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Courier Corp. (NASDAQ:CRRC)

F3Q08 (Qtr End 06/28/08) Earnings Call

July 17, 2008 9:00 am ET

Executives

James Conway - Chairman, President and CEO

Bob Story - EVP and COO

Peter Folger - SVP and CFO

Analysts

Jamie Clement - Sidoti

Paul Hogan - Fenimore Asset Management

John Rogers - Janney Montgomery Scott

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Courier Corporation Earnings Call. My name is Erica, and I'll be coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. James Conway, Chairman, President and CEO. You may proceed, sir.

James Conway

Thank you very much, Erica. Good morning, and welcome to Courier Corporation's third quarter earnings conference call. I am Jim Conway, Chairman and Chief Executive Officer. Thank you for joining us.

We released earnings at about 7:30 this morning. I hope you have all had a chance to see the results. Frankly, they weren't pretty. Sales were flat and profits took a dive from a combination of lower utilization on the manufacturing side and a serious drop in Creative Homeowner sales on the publishing side.

As a result of the loss of Creative Homeowner, we took an impairment charge in the value of that business, which gave us a large net loss for the quarter, but had no effect on our cash flow. We've taken strong measures to stabilize Creative Homeowner and will take more as needed.

At the same time, we had some positives in the quarter, and our financial condition remained strong, leaving us well positioned to face the challenges of the current economy. I have more to say about all this in a few minutes. But first, let's review the quarter.

Courier's Chief Operating Officer, Bob Story, is here with me today. Peter Folger, Courier's Chief Financial Officer, is also here with us. Bob will begin with an overview of financial results for the third quarter and first nine months of fiscal year 2008. I'll then discuss the key issues driving our business. I'll also provide guidance on what to expect for the fourth quarter and full fiscal year.

Bob, please go ahead.

Bob Story

Thank you, Jim.

Before I begin, I'll remind you that during this call, we may make forward-looking statements relating to the company's financial goals and business environment, among other things. Actual results may differ materially. Today's earnings release issued earlier this morning includes detailed commentary on the factors that could affect financial results. We encourage you to review those factors in conjunction with any forward-looking statements we make today. All forward-looking statements are being made under the provisions of the Private Securities Litigation Reform Act.

I'd like to start off this morning talking about Creative Homeowner. Creative publishes and distributes books on home design, decorating, landscaping and gardening. Their books are sold through many channels, but none as significant as the large home center chain. We have seen softening sales in this channel for six consecutive quarters now as a result of the downturn in the housing market.

Last quarter, we saw some signs that seemed to indicate that the rate of decline was slowing, as Spring approached, and as we were comparing against soft quarters a year ago. It turned out to be a short spurt. Sales continue to fall sharply this quarter. And on top of that, we were hit with very large returns from retailers in all our channels that were well above historical level. Much of this came late in the quarter.

Creative's third quarter gross sales were $5.9 million, down 24% from last year's third quarter. Returns were up approximately $1 million to $2.1 million, leaving net sales in the quarter at $3.7 million, down 45%. In the first nine months, Creative's net sales were $15.7 million, down 25% from last year.

During the quarter, Creative took steps to reduce costs, including the reduction in their payroll of approximately $1 million. They also narrowed the focus of their publishing program which we expect will reduce their spending by an additional $1 million. They incurred charges of approximately $1 million in the third quarter to increase inventory reserves and to write down the investment entitled that has not performed up to expectations in the light of recent sales experience.

As a result, Creative incurred a pre-tax loss of $3.6 million in the third quarter or $0.18 per diluted share, bringing their pre-tax loss for the first nine months to $5.2 million or $0.26 per diluted share.

With the sales and earnings that were well below our expectations, and no recovery in sight, it became apparent that we needed to test for a possible impairment in the value of Creative's intangible assets. Based on our assessments, we've recorded a pre-tax impairment charge of $24 million, which was $15.5 million or $1.25 per share after-tax.

We are in the process of finalizing the allocation of the valuation of each of Creative's assets in accordance with the requirements of FAS 142 which won't be completed until next quarter. When it is completed, an adjustment to the impairment charge may be required in the fourth quarter. More information on the impairment charge will be available in our Form-10Q which will be filed by August 7th.

Creative's operating performance and the impairment charge had a significant impact on Courier's third quarter results. Overall, sales were $73.4 million, even with last year's third quarter, with a net loss of $12.4 million or $1 per diluted share. Excluding the non-cash impairment charge, third quarter net income was $3.1 million or $0.25 per diluted share.

For the first nine months, sales were $204 million, down 5% from last year, and the net loss was $7.6 million or $0.60 per diluted share. Excluding the impairment charge, net income was $7.9 million or $0.63 per diluted share.

EBITDA, which is earnings before interest, taxes, depreciation and amortization, was $11.5 million in the third quarter compared to $16 million last year, and year-to-date, was $30.2 million compared to $41.3 million in the same period last year. EBITDA is a non-GAAP measure that we track as an indicator of the company's operating cash flow performance. It should be considered in addition to, not as a substitute for or superior to, GAAP financial measures.

Now, I'll break these results down between our two business segments, starting with the specialty publishing segment, which is comprised of Dover Publications, Research & Education Association or REA and Creative Homeowner.

Specialty publishing sales in the second quarter were $13.4 million, down 25% from last year, while sales for the first nine months were $45.4 million, down 14%. Creative Homeowner, with sales down 45% in the third quarter and 25% for the first nine months of fiscal 2008, was the major factor. But the weakness in the housing market combined with higher gas and food prices spilled over into other retail markets, making this a difficult quarter for Dover and REA as well.

REA sales were down 7% in the third quarter, reducing their growth for the first nine months to 4% compared to the same period last year. Sell-through of REA books at most major retailers were up in the quarter, suggesting retailers are continuing to manage inventories closely. Dover sales were down 15% in the third quarter and down 9% for the first nine months in a challenging quarter as retailers of all types ordered cautiously.

To offset market weakness, Dover introduced a new line of products targeting the craft market, which began initial shipments late in the third quarter. And they anticipate the launch of another new product line in the fourth quarter.

During the third quarter, the publishing segment completed the transition from a heavy reliance on outside commission sales rep groups who sold to small and mid-sized retailers to its own field sales force, selling for all three of Courier's publishers. While this transition was completed smoothly, it did result in a reduction of sales to smaller accounts at both REA and Dover during the quarter. With this change now behind us, we expect to see the benefits beginning in our fourth quarter.

Gross profit, as a percent of sales, for the publishing segment decreased from 40.1% in last year's third quarter to 24.9% this year. Creative Homeowner pulled the segment's gross margin down significantly because of their high returns rate and because of charges of approximately $1 million, increased inventory reserves and write-down investment in titles that have not performed up to expectation.

Excluding Creative, the gross profit percentage dropped from 47% to 45% as the benefits of productivity gains and cost reductions achieved since last year were reduced by the impact of lower sales in the quarter. For the first nine months, the gross profit percentage was 35.5%, compared to 41.8% for the same period last year, again due to the issues at Creative.

Selling and administrative expenses for the segment were $5.8 million in the third quarter compared to $5.9 million last year, and for the first nine months were $17.5 million compared to $17.7 million last year, down slightly in both periods.

Interest expense allocated to this segment in the third quarter was $446,000 compared to $466,000 last year, and for the first nine months was $1.3 million compared to $1.4 million last year. The pretax loss in the specialty publishing segment in the third quarter was $3 million compared to pretax income of $844,000 last year. The major cause of the earnings drop was Creative Homeowner, which incurred a pretax loss of $3.6 million in the quarter compared to a loss in last year's third quarter of $600,000. For the first nine months, the pretax loss in the segment was $2.7 million compared to pretax income of $3 million last year, with Creative Homeowner accounting for $5 million of this change.

In our book manufacturing segment, third quarter sales were $63.2 million, up 8% from last year, while sales for the first nine months were $166.3 million, down 2% from the same period in 2007. In this segment, we focus on three publishing markets, education, religious and specialty trade. In the education market, third quarter sales were $27.6 million, down 7% from last year, and for the first nine months of the year sales were $66.6 million, down 8%.

We started off very busy this quarter, but couldn't sustain a consistent workflow, as orders were being pushed, pulled and canceled by the publishers. As a result, we were unable to run at full capacity through the quarter as we did last year. We entered the fourth quarter with a healthier book of orders than last year at this time. We continue to see many changes as orders confirm up for production.

Sales for the religious market typically experienced significant quarter-to-quarter fluctuations, and the third quarter was no exception. Religious sales were $18.4 million in the quarter, 39% above last year, which follows the second quarter drop in sales of 15%.

For the first nine months of the fiscal year, sales to religious market were $49 million, up 7%. We expect religious sales for the full year to grow at 5% to 6% in line with historical trends. Sales for the specialty trade markets were up 18% to $14.4 million from last year's third quarter, and up 2% in the first nine months of the year, to $41.4 million. New customers and share gains with existing customers accounted for the jump in third quarter growth.

Gross profit in the book manufacturing segment decreased by 9% in the third quarter to $15.7 million and as a percentage of sales decreased from 29.5% to 24.8%. This drop in the gross profit percentage is the result of lower capacity utilization in the quarter combined with an increase of approximately $500,000 and depreciation expense related to last year's expansion of four-color text book capacity at our Kendallville, Indiana plant, and the new printing and binding line for the religious market installed in our Philadelphia plant this year.

Margins in the quarter were also reduced by modest start up costs in Philadelphia, related to the new binding line as well as continuing pricing pressure. Gross profit for the first nine months of the year was $38.8 million, and as a percentage of sales dropped from last year's 27.2% to 23.4% this year, reflecting the lower sales and capacity utilization combined with a $1 million increase in depreciation expense.

Selling and administrative expenses in this segment were $7.5 million in third quarter, up 6% compared to last year primarily as a result of the expansion of our sales force late last year. In the first nine months of 2008, selling and administrative expenses increased 3% to $23 million. Interest income allocated to this segment in the second quarter was $123,000 compared to $49,000 last year, and for the first nine months of 2008 interest income was $432,000 compared to $261,000 in the same period last year.

Pretax income in the book manufacturing segment was $8.2 million in the third quarter down 19% from last years $10.1 million due to the drop in capacity utilization in gross margins. For the first nine months of the year pretax income in this segment was $16.2 million down 32% from last years $23.9 million.

Now I will shift gears and talk about cash flow and our financial condition. Cash provided from operating activities was $18.3 million in the first nine months of the fiscal year compared to $16.5 million for the same period last year. Working capital used $9.6 million this year compared to $16.3 million in the same period last year.

Investment activities this quarter used $11.4 million of cash. Capital expenditures were $7.8 million compared to $17.9 million for the same period last year. We expect capital expenditures for the full year to be between $13 million and $17 million. This includes the completion of our capacity expansion program in our religious book manufacturing operation in Philadelphia and about half the cost of construction of a warehouse in Kendallville, Indiana which begins this month.

Republication expenditures in our publishing segment were approximately $3.7 million this year, down 15% from $4.3 million a year ago. For the year we expect these costs to be between $4.4 million and $4.7 million compared to $5.4 million last year. We used approximately $7.5 million to pay our quarterly dividends, up 11% from last year. We also used $12 million to repurchase 450,000 shares of our stock in the first nine months of the fiscal year, from the $15 million authorized by the Board of Directors this year. And we ended the quarter with $28 million of long-term debt compared to $30 million at the end of March, and $17 million at the end of the fiscal year in September.

So to sum up, our cash flow remained strong despite the large drop in earnings. This quarter we completed a multi-year capital investment program to expand capacity and create the most efficient production platforms for four-color textbooks and religious scriptures in North America. We now expect capital expenditures to drop significantly. We declared our regular quarterly dividend today and we have a healthy balance sheet leaving us well positioned for future growth.

Now I'll turn the call back to Jim.

James Conway

Thank you, Bob. Usually at this point in the call, I provide a little color around the facts and figures Bob just laid out. And then walk through some of the highlight of what's new in each of our businesses. Today in light of the quarter we've just finished, I am going to depart slightly from that format and focus on what I think will be the two or three big questions in most of your minds.

The first one obviously is what happened at Creative Homeowner and how are we fixing it? And related to that, what does the impairment charge mean for our business, and what if anything does the experience with Creative Homeowner mean for our publishing segment as a whole?

The other area of questions is on the manufacturing side. What's happening in the educational market? Is the situation straightening itself out and how are we dealing with the volatility? So let's get started.

There is no question is my mind that fixing the situation at Creative Homeowner is our highest priority right now. There is also no question that despite a calamitous quarter, Creative Homeowner is fundamentally a sound business that we happen to buy just before downturn in the housing market. We've all watched the slide in housing prices, the collapse of mortgage companies and the ripple effects throughout the economy.

On top of these factors, the rising cost of gasoline and home heating oil in recent months has not only damaged the overall economy but shrivels in family budgets. And as a result, consumers have decided to avoid spending money on major discretionary projects for the time being.

Like many others, we hoped that new spring selling season would bring people back to the stores. But as the quarter progressed, it became increasing apparent that those hopes were not going to be realized. We took a one to punch from the combination of slower sales and a sharp uptake in returns from retailers. And we realized that while Creative Homeowner books were still outperforming other titles and often by wide margins, the soft market was not going to go away soon and was deep enough to challenge our historic assumptions about the value of the business, and so we acted.

We took initial steps to help stop the bleeding and to provide a firmer foundation and greater focus for the business going forward. We cutback on non-core product, we reduced headcount and we wrote down our investment entitles whose sales had been up more sharply.

At the same time, we also accelerated our regular annual impairment process to test for potential impairment and the value of goodwill in other intangibles and Creative Homeowner's business. As a result of that examination, as Bob has described, we took a substantial non-cash impairment charge.

While the impairment charge threw us into a loss for the quarter, it did not change the fundamentals of our business, our cash flow, our customer relationships, or the soundness of our overall strategy and approach.

In the mean time, we've taken steps to turn the tide at Creative Homeowner and we'll take more as needed. Ultimately, we will do what we have to do to enable this proud category in leading business to return to winning form as soon as possible.

In addition, while obviously we have focused on Creative Homeowner; we have also kept our eye on the ball of improving efficiency across the entire publishing segment. As Bob mentioned, during the quarter we completed our transition to a unified in-house sales force, selling books under all three imprints.

We also began the task of streamlining and centralizing our customer service operations, eliminating back office redundancy while maintaining the integrity and personality of each brand. So as a whole, our publishing segment has taken steps to improve performance in this very challenging environment. And the rationale for combining book publishing with manufacturing is as valid as ever. In fact, in a volatile economy, the synergy between manufacturing and publishing has added value by plugging holes in plant utilization.

With that, let's move briefly to the situation in book manufacturing. I mentioned volatility. We are seeing a lot of it these days. In the religious market, we've had wide fluctuations for several quarters, but the long-term trends have stayed pretty consistent. So we don’t read too much into a single quarter with a 39% sales increase, as we just experienced.

In the education market, we've also seen increased volatility, but we don’t believe the underlying trends have changed all that much there either. We are seeing some effects from consolidation among educational publishers. When publishers merge and look at their combined inventory, it's reasonable for them to want to shrink it and reduce redundancy going forward, and that is what they are doing.

The other major factor in the volatility is that the elementary and high school textbook market has somewhat different dynamics from the college market, and as Courier has grown into a major player in the Ohio market, we've been more affected by them. The college textbook market typically involves smaller runs and a more stable cycle. In the elementary and high school market, there is a potential for bigger wins and losses as statewide textbook adoption programs settle on a particular title.

And as we get closer to the start of another school year and these decisions get finalized, publishers are inevitably refining their orders, resulting in increases, decreases, and sometimes outright cancellations. These fluctuations make it hard to plan, particularly against the background of uncertainty about State budgets in an economic slowdown. At the same time, rewards for participating in the Ohio market are substantial, and we have been reaping a growing share.

So with that let's go to outlook. As we have said, the market environment faced by Creative Homeowner is unlikely to improve soon. Normally we don't provide guidance on individual businesses within Courier, but we feel it's appropriate to provide some guidance on Creative Homeowner's fourth quarter. While we have taken steps to reduce cost and strengthen the business, we expected to report a fourth quarter loss of between $1 million and $1.7 million, compared to a loss of $350,000 in last year's fourth quarter. We have factored that expectation into our guidance. In publishing, we expect the segment as a whole to return to profitability despite the projected loss at Creative Homeowner.

In book manufacturing, we expect fourth quarter educational sales to be modestly higher than last year, though not enough to bring the full year up to last year's exceptionally strong performance.

In religion, we expect fourth quarter sales to be a bit below last year, following an unusually strong third quarter leaving full-year sales to be up 5% to 6%, in line with long-term expectations.

Overall for the fourth quarter of fiscal 2008, we expect total sales of between $78 million and $83 million, versus sales of $81million in the fourth quarter of fiscal 2007. Excluding any potential impact resulting from the conclusion of our impairment analysis, we expect fourth quarter earnings of between $0.57 and $0.67 per diluted share, versus earnings of $0.74 per diluted share in last year's fourth quarter.

In addition to measuring our performance by generally accepted accounting principles, we also tracked several non-GAAP measures including EBITDA that is earnings before interest, taxes, depreciation and or amortization, as an additional indicator of the company's operating cash flow performance.

For the first nine months of fiscal 2008, Courier's EBITDA was $30 million compared to $41 million for the same period last year. For the full year, we expect EBITDA to be between $48 million and $50 million versus $61 million for fiscal 2007.

In conclusion, this was a tough quarter. But our business is still strong. Our cash flow and balance sheet are still strong. Our reputation for quality and service is unsurpassed in our industry. And our record of dividend payment and dividend growth reflects these strengths, with 11 straight years of double-digit dividend increases.

So at this point we'll turn the call over for questions. So Erica it's back to you.

Question-And-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question comes from the line of Jamie Clement from Sidoti. You may proceed.

Jamie Clement - Sidoti

Hey, good morning, gentlemen.

James Conway

Good morning, Jamie.

Jamie Clement - Sidoti

Hey Jim, when you look at this fiscal year overall, Do you mean across the industry from an educational market perspective, do you think all industry-wise things are going to be down? I think your press release alludes to a competitive environment. Has pricing also become incrementally a little bit more of an issue over the last couple of months?

James Conway

I am not sure it has become such an issue over the last couple of months Jamie, as much as it's been a very competitive year. We find pricing to be always fairly competitive, it's just the nature of the market. As far as your comments for the year, I think we're going to have, as we said looking at the fourth quarter, our load going into it is very strong. There is just frankly some unpredictability as it relates to the elementary in high school markets that we have mentioned. But sooner or later, the kids are going to have to have books in schools. So we are hopeful we're going to have a strong fourth quarter.

Jamie Clement - Sidoti

Yeah, and Jim on that comment I mean, with the economy being tough and presumably tax receipts down and that sort of thing, do you have any comments from your publishing customers that would suggest that maybe some adoptions have been pushed off a little bit?

James Conway

We have not had any comments of that to date, and talking to our customers; they still feel that there are going to be books that are produced. And at the same time, we know that their inventories are down so they are going to have to start ordering some of these new titles to get them into the school systems. At the same time Jamie, these education budgets when it comes to the books that are going into the classrooms, its 2% to 3% of the educational budget. So, it's one of the last things that get cut.

Jamie Clement - Sidoti

Yeah and Jim, that I know, and I can understand how your September and December quarters, where it's a little bit more reprint, where there could be some issues there, but I would have assumed that if the States going with the new title, those titles have to be printed, and I would have hoped to have seen some of that here in the June quarter. You know what I mean?

James Conway

We agree with you.

Jamie Clement - Sidoti

Okay.

James Conway

Overall it was, there were an awful lot of forward bookings. And then as I mentioned in the conference call, there was number of these orders where quantities from certain publishers were dramatically decreased as they got the feedback from the marketplace while others were dramatically increased. So we are still seeing a lot of movement as to who the publishing winners may be in particular states.

Jamie Clement - Sidoti

Okay, alright. Well, thanks very much for your time.

James Conway

Thanks, Jamie.

Jamie Clement - Sidoti

Yeah.

Operator

(Operator Instructions). Your next question comes from the line of Paul Hogan from Fenimore Asset Management. You many proceed.

Paul Hogan - Fenimore Asset Management

Good morning.

James Conway

Good morning, Paul.

Paul Hogan - Fenimore Asset Management

A couple of questions for you. You had mentioned the returns that were higher than normal in the quarter. Is this a trend that you think will continue or was this more of a one-off item?

Bob Story

Paul, some of that we believe quite strongly is one-off. A lot of that, and usually high amounts we think are one-off. But it would be naive right now for us to predict that they are going to suddenly drop all the way back to normal level. I think we'll probably see fourth quarter trends a little bit higher than normal, nothing like we saw in the third quarter.

Paul Hogan - Fenimore Asset Management

Okay. Were these books that had been in the channel for a while, or if you can tell, were they books that had just been introduced to the channel in the past few months?

Bob Story

The bulk of it was books that were fairly recently in the channel within the last few months. On the other hand the retailers get full credit when they return books, it's the business model of this industry and we know that at least in some cases, smaller amounts but, we're seeing some stuff coming back that's a bit older. It's equivalent of making a payment to us when they return older books.

Paul Hogan - Fenimore Asset Management

Sure, okay.

Bob Story

So, in this kind of an environment Paul, everybody is doing everything they can to save a nickel, and so that's part of what's going on with these returns as well.

Paul Hogan - Fenimore Asset Management

Okay. And you talked a little bit about CapEx dropping dramatically for next year. Do you have, I guess you are not prepared to give guidance on that yet. Could you give a sense of the order of magnitude, does it drop by half, does it drop by quarter?

Bob Story

Well, it's actually begun to drop this year quite a bit. We've reduced our estimates for the year to, I think I said 13 to 17 for this year.

Paul Hogan - Fenimore Asset Management

Yes.

Bob Story

Which is quite a bit lower. Next year we know we have the completion of a warehouse in Kendallville, Indiana which probably is a $5 million expenditure next year. There are no other major items planned for next year, so it won't be tremendously below the 13, it will be below 13 to 17, and it will be way below the 25 to 30 that we've experienced for the two years pervious to that. I can't be anymore specific right now. We'll have much more clear guidance next quarter.

Paul Hogan - Fenimore Asset Management

Okay, that's fine. And last year, you spent what $26 million or so, this year you are almost cutting it in half?

Bob Story

Yes.

Paul Hogan - Fenimore Asset Management

Okay. Alright, good. And what should we expect with buyback going forward?

Bob Story

Well, we've got currently $3 million more of authorization from our Board, and those calls get made as to what we do in kind of day-to-day. We'll have to wait and see once the window opens up again. I can't be anymore specific in that right now.

Paul Hogan - Fenimore Asset Management

Okay. You have typically been pretty opportunistic with your acquisitions, and this is a pretty ugly environment, not only affecting you, but affecting others. So, do you see any opportunity on the horizon where your stronger financial position might put you in pretty good shape to do something?

Jim Conway

Well, Paul, this is Jim. And, we are always looking. We do think, we always have been quiet opportunistic and if we see a great company that comes along, and looks like there will be a great deal for our shareholders and to benefit in to the publishing of book manufacturing side of the business, we'll take a very careful look.

Paul Hogan - Fenimore Asset Management

Okay. Have you seen an up-tick in activity in that regard to people approaching you or anything going on in the industry?

Jim Conway

No more than usual, Paul. It's always a pretty active environment. And I'd say at the moment, it continues to be as active as it's always been.

Paul Hogan - Fenimore Asset Management

Okay. And on the educational side for manufacturing, when you look at the adoptions, and I assume this is primarily adoptions where you saw the softness, were adoptions that were delayed or canceled or pushed out in some way?

Bob Story

Actually, Paul, a lot of the adoptions have come through pretty well this year. To clarify, the new titles we've been manufacturing are up quite a bit this year. The reductions that we're seeing are primarily in older titles than in reprints. The adoption copies, the orders can bounce around a lot, just prior to manufacturing, pull in and push out. But net, net they are up this year, what's down as a re-principal the titles and that has an awful lot to do I think with the working capital and inventory management by the publishers. So their sales are up but their inventories are going down primarily on the older titles.

Paul Hogan - Fenimore Asset Management

Okay, alright, good. Thanks for that clarification. And your four-color margins, how are they doing at this point? Are they where you thought that they would be?

Bob Story

Yeah. I would say, in the aggregate, they are, although our capacity utilization is down a bit versus last. So that's the margins implied by, lets call it the pricing and efficiency of the work we run is where it was a year ago, I would say. But, margins when you consider capacity utilization overall, are down a bit because utilization is down.

Paul Hogan - Fenimore Asset Management

Okay. And, what are your plans for your capacity going forward as you get out of the busier time of year into the slower seasons, what should we expect there?

James Conway

You mean, as far as adding capacity Paul or running up?

Paul Hogan - Fenimore Asset Management

Of being able to fill the capacity that you have?

James Conway

You know, we, if you look at the business historically, the fourth quarter tends to be the busiest for us, and that's what we anticipate again this year. When you move into the less busy times of the year, which tend to start November, December, our efforts are always trying to influence our customers to move, work into those times where we have capacity available.

Paul Hogan - Fenimore Asset Management

Okay, alright. Because you have more four-color capacity, which would be higher margin, does that put you in better shape or because you've added so much capacity that there might be a downside impact there?

Bob Story

You're asking what our predications are for the beginning of the next fiscal year I think Paul, and we're not really prepared to comment on that, but I know that last year, we had about the softest first quarter that we've ever seen as a result of unusual trends, and we're actively working to generate a result that's better than that.

Paul Hogan - Fenimore Asset Management

Okay. Okay, well thank you guys.

James Conway

Thanks, Paul.

Operator

(Operator Instructions). Your next question comes from the line of John Rogers from Janney Montgomery Scott. You may proceed.

John Rogers - Janney Montgomery Scott

Good Morning.

James Conway

Good Morning, JT.

John Rogers - Janney Montgomery Scott

I just have a question on the four-color side. It seems, at least on the last call, that your capacity was fairly well set up for the third quarter. And, I know you said you have had some changes on the new orders -- the new adoption text books orders were actually up. So only why the reorders were so much different from plan?

James Conway

As Bob pointed out JT, I think the critical element is, publisher has been very cautious, waiting to the last minute, managing working capital, and if they can generate the books out of inventory that's what they were doing. So, it's always in this sort of tough environment they are waiting to the last minute before they place a definitive order.

John Rogers - Janney Montgomery Scott

I was just wondering about -- if they are reorders -- is there really that much risk in the schools coming back and buying the books again?

James Conway

Well, in an environment where past utilization isn't maximized or peaked, it's easy to wait until the last minute, until you actually know what your orders are going to be, and I think that that's part of what we are seeing this year, is that they can wait and they are waiting, so that they don't over buy. Reservation of working capital is on their side.

John Rogers - Janney Montgomery Scott

Now, why do you think it is? Towards the beginning of the year, the impression was that this was going to be, actually be a tighter capacity year than last year. Do you know what has changed, is it sheer out of fear of fewer text book adoptions, test book adoptions being pushed out or--?

James Conway

I just think, it's JT, it's just everybody is reacting to the fact the economy has turned down and profits are under pressure, everybody in business takes these kinds of steps to preserve their cash and protect their profitability. I know that there also has been significant consolidation in the last year in the publishing side that always causes a new looks at the way business practices are conducted and that may have something to do with it as well.

John Rogers - Janney Montgomery Scott

Al right. So, is there the possibility that because of that consolidation we're going to continue seeing weaker orders going forward?

James Conway

JT, I am not so sure I take that leap. You know at the end of the day, the adoptions of new textbooks are going through in the elementary and high school market. States are making their final decisions, and they will be publishing winners and publishing losers, as these States make their final decisions. And, schools are going to open September 1, and they're going to need the books.

John Rogers - Janney Montgomery Scott

Okay thanks.

James Conway

Thanks JT.

Operator

Mr. Conway you have no further questions at this time.

James Conway

Great, Erica, thank you very much for your help and assistance. And folks, thank you for calling in and listening in and we look forward to much better results when we talk to you at the end of our fourth quarter. So thanks folks, and again Erica thank you for your help.

Operator

You are welcome sir. Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a wonderful day.

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Source: Courier Corp. F3Q08 (Qtr End 06/28/08) Earnings Call Transcript
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