Derek Hatch – Corporate Controller
Stephen Young – CFO
Bill Bennett – President Organizational Solutions Business Unit
Sarah Merz – President and General Manager Consumer Business Unit
Bob Whitman – CEO
John Lewis – Osmium Partners
Tom Coach – Turnaround Capital
Franklin Covey Co. (FC) 1Q08 Earnings Call Transcript January 11, 2008 11:00 AM ET
Good day ladies and gentlemen and welcome to the first quarter 2008 Franklin Covey Company earnings conference call. My name is Stacey and I will be your moderator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance, please key star zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today, Mr. Derek Hatch, Corporate Controller, please proceed.
Good morning everyone. On behalf of the company I would like to welcome everybody to our first quarter fiscal 2008 webcast this morning and before we begin the festivities, I’d just like to remind everybody that this presentation will contain forward looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties, including the ability of the company to stabilize and grow revenues, hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, increases or decreases in the company’s market share, growth or contraction of overall market for products offered by the company and its competitors, changes in the training and spending policies of the company’s clients and other factors identified and discussed in our fiscal 2007 10K report and subsequent 10K and 8K report filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence. There can be no assurance that the company’s actual performance will meet our expectations. These forward looking statements that will be discussed are based on management’s expectations as of the date hereof and are subject to outcome of various factors, including those listed above, any one of which may cause future results to differ materially from our current expectations.
With that said, I’d like to turn the time over to Steve Young, our Chief Financial Officer to begin our discussion of the financial results.
Thank you Derek that was wonderful. Good morning everyone, again and thank you for joining us. I hope that you have had a chance to review our earnings release and our quarterly report. If you have not had a chance yet I would encourage you to read both of those documents, they contain significant amounts of important information that we won’t have time to cover in our webcast today.
Those of you who have had a chance to review our earnings release or financial statement, like many people, probably started at the top and see what’s going on with revenue then jump to the bottom and then look in the middle. Following that convention you would notice that our net sales declined approximately $1.9 million compared to last year and you’d wonder why that is perhaps. Then you’d look down at the bottom and you would see that net income available to common shareholders increased $1.6 million and would say well that’s good considering that revenues, sales decreased and earnings increased and then you’d look in the middle and say, sure enough operating income or income from operations also increased $1.5 million. You would see that margins improved a little bit and that our SG&A decreased by $2.1 million. So I’ll cover a few of the highlights related to this information and then Bill and Sarah and Bob will add detail as it relates to the business units and to the business.
First of all, when we look at our net sales number, please remember that of the $1.9 million decrease, $1.3 million of that is a result of our sale of the Brazil and Mexico operation and the transition of those operations into licensee arraignments for those countries. That’s $1.3 million of that difference. Then as you would see in the detail and expect, there are several operating areas of the company that have results better or significantly better than last year and some have results that are not as high as last year and Bill and Sarah will primarily walk through those differences.
You see that our gross profit percentage increased 100 basis points and realize that that’s primarily a result of mixed, even though the business units are also holding their margin as the training, consulting portion of the business improves, we would expect our margin to continue to improve a little bit. As we look at our SG&A number and see that it decreased by $2.1 million compared to the prior year, we would also mentioned the Brazil and Mexico transaction as not only one that impacts sales but also SG&A, so $1.2 million of that decrease is a result of that transition of Mexico and Brazil to licensee operations. I’m sure Bill will talk about it more, but overall that transition, even though sales decreased, our operating income improved about $0.4 million as a result of the transition of those two offices, so compared to the prior quarter, sales down, SG&A down but earnings up as a result of that transaction.
We would also be happy to report that in our first quarter, our audit and related fees were quite, about $0.5 million better than last year. We would also point out that our analysis of our revenues and our operating income as it impacts our long term incentive plan and share based compensation, that as we looked at the performance over the service period, it was necessary for us to make an adjustment to our long term incentive pay accruals and that reduced our SG&A compared to last year by approximately $800,000.
So the sum of those three things is greater than $2.1 million, reflecting we also have increases in bonus and related accruals and investments in growth that we’ve talked about for several quarters that were a little bit higher than last year. As a result of all of that, our income from operations was $1.5 million higher than last year. Our net interest expense up a little bit compared to last year as a result of our redeeming the remainder of the preferred and entering into a line of credit to do that.
Our tax expense you’ll see is a little bit over a 50% as a percentage of income before income taxes. As we go into the future, when we get to a point that our management stock loan program is paid off and we’re able to use our foreign tax credits, then that percentage, our effective rate will decrease to what some might expect is a more normal effective rate, 40, 41, 42% depending on what our difference are at that time.
So, then we would point out also that our preferred stock dividend was zero compared to $900,000 last year and that’s a difference, or a zero dividend that will continue. So, at the end of the day or at the bottom of the page, our net income available is $1.6 million higher than the prior year.
If we look at the balance sheet, we would see a balance sheet that essentially as we would expect, like to talk just a little bit about cash and just note that the increase in the receivables, the receivable balance, primarily a result of increase in the areas of our company that generate receivables, the training consulting side is a business, increases there. So volume related, slight increase in days sales outstanding but primarily volume related.
Just a second on cash and our line of credit. You will notice that our cash balance is approximately $8.8 million and our line of credit balance, approximately $14.7 million at the end of the quarter and many of you will remember our comment for a couple of quarters that about at this time or the end of January we would be essentially out of the line of credit. Let’s go back and remember that at the time we made that comment, it was not necessarily an attempt to predict our cash as it was to say, we have an opportunity to redeem the remainder of our preferred shares, in order to do that we’re going to enter into a line of credit arraignment but we want you to know that we don’t view those line of credit arraignments as long term and we’re going to be out of those in a fairly short amount of time.
So I’m pleased to report that as of today our cash balance if we were to close our books today is higher than our credit line balance today. We were into the credit facility $14.7 million at the end of the quarter and our balance as of yesterday was $3.8 million and our cash balance is higher than $3.8 million. So, if we were to give ourselves a little bit of leeway of what essentially out means I would say that if our cash balance is greater than our line of credit balance then we might be essentially out of the line and forced to be fully out of the line will simply depend upon over the next few weeks, how aggressively we want to bring cash in from our international operations, what our operations are for this next period of time and so I believe that we’re essentially out of the line and we’re pleased that today we have a $3.8 million balance, understanding that our cash needs go up and down weekly in a cycle. So we’re pleased about that.
Really nothing that I would talk about on the balance sheet other than that, pretty standard straightforward numbers that you would expect. So let me say just a little bit about our Q2 and then talk a little bit about more later, but if you remember in Q2 we have the sale of our printing facility that created more than $1 million worth of operating income and we won’t have a similar sale this quarter so our operating income will be decreased by that amount.
Additionally, we would now estimate that our second quarter operations will be less than our first quarter operations, or than our second quarter last year by an amount that could or would exceed our first quarter increase so we might be in a position or estimated to be in a position similar to what we were last year in that our first half of the year would have an operating income financial result less than last year but expect to have an improved result by the end of the year.
So, I guess the short summary would be that in our business there are some areas of the business that are significantly better than last year, our financial result higher than last year compared to the first quarter. Some areas of the business that the financial result was lower than that of the first quarter, but overall we continue to see improvement in our financial results. So with that we pleased to turn the time over to Bill Bennett, the President of our OSBU for more discussion of that business unit. Thank you.
Thank you Steve and thank you to everyone on the call for joining us this morning. First of all pleased to announce that we concluded Q1 with both top and bottom line growth and I’d make note that the successive quarter of both top and bottom line growth marks 12 of the last 14 quarters, top line growth and 15 of the last 17 quarters, bottom line growth. As you can see from the tree, OSBU Q1 performance tree we grew 2% on the top, 18% on the bottom. As already has been discussed a couple times, that 2% is somewhat misleading in that we had the Brazil and Mexico conversion in there and dropped $1.3 million in revenue because we moved to a royalty model so that offset the top line somewhat in OSBU.
I think the most relevant way for us to break this out is to take a look at what we call our core revenue channels versus the other ones and we’ll begin with the core revenue channels. As you can see in the chart they represent 83% of our total revenue and as a group, core revenue grew 16% on the top and 38% on the bottom. Taking it out one more tree branch to the right, you can see that our domestic direct offices were up 19% year-over-year on the top, 46% on the bottom. The drivers behind that were that our two major channels of delivery, on site based delivered and facilitator delivery were both up.
The onsite basis we delivered 8% more days than prior year but we also delivered them with a 12% higher revenue per day which gave us a combined [song] impact of about 23%. Facilitator business was up in all of the regions in the US, all seven of them, grew year-over-year.
An international standpoint, in our direct offices, as you can see, 9% on the top, 13% on the bottom. Net notable because Japan, who is not [knit] a year-over-year growth quarter in 17 quarters did so in Q1. That wasn’t concerning to us because we have a perennial customer who typically books with us in Q1, actually moved forward to Q4 of the prior year, so they weren’t able to compensate for that, but that appears to be a onetime impact and Japan looks to be in very good shape.
On a licensee basis, again as you can see, 24% from the top, 61% of the bottom, to date we have about, well exactly 31 licensees around the world that are representing 133 countries. We had good growth overall but would mention that we had triple digit growth in India, Malaysia, the Benelux region, Scandinavia, Spain and Greece and normally we would report Brazil and Mexico in with the licensees because that’s been their status, we’ve separated them out here because this is the year of their conversion. But of course on the bottom line, both Brazil and Mexico had as Steve already pointed out, a little over $400,000 year-over-year in bottom line improvements so that would normally be added to that licensee category.
So overall core revenue channels we feel are in great shape. The other 17% revenue is all lumped together on this slide and what you see as other revenue channels. Collectively the group was off 36% on the top, 51% on the bottom. The three of the four there are the ones that we’re focusing on at [Fiji] publics and promotional revenue because it’s the largest, so that’s Brazil and Mexico’s in conversion.
Talking first about sales performance group, this is our team that sells our sales training programs, helping clients succeed. This group has been up and down over the years. The problem being that they have a few small accounts but a disproportionate number of very large accounts and when all those large accounts have a good year, we have a fantastic year and when one of them has an off year it tends to create a significant bump as is the case in Q1 and you can see that 47% hit on the top, 69% hit on the bottom. That’s especially exacerbated by the fact that Q1 ’07 showed significant growth over Q1 ’06, so we had a hard comp we were up against and had one of the large accounts that was off in Q1 and we have plans to address this issue in the sales performance group.
Public programs, which is the team of people that deliver training programs to the general public that look at locations such as hotels and conference centers, was off 23% on the top, 76% on the bottom. That was driven by a reduced number of programs that were delivered this year, that was a decision that is typically made about six months out in advance of program delivery as well as the slightly decreased attendance. Those things are driven by the fact that we had some maturing one day programs that were out there that were in need of refreshment. We made a positive move in that we’ve introduced our new leadership offering into the public setting which is great and it’s getting great reviews, however whenever you introduce a brand new program you have a disproportionate expense increase in mailing cost to try and establish awareness and get the attendance volume up which is why we took an additional hit on the bottom, but that program is doing very well so we anticipate that may be very positive contribution as we go forward.
Finally on the promotional revenue area, this is a cluster of revenue groups that’s characterized by our books and audio business as well as our speaker business which is primarily dominated by Stephen R. Covey, speaking engagements. It’s a little bit of revenue in the big picture and even less EBITDA as the primary purpose of these functions, while obviously we want them to be profitable, their main function is to create market awareness for the company. The quarter was difficult for this group because we were comping again two big book’s performance last year [unintelligible] most important decisions which [unintelligible] book consequently creating a poor year-over-year performance there. I would mention though that despite that, Stephen R. Covey is as active as ever, in fact delivered 85 times on the road last year which was an increase over prior year.
So overall, that’s the story behind the other revenue channels. We’re not worried about Brazil and Mexico, which still does have an impact on that 17% revenue grouping and the others we have plans in place to address.
Real quickly going to the next page you can just see that our running 12 month momentum index continues to show an upward trend as well as growth over prior year which was growth over the year prior to that and this was effectively a book-to-bill ratio, this is calculated by the total value of our deals booked as opposed to the revenue that we’re able to recognize.
Finally or next stage I should say, as I think you’re aware from prior calls, one of our key strategies for our multi-year growth plan is increasing the size of our sales force worldwide. Since the beginning of fiscal ’05, we’ve been adding sales people both domestically and internationally as well as sales agents in some countries and we’ve consistently tracked the number of those as well as the ramp rate of those new additions to make sure they’re staying on the target that we’ve laid for ourself. What this chart is showing to you on the left side is that this year, to date, while we are slightly off our ramp, we are well ahead of last year on a basis with these new sales people and on a lifetime basis, we are comfortably ahead of the ramp plans that we have in place for those sales books.
Now finally on the last page, we refer to our alumni client partners as those client partners that were in place prior to the fiscal ’05 implementation of sales persons growth strategy and so we have an additional strategy to try to make sure that that alumni sales group continues to grow. We have one target for the sales force as a whole of these alumni and then we have another for the middle 60% to try to drive that group up. We’re happy to report that we are well ahead of prior year and well ahead of the baseline goal that we set for ourselves in this group.
So, that’s a summary for OSBU and with that I will turn it over to Sarah Merz.
Thanks Bill. Good morning everybody and thank you for the opportunity to give an update on the consumer business unit. If you look at the same tree structure on page 11 or slide 11 you’ll see that in the CSBU in the first quarter of ’08, we experienced a 7% revenue decline and a 5% EBITDA decline. As Bill has done, I’ll divide the economics into different parts of the business we track. The top row being our proprietary channels of retail stores, ecommerce call center and in international the ecommerce and call center business. Secondly the third party channels or the wholesale commercial business as we call it. And then finally, the operating groups.
If you go to the middle column of the tree, you’ll see that the vast majority of our revenues as recorded are coming from our proprietary channels, about 86% of the revenue with another 12% of the revenue coming from the wholesale and commercial and the remaining 2% coming from operations, which is primarily our Franklin Covey printing operation.
I’d just like to point out though that the wholesale business has a significant portion which is royalty based and so those percentages tend to minimize a little bit of the retail footprint that is coming from wholesale since that revenue dropped straight to the bottom line as EBITDA. So if we start with the top layer there which is the revenue and EBITDA performance coming from our proprietary channels, you’ll see that we recorded a 6% decline in revenue and an 11% decline in EBITDA.
We’ve given an additional layer of detail on the right hand side, so let me just walk through that because you’ll see how those piece parts aggregated to those numbers. Starting with the retail stores, we saw about a 7% revenue decline and a 33% EBITDA decline. There are two pieces in the retail store business. First of all we closed some stores last year, so you have non repeating sales from closed stores which are obviously 100% variance year-over-year since those stores are no longer open today.
Then you look at the stores that are open this year that were open last year and our comp store sales did see some softness but obviously not to the level of the 7%, because that’s the blended rate. The largest impact on the retail performance were declines in store traffic and we off-set those fairly considerably by our continued efforts on outbound selling, which we’re very happy to see is growing year-over-year, but it did not fully offset the traffic softness, so we did record some comp store decline in the overall revenue decline of 7%.
The second piece is consumer direct, which you’ll recall is the blend of call center and ecommerce. We saw the same softness in traffic, only this time it comes through as phonecalls and clicks on our website, but [unintelligible] kind of softness in traffic in the first quarter. Some of that traffic decline was anticipated because we chose to move some of our catalog spending out of the first quarter and into the second quarter, bringing it closer to the busy season and we made a strategic decision that we would get a better return on our investment by shifting that catalog spending to Q2.
The third piece of it is international and like in the OSBU we are seeing continued growth in international with a 12% increase in the revenue line and a 28% increase on the EBITDA line. So that expansion effort continues at a nice pace. So you aggregate those three elements together which brings us to our total consumer proprietary channel numbers.
If you go to the next row which is our commercial and wholesale business, we saw an 8% decline in revenue and a 14% decline in EBITDA, the vast majority of that decline, we have identified as being associated with a transition of our distribution partners. We work with four different organizations on distribution, the largest of whom is Mead Westvaco. We have transitioned the office superstore business to a new partner, RR Donnelley and as part of that transition, Mead is not replenishing its inventories at its typical pattern as that cutoff date is March 1. So we are working to make that transition happen but we anticipated some of this would be associated with inventory draw downs and we are working through that right now. We are adding a fifth distributor and we will be announcing that shortly, who will help us address the computer superstore and department store classes of trade. So that is our wholesale business.
The third component is our SG&A and operational side of the business and you can see there that our spending was decreased over prior year quarter and so we saw an EBITDA pickup of 15%. That comes really from two pieces, we experienced operating efficiencies in our printing operations and I believe we shared with you last quarter that we reconfigured our printing operations, so we saw efficiencies just in output as well as in raw material input and it also reflects the shift in catalog spending which I mentioned earlier, shifting some investment out of the first quarter into the second quarter.
So those three components aggregate together to the total CSBU revenue and EBITDA changes that we recorded. As we have noted on the next page, we are still working intensely on the growth opportunities, they continue to be both domestic and international wholesale as well as the international licensee network that Bill referenced and new product activity. I won’t talk about this very much except to note that we do continue to add distributors on the wholesale side, we are working closely with our retail partners, office superstores and mass marketers, the mass retailers there and continue to test new products, new offerings and we are pleased at what we’re seeing.
One of our new partners does happen to have an international infrastructure on the wholesale side which will allow us to pick up the pace on our international wholesale initiatives, because they’ll be able to facilitate that with their existing operations and their offices in other countries.
One area to note on new products because you might have seen some press coverage on it is our plan plus online business continues to grow, we have a great CES press event and serious meetings on that and we are experiencing double digit growth on that month over month and are very excited at the opportunities for that new product offering.
So with that quick overview of first quarter performance I’m going to turn the time over to Bob Whitman, our CEO, Bob.
Sorry, can you hear me now? Excuse me, thanks Sarah and Bill and Steve. It was a good summary, a couple of points maybe I’d note, relative to things that were said and then maybe give an overview and open to question.
One, as Steve mentioned that there was a reversal for the [L tip] award, reduction in the probability that we would receive that in the Q would note the basis for that, probably worth noting that while we are on track to hit our profit goals associated with that, the change in business model, the dimensions of the [L tip] award required both revenue growth and certain targets for revenue growth and for profit. While we expected the profit targets to change in that business model where we’ve gone in the consumer side to more royalty based, a higher percentage of our business being royalty based which takes some money off the top line and putting more on the bottom line, but in terms of the percentage to the royalty, that’s hurt it as well as the conversion of Brazil and Mexico with licensee and the closure of stores so it’s primarily that I wanted to mention.
Second, it’s good to see the overview of the second third and fourth quarter, as you mentioned the third and fourth quarters were very strong. The second quarter because of the dominance of the consumer business unit in the second quarter, more than 100% of the decline in the second quarter is expected to come from the operations of the CSBU alone and then you add to that the non repeat of the building sale which suggests that OSBU and other things [unintelligible] strong performance in the second quarter. The CSBU has been somewhat soft in sales through the high season but it’s been picking up over the course of now the first of the year is here and people are recognizing, hey it’s the New Year and need new planners. But we also expect CSBU operations to improve in the third and fourth quarters this year [unintelligible] there and the impact without them selling [unintelligible] into their wholesale operations are therefore much more observable [unintelligible].
Just noting I think Bill’s presentation that talk about the kind of the core channel growth which is where of course we’re focusing, don’t want to choose, Bill didn’t, the smaller channels like public programs SPG and he’s been addressing those, but we really to have the consistency that we want every single quarter, it’s exciting on one hand to see the big engines really hitting well and almost everywhere, our domestic international licensee operations are doing well, but these other operations can have a big impact, so Bills been spending a lot of time continuing to address and fix these two or three things that effected their first quarter.
We expect the second quarter that they will have a little bit of impact but significantly less and by the third and fourth quarters that they’ll be neutral year over year to [unintelligible] growing with the idea that they would all be growth operations in the future that would require some restructuring which is underway but maybe worth mentioning that you know those small range the only 17% of the revenue you know reduced EBITDA in the first quarter operating income in the first quarter from the OSBU, by significant amount versus what it would have been given the resilience in the revenue and profit growth that OSBU achieved.
You know overall, just say maybe the last comment and then open it up to questions but you know the three key elements obviously is shareholder value creation, one, continue to grow top and bottom line and the biggest engines behind that right now are our organization sales for our organizational sales business unit and the biggest debts there have been are the hiring and ramp up of client partners and the productivity of our existing client partners. The biggest deterrent on that side has been kind of the softness in our core channels in CSBU over the last year or so, particularly and while the growth initiatives that are undergoing that are going through on the wholesale and [unintelligible] online side international side we think even if those were to never stabilize we think that the growth in these other areas would offset those declines.
That said we really think we have an opportunity to have some plans to further restructure our consumer operations so that the reliance of the overall business on retail and some of these other things is reduced and so in that area we think we believe going forward that in both second quarter third quarter and fourth that the main engines moving forward in the coming years and the fact that the flow through from investments that had been made years ago in new client partners is now hitting that part of the curve where the biggest increase is now occurred. The first year of the new client partner is more or less a break even proposition, the second year you get money back and it’s profitable but because of the fixed cost component, every year has more and more flow through.
So the second element of course the multiple that’s applied to our earnings and that’s a function of a lot of things and you all will have your own formulas but certainly one of the issues is the growth rate and we believe we have opportunities for accelerating that growth rate particularly on the OSBU and also on the CSBU as it [unintelligible] to the wholesale and international initiatives as well as [plan plus].
Second dimension of the business model, we’ve done a lot to improve the business model over the last years but we have we believe there are further opportunities and primary [unintelligible] cost reduction you know over the last few years has been revenue growth and will continue to be. We nevertheless believe we have some opportunities to go in and adjust the current business model, even at current revenue levels, particularly in our IT costs and some of these other related areas where you now have a size of business particularly in the CSBU side that allows us to think about that.
Certainly the predictability of earnings stream will affect the multiples and therefore the need to fix some of these smaller operations that have been problematic in a given quarter that overall we’ve been fine but quarter to quarter they’re not predictable and while our main engines have been we’ve had disruptions and are committed to fixing those.
And then finally I think the relative, the more and more that our business is on the higher margin, higher growth organizational side, where our growth [unintelligible] has been, you know the better the multiple is likely to be as we continue to focus on the growth on OSBU and structuring our business model in CSBU, those are the downside risk is minimized and we have good profitability but not focusing as much on worrying about the top line revenue.
Finally, third element of value creation would be in our minds shrinking the outstanding share base. As Steve mentioned we have now put ourselves in a position where we can pay off our line with remaining cash [unintelligible] some cash left and our credit limit variable and we’ll be looking for ways to utilize that, [unintelligible] opportunities we’ve all talked about in the past will be to find ways to shrink that share base over the you know in the coming quarters.
With that point I’d like to turn time over to you all for questions and I guess I’ll turn it back to our moderator.
Ladies and gentlemen, if you wish to ask a question please press star one on your touchtone telephone. If you question has been answered or you wish to withdraw your question, please press star two. Questions will be taken in the order received. All questions must be submitted at this time in order for it to be registered. Please press star one now to begin. Your first question comes from the line of John Lewis with Osmium Partners, please proceed.
John Lewis – Osmium Partners
Thanks good morning guys, just a couple quick questions, I guess first off for Bill, you talked about some pretty significant growth rates, I think you said in India, Scandinavia, Spain, Greece, can you talk about what kind of growth rate or where you are on China and maybe some other countries that have critical mass that are growing?
Yeah, thank you John, it’s a good question. China we grew but frankly it’s modest compared to what should be happening with China. The licensee partner we had in China has kind of had some up and down performance, we’ve met with them in September to discuss this and we’ve laid out kind of an attack plan this year of what we think we need to do to try to spur that on. Right now China is only down around 12% growth and so we are not by any stretch of the imagination maximizing that opportunity in China. This licensee partner there is connected to a, it’s a large organization so it should have the right type of resources to make it happen.
Both myself and Stefan [Mardique], the head of international, are traveling to China soon to spend quite a few days with them and go over the business plans and take a look at their objectives but I think that the bottom line for us is that unless we see the kind of growth at least that we’re seeing in India, we’ll have to make a change in that strategy there.
John Lewis – Osmium Partners
Thanks and then on other parts where you build, in terms of, you saw fairly significant improvement in your operating margins on the OSBU international side, I think they jumped, even when you adjust for Brazil and Mexico, I think you saw the operating margin jump from 20.5 to 27.5, can you just give a little color about what’s driving those operating margins?
Sure. One thing is that we’ve made a change in a number of the direct office general managers over the last few years and I don’t want to jinx ourself but we made some pretty good calls on these people. You know UK is a large office, it carries a lot of the revenue and Ken Long Smith the leader we put in place over there has just really wrestled that business model to the ground and built it back up and made a substantial difference, so we’ve got improvements showing in the UK in the gross margin, in the cost management and obviously in the revenue growth. So we’re kind of hitting at all levels there and that has made a significant contribution.
Australia, small thought it may be as an office, we’ve also done very well with the new general manager we put in place down there and he has accomplished the same thing. And I just would mention on the top line the gross margin changes have come primarily from the fact that both of these gentlemen have wrestled down the discounting practices and just kept our pricing in place the way it needs to and we’ve done that despite the sales force’s fears with virtually no impact to the client set, so it’s just as we hoped it would be there.
So, I think in all the offices, you know Japan has always been an extremely well run office, so that doesn’t hurt us and Canada has been on a slow improvement track as well so I think in all places we’ve had improvement that’s compounded to represent some pretty good change.
John Lewis – Osmium Partners
That’s great, thanks Bill. I guess just another question was for Sarah in terms of plan plus you said you’re seeing a [unintelligible] of a very small base, double digit month over month growth, what kind of expectations do you have for plan plus and can it be a meaningful revenue driver for you?
John, thanks for the question. It is off of a fairly small base but we have seen double digit growth each month now for about the last six months and so we do have very high hope for continued growth there and it can be a very significant contributor. The nice thing about the plan plus on my model is it’s a subscription model so when you sign an organization up they are paying you every single month and it’s almost pure EBITDA.
So, I think our growth is going to be a function of how fast we can scale resources to keep feeding the growth. We have a great partner who has the sales teams and they continue to add sales people and we pass them our leads from all of our channels so when they convert them we get the majority of the revenue and the EBITDA associated with that.
We think it’s also a very nice foundation for further applications. We’ve built the engine and now we’re looking at other applications, for instance, versions of this which would be delivered over mobile phones and we are very shortly probably going to be talking about a new partnership with somebody to deliver this over mobile phones. There are other applications that extend into other parts of the business, including the organizational solutions business that could use this engine for delivery of content. So, we do think it will become a significant portion, it is in the whole scheme of things relatively a small portion today on the revenues side but it’s getting to be fairly meaningful on the EBITDA side.
John Lewis – Osmium Partners
Thanks very much for that Sarah. I’ll hop back in and I’ll be back in a minute for more questions.
As a reminder ladies and gentlemen, please press star one on your touchtone telephone for questions. Your next question comes from the line of Tom Coach with Turnaround Capital, please proceed.
Tom Coach – Turnaround Capital
Yeah, hey Bob and Steve, I had a question which is given the some of the volatility in your revenues and I guess operating income quarter-to-quarter, can you give a little bit more clarity on, you said you expect the second quarter to be down versus last year on an operating income basis but then the rest of the year to be up. I’m just trying to understand I guess what gives you the confidence to be able to sit here and talk about the second end of the year and I guess tied into the second part is when you talk about trying to restructure some of the both sides of the house businesses to try and dampen some of the volatility. How do you do that and what do you mean by that?
Okay on the first part of the question and Steve, go ahead if you’d rather go [unintelligible].
More than happy Bob.
Okay [unintelligible] you know the [unintelligible] in the second half of the year the back half of the year comes from primarily of course in the OSBU where we give advance bookings that give us some transparency, you know a lot of transparency three to four months and sometimes [unintelligible] six to seven months out is where we also know about events and some of the things that we’re going to be having in the back half of the year including [unintelligible] what we call these greatness summits that we have that every [unintelligible] historical symposiums and which are profit making activities and have significant revenues associated with them, along with big contracts that we know about that kick in in the back half of the year.
So that’s the primary thing on OSBU side that gives us some transparency, together with the fact that we also in some of these operations that affected first quarter badly which Bill has talked about, public programs being down, that’s something that was a decision that was made six months ago on [unintelligible] strategy et cetera as well as the launch of a new program but we know what our main schedule is, what our response rates are so the good, good visibility there the fact that SPG is a big account business and we know that we’ve already got some of those big accounts in place I think says that on the things that did well they look like they will continue to do well in the coming quarters and on the things that weren’t so good in the first quarter, they’ll be less bad in the second quarter and neutral to positive so on the OSBU side that gives us some visibility on that.
The CSBU side you know is primarily a statement that if you’re off in CSBU, things are soft, the portion of the year where it hurts you the most is in the first two quarters where the sales of course are the highest, you know the impact of the softness you know hits you the most on the bottom line. So part of it’s just a statement about the fact that even if CSBU operations were to continue with the same level of softness, the impact of the back half [unintelligible] revenue and EBITDA basis would be a lot less. The other side of it is the growth side of that business, wholesale business tends to the sales actually occur in what would be the off season because you’re selling to a third party who buy that and we already have orders being placed or worked on gives us confidence in the back half of the year. Is that response to that questions…
Tom Coach – Turnaround Capital
The second half of that question was what can we do to smooth out earnings. [conference call audio cutoff]
[conference call audio rejoined]…anticipating it, we’ve had a great exciting release with seven habits interactive which is the online version of seven habits we did in conjunction with Ninth House and have that just starting up, we’ve got our first early wins there and so we’re trying to anticipate it but to answer your question directly, haven’t really felt it yet while my intention is to anticipate it and plan accordingly.
Just to underscore in that our booking days, the number of days that we book for future delivery in December was our highest in history but nevertheless, you know there’s concern obviously as Bill said that the seven habits interactive product gives you a much lower price point that doesn’t require the travel and other things that are often cut back in the tangentially affect training.
The other course focus we hope will cushion us in some respect as the folks in the new customer loyalty offering and our more execution oriented things where people are finding them to be part of their core business processes even some of the big for example in the Department of Defense where they’ve curtailed because of the war costs would certainly be an early example, because of the war costs they’ve curtailed a lot of their normal training, which will hurt us on one side but we’ve been, so they canceled some additional training but are actually more than making up for the loss of that business with new executor and stuff that helps them drive it home.
Third is I think you know I expect we would see some slowdown and that you know some we would be effected somehow and while that’s not the reason for this additional cost restructure about which I spoke, we think there’s another $8-$10 million of costs on top of the $125 [b]illion that’s come out that in some of these areas like IT and other things that we should be able to get another $10 million of costs out which would help us cushion us if there is some softness.
Great, thanks a lot.
Your next question comes from the line of John Lewis, please proceed.
John Lewis – Osmium Partners
Hi Bob, just a follow on question for you. I guess if you go back and take a look at your capital structure over the last few years, I think you paid them I guess it was around $90 some odd million from the preferred, I think you paid over I guess when that deal was done you were in a rather distressed position and I guess that was I guess the preferred was about 10% and that interest wasn’t tax deductible now I think you have access to capital and your after tax costs is 4%, just looking, one other quick thing, when you look at the operating leases, I guess they’re around $32.5 million, I know you guys also sublet some of that space so I think your cost on that $32 million is about slightly under 2% if you take…is that about right?
[unintelligible] Steve I would think that’s about right. On that portion of the preferred that was retired from the sale lease back. Although [unintelligible] effectively what it was [unintelligible] building, you know we traded 10% as you say after tax for a cost that was roughly 9% pretax if we had the whole burden but because we then leased out a little over half the rest of the facility, that dropped down for us that pretax adjustment to 4.5% and the after tax cost went down to somewhere as you say closer to 2.5%, 3%.
John Lewis – Osmium Partners
Okay, I guess my question and or point would be that when you borrowed money, when you were distressed you were paying I guess effectively almost 2.5 times what your aftertax is today, so in essence the interest you were paying on those preferreds under today’s scenario could support almost 2.5 times the debt load. Is that a fair way to look at it?
John Lewis – Osmium Partners
Just for the record and I know you probably don’t want to say anything on it today but in our mind it just seems, we ran a bunch of numbers and it just makes overwhelming sense to buy back a huge block of stock given the current scenario. I know you guys are in your planning phase but we were first thinking 25 million sounded aggressive but we think maybe even 35-40 million given, I mean you borrowed 40 million at 6% your after tax cost is 4%, I mean that’s 1.6 million to buy back potentially a very large block of stock at a very low multiple of cash flow.
We agree with that analysis.
John Lewis – Osmium Partners
Okay, well thanks and I look forward to seeing you and your team next week at the annual meeting.
There are no further questions at this time.
Okay, thank you very much, we’d like to thank everyone for being part of this day and I’d like to personally thank our great team who’s done such a great job at getting things turned around and moving forward and thanks to you Steve and Bill and Sarah for all you do. Thanks.
Thank you for your participation in today’s presentation, this concludes your conference, you may now disconnect and have a good day.