charlie Stauzer - CJS Securities
Got it, so we should expect no further payments?
Jon Biro
No, no that issue is now behind us.
Charlie Stauzer - CJS Securities
Okay, great, thank you very much.
Operator
(Operator Instructions) Since there are no further questions, I will now turn the call back over to management for any closing remarks.
Joe Davis
Okay, thank you. Well, I guess my closing remark is to say we certainly appreciate the continued support of our customers, the hard work and dedication of our employees. We also would like to thank our shareholders, and we look forward to reporting you our December quarter results in early February. Thank you for your interest today.
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