Compass Diversified Holdings (NYSE:CODI)
Q2 2008 Earnings Call
August 11, 2008 9:00 am ET
Joseph Massoud – Chief Executive Officer
James Bottiglieri – Chief Financial Officer
Alan Offenberg – Partner
Lawrence Solow – CJS Securities
Robert J. Dodd – Morgan Keegan & Co.
Vernon C. Plack – BB&T Capital Markets
Henry Coffey - Sterne Agee
Good morning, and welcome to Compass Diversified Holdings’ 2008 Second Quarter Conference Call. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Jeffrey Goldberger of KCSA Strategic Communications for introductions and a reading of the Safe Harbor statement.
Welcome to Compass Diversified Holdings Second quarter 2008 conference call. Representing the company today are Joe Massoud, CEO, and Jim Bottiglieri, CFO.
Before we begin I would like to point out the Q2 press release including financial tables is available on the company’s website at www.compassdiversifiedholdings.com. In addition management will file Form 10-Q for the quarter ended June 30, 2008, with the SEC later today.
Please note that throughout this presentation, we will refer to Compass Diversified Holdings as “CODI” or “the company.”
Now allow me to read the following Safe Harbor statement. During this conference call we may make statements that contain certain forward-looking statements, including statements with regards to the future performance of CODI. Words such as believe, expect, project, and future, and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to inherent uncertainties in predicting future results and conditions.
Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and some of these factors are enumerated in the Risk Factors discussion in Form 10-K filed by CODI with the Securities and Exchange Commission for the year ended December 31, 2007, and other filings with the Securities and Exchange Commission. In particular, the domestic and global economic environment has a significant impact on certain subsidiary companies, including our largest, CBS Personnel Holdings. The condition of the economy also impacts to varying degrees each of the other subsidiary businesses. Furthermore, we are uncertain as to our ability to consummate acquisitions which are accretive to shareholders in 2008 or beyond. CODI undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
At this time, I would like to turn the call over to Joe Massoud for opening remarks.
Good morning! Thanks Jeffrey, and actually we have a pretty full call here, so welcome all to our 2008 second quarter earnings conference call. During today’s call, we will provide an update on our operating results and a review of our businesses for the second quarter and first half of 2008. Before that, I would like to offer some general comments on CODI’s performance, recap our two recent divestitures, provide some guidance as to our expectation for 2008 cash flow, make a brief commentary on our valuation, and provide some thoughts on the current middle market acquisition environment.
The last three months have been an exciting period for CODI, which included some significant activity on divestiture front. Currently, Compass Diversified Holdings owns six niche-leading, middle market businesses that as a whole performed extremely well during the first half of 2008. Overall, we experienced significant organic cash flow in the second quarter, notwithstanding softness in the economy.
In the second quarter, we increased cash available for distribution and reinvestment which we refer to as cash flow or CAD by approximately 48% to $13.9 million, compared to $9.4 million for the year ago quarter. For the training 12-month period, CODI increased cash flow to $54.3 million, or approximately $1.72 per share. To give you a sense, the year-ago number for the period ended June 30, 2007, would have been $1.52 per share, so there is some significant growth there.
While many companies are showing declining cash flows across the board in the market, we offer our shareholders a rare opportunity to participate in the growth of our overall mix of businesses. Our strong cash flow levels thus far this year and our expectations for the remainder of the year give us a high level of confidence in our ability to pay and grow our distributions over time as well as to reinvest our significant excess cash flow into the growth of our business.
As most of you know, our model involves acquiring business in cooperation with the management of those companies and working with them to grow the cash flows of their business. From time to time, when our board and management believe it maximizes return to our shareholders, we may also sell our interest in some of these businesses. Two recent examples of the strength of this value creation model were the June sale of Silvue Technologies Group and Aeroglide Holdings.
In each instance, the sale was at a valuation that was extremely favorable to our shareholders. As a result of these sales, CODI booked gains totaling approximately $72.3 million, or $2.29 per share. To recap, we also sold Aeroglide when we sold Aeroglide to Buhler Holding AG of Switzerland for a total enterprise value of $95 million on June 24, 2008. After payments to minority shareholders and payment of all transactions expenses, we received approximately $85.6 million. The sale price was approximately 8.5 times trailing EBITDA which was substantially higher than the multiple we paid when we acquired the business, and as previously announced and discussed on June 25, 2008, we also closed the sale of Silvue to Mitsui Chemicals of Japan for a total enterprise value coincidentally also of $95 million . Silvue was soldas approximately 12 times trailing EBITDA which also represented a significant uptick in multiple.
The sales of these companies demonstrate our proven ability to successfully manage the lifecycles of middle market businesses. Including the sale of Crosman in 2007, CODI has realized more than $105 million in gains on the divestiture of businesses for its shareholders since its May 2006 IPO.
Now turning to guidance, for the full year, we expect CODI to produce between $51 million and $56 million of cash flow in 2008, which is quite similar to our current trailing 12-month results. Also, please note that this guidance assumes that we retain substantial cash on our balance sheet and assumes no additional deployment of this capital capacity prior to the end of the year. Needless to say, for those of you who follow the company closely, should we consummate an acquisition, we would expect it to be immediately accretive to 2008 cash flow in a meaningful way.
From a valuation perspective, we believe we’re currently trading at extremely attractive valuation, both on the basis of multiple of cash flow generated for our shareholders and the sum of valuations of our underlying businesses. Based upon the midpoint of our 2008 estimated cash flow, our company currently trades at only approximately 7 times cash flow, which we think is an excellent valuation, particularly given that our calculation of cash flow excludes the gain that we’ve generated on the sales of our businesses and is net of cash tax payments and maintenance capital expenditures. So, it’s really for us a measure of sustainable cash flow generated for our shareholders and either returned to them or reinvested on their behalf in the growth of their business.
From a sum of the parts perspective, we’ve somewhat unusual in our transparent and full disclosure approach to providing financial information to shareholders. We’ve decided to provide our stakeholders with information on a quarterly basis on each of our subsidiary companies allowing for an analysis of the value of those businesses. A quick and dirty analysis of how we conservatively view those businesses could be done in the following way: Based on our June 30, 2008, financials which we are releasing today, we have $485.4 million of book value, or $15.40 per share. In addition, as part of calculating our supplemental put obligation, we are making quarterly estimate of the gain that would be produced if we were to sell each of our businesses. As of June 30, 2008, this obligation was $13.6 million, implying an embedded gain of $67.8 million, or an additional $2.15 per share, totaling $17.55 per share.
I’d also like to point out that we’ve now sold three businesses since our initial public offering in May 2006, two of the initial subsidiary companies and one that we acquired after being public. In each case, the valuation actually achieved upon sale was substantially in excess of the valuation used to estimate the supplemental put obligation in prior periods. We’ve now achieved over $105 million of unrealized gains for our shareholders in 2 short years. I say this only to lend some validation and credibility of evaluation that we and our outside service providers have arrived at for the existing subsidiary companies and which we believe have the potential to be conservative.
Finally, from a yield point of view, on the strength of our subsidiary company cash flows, we declared a distribution of $0.325 cents per share during the quarter, which at current prices gives us an annualized cash flow yield of almost 11%. As a reminder, we increased our distribution to shareholders by approximately 24% in two short years that we’ve been public; however, we’re not a company whose goal is to distribute all or more than all of our cash flow. Our goal is to create shareholder value through a combination of distribution of cash to our shareholders and reinvestment in our businesses on their behalf.
In terms of acquisition opportunities, we believe the current environment remains very fertile. We are buyer of choice for sellers and their representatives as a result of our committed financing structures and our certainty to close. With the proceeds from the recent two divestitures, we’ve ample capital capacity including approximately $100 million in cash and almost $300 million available under our revolving our credit facility for deployment in an attractive environment. We also have no significant debt maturities until 2012.
With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri to discuss our second quarter financial results.
James J. Bottiglieri
Today, I will review our financial results for the quarter ended and 6 months ended June 30, 2008, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the [inaudible] each of the businesses.
On a consolidated basis, revenue for the quarter and 6 months ended June 30, 2008, were approximately $398.9 million and $750.0 million respectively. Net income for the quarter was $72.6 million, or $2.30 per share. Net income for the quarter includes a gain on the sale of Silvue and Aeroglide of approximately $72.3 million. For the 6 months ended June 30, 2008, net income was approximately $71.8 million, or $2.28 per share. The company also recorded a non-cash expense of $4.3 million in the second quarter attributable to its supplemental put obligation which is a non-cash expense, and which we described in more detail in our 12/31/2007 10-K.
Now turning to results of each of our businesses, starting with Advanced Circuits. For the quarter ended June 30, 2008, Advanced Circuits revenues increased to $14.3 million compared to $13 million for the quarter ended June 30, 2007, largely due to increased sales of prototype and quick-turn productions.
Income from operations for the first quarter was $4.5 million compared to $4.1 million for the same period in 2007. The increase in operating income was largely due to the operating profit generated from the increase in sales during the quarter.
For the 6 months ended June 30, 2008, Advanced Circuits revenue increased to $28.6 million, compared to $26.1 million for prior period of 2007, largely due to increased sales of prototype and quick-turn production. Income from operations was $9.2 million for both periods. Operating income remained flat as operating profit generated from increase in sales was offset by the recording in fiscal 2007 of charges for loan forgiveness arrangements provided to Advanced Circuits management of approximately $1.2 million. This business continues to perform well. Growth has occurred both in its core prototype and quick-turn circuits for production business as well as in its newer and much smaller assembly business. As this leading niche market company grows, it continues to increase its operating efficiency, which in turn leads to opportunities to gain even more customers. We are excited about Advanced Circuits’ prospects for the remainder of the year.
American Furniture Manufacturing – For the quarter ended June 30, 2008, revenues decreased to $31.3 million compared to $35.6 million in the prior year quarter. Operating income was $1.2 million compared to $2.6 million for the second quarter of 2007. For the 6 months ended June 30, 2008, revenue decreased to $68.4 million, compared to $88.5 million for the first six months of 2007. Operating income was $4.9 million, compared to $7.8 million for the first half of 2007. This decrease was due to lower sales resulting from a combination of fire at the facility in February 2008 and from a weakening economy.
Approximately $4.1 million of the operating income recorded in the first half of 2008 was the result of accruing expected reimbursements for business interruption and from other types of insurance for the loss sustained by the fire. Since this fire, we have carefully reviewed the situation and continue to believe that this event will not materially impact American Furniture’s ability to produce cash flow in the medium to long term.
AFM’s 1.2 million square foot facility is on track to be fully operation by November 2008. This business is performing well now and will benefit in the medium to long term from the difficulties facing many of its small competitors. We’re confident that AFM is outperforming most of its industry competitors, signaling market share growth. We’ve both added numerous accounts and increased floor space at existing camps as our less well capitalized competitors face difficulties. We’re excited about AFM’s prospects as it begins to emerge from the current economic softness over the next year or two. In the meantime, we expect the company to produce cash flows at levels expected when we expected when we acquired this business.
Anodyne Medical Device – For the quarter ended June 30, 2008, Anodyne’s revenues increased to $13 million compared to $9.1 million for the same period last year, largely due to sales from new product rollouts. Income from operations increased to $1.1 million compared to $0.4 million for the same period in 2007. The increase in operating income was largely due to the increase in sales.
For the 6 months ended June 30, 2008, Anodyne’s revenues increased to $24.4 million, compared to $18.5 million for the same period last year, largely due to sales from new product rollouts and from the inclusion of sales from its acquisition of PrimaTech which occurred in June 2007. Income from operations increased to $1.6 million compared to $0.7 million for the same period of 2007. This increase in operating income was largely due to the increase in sales.
Anodyne continues to experience a strong ramp-up in its sales of new products introduced in 2007, and we expect it to show strong growth in operating results for the full fiscal 2008 period.
CBS Personnel – For the quarter ended June 30, 2008, CBS Personnel reported revenue of $270.2 million compared to $142.9 million for the same period last year. This 2008 revenue includes $141.7 million of sales from Staffmark, which was acquired January 21, 2008. Revenues on a pro forma basis would have been down by approximately 6% due to the impact of a weakening economy. This decrease is less than that reported by the company’s publicly traded peers whom we follow for their US operations. We believe that this is evidence that CBS is gaining market share in the market in which it operates and further affirms CBS’s distinct operating model. This outperformance is similar to what we saw in the 2000 to 2002 period when our market share gains led to a dramatic increase in accounts serviced and placements as we emerged from the recession.
Income from operations decreased to $4.3 million for the second quarter of 2008, compared to $4.9 million for the second quarter of 2007. The impact of the operating profit generated from sales related to the acquisition of Staffmark was offset by expenses of approximately $1.8 million related to the integration of Staffmark and for $1 million of higher amortization expense largely attributable to amortization recorded for the acquisition of Staffmark. A lower gross profit margin of 17.3% compared to 18.3% in the first quarter of 2007 also contributed to the decrease in operating income as the company experienced higher workman compensation costs due to the Staffmark acquisition.
For the 6 months ended June 30, 2008, CBS Personnel reported revenue of $506.2 million, compared to $278.3 million at the same period of last year. The 2008 revenues include revenues of $251.9 from Staffmark which was acquired on January 21, 2008. Revenues on a pro forma basis would have been down by approximately 5% due to the impact of a weakening economy. As I just mentioned, we are encouraged that this percentage decrease appears to be less than the decrease reported by most of the company’s publically traded peers.
Income from operations decreased to $5.8 million for the first half of 2007 compared to $8.4 million for the first half of 2007. The impact of positive operating profit generated from sales related to the acquisition of Staffmark was offset by expenses of approximately $3.4 million related to the integration of Staffmark and by $1.8 million of higher amortization expense largely attributable amortization recorded for the acquisition of Staffmark. A lower gross profit margin of 17% compared to 18% for the first 6 months of 2007 also contributed to the decrease in operating profit due to higher Workmen’s Compensation costs and a shift in the mix of revenue from the Staffmark acquisition.
Fox Racing Shox – For the quarter ended June 30, 2008, revenue was $34.4 million compared to $26.7 million in the prior year period. The increase in revenue was attributable to increased sales at Fox’s bicycle and power sports divisions. Income from operations was $3.2 million during the first quarter of 2008, compared to $1.7 million for the quarter ended June 30, 2007.
For the 6 months ended June 30, 2008, revenue was $57.9 million, compared to $42.7 million in the prior year period. The increase in revenue is attributable to increased sales from our bicycle and power sports division. Income from operations was $3 million during the first half of 2008, compared to $0.1 million for the prior year period due to the increased operating profits from the increase in sales. Needless to say, we are excited about Fox’s growth for the first six months and are optimistic about the remainder of 2008 as well. This performance both reaffirms our decision to acquire this business earlier this year as well as supports many of the initiatives [inaudible] management to help them strategically manage their growth.
Halo Branded Solutions – For the quarter ended June 30, 2008, Halo’s revenues increased to $35.8 million, compared to $32.4 million for the same period last year, principally due to acquisitions made since December 31, 2006. Income from operations was approximately $0.5 million versus $0.6 million for the prior comparable period as increased operating profits from higher sales were offset by $0.1 million of higher amortization expense associated with amortization of tangibles established in connection with the acquisitions made by Halo.
For the six months ended June 30, 2008, Halo’s revenues increased to $64.6 million, compared to $55.9 million for the same period last year, principally due to $6.7 million of sales from acquisitions made since December 31, 2006, and from increased sales to existing customers. The loss from operations was approximately $0.2 million for the current period versus $0.7 million for the prior year end, as operating profits from the increased sales were only partially by $0.1 million of higher amortization expense associated with amortization of intangibles. As you will recall, this business experiences the large majority of its cash flow in the fourth quarter of the year.
Turning now to our balance sheet; we had $100.2 million cash and cash equivalents and had net working capital of $204.9 million of June 30, 2008. Subject to borrow and base restrictions at June 30, 2008, CODI had over $300 million in revolving loans available to be used to fund acquisitions and working capital requirements. I’ll now turn the call back over to Joe.
Thanks Jim. Before opening the call for questions, I would like to reiterate my overall satisfaction with our performance for the year today. In the face of a challenging economic environment, our business has performed well and demonstrated substantial cash flow growth which we believe demonstrates the strength of each of our individual businesses as well as our model for working with the management teams of those businesses. We believe our stock price remains considerably undervalued based both on a multiple of our cash flow and a calculation of the sum of our parts. Our stock value had begun an appropriate valuation in the wake of our follow-on offering last summer only to be tossed in the current of negative expectations for financial companies since last August which we believe is dramatic misclassification given the vast differences between our business model and those of the other finance companies including the business development companies.
During a cyclical downturn in the economy, we maintain that experience is invaluable. The lessons we learned in acquiring and managing middle market businesses with great success during the last recession in 2000 to 2002 give us a great deal of confidence as we approach the remainder of 2008 and beyond. As a management team, we’ve been together working with the management teams of subsidiaries to successfully execute our model for over a decade. Since entering the public markets in May 2006, we have acquired nine businesses, sold three businesses for a gain of more than $105 million, substantially increased our cash flows and cash flows per share, leading to an increase in our quarterly cash distribution of 24% since inception, and we currently operate six market leading companies whose performance in the present economic environment is outstanding and who are poised for continued growth.
Thank you for your time, and we’ll be happy to take any questions you may have. Please open the phone lines for questions.
(Operator Instructions). We’ll go first to Larry Solow - CJS Securties.
Larry Solow – CJS Securties
The midpoint of your guidance and the CAD over the last twelve months implies a coverage distribution of about 1.3 times. Is that kind of a comfort level? If you were to achieve an acquisition soon to be accretive with this, can you expect this to increase?
First of all, you asked is that a comfort level? A coverage of 1.3 times at this point in the cycle is more than comfortable from a coverage point of view. At this point, the decision our board is making regularly is the mix of distribution to shareholders versus reinvestment in the business. I don’t think there is comfort of continuation of distribution concern at all. Yes, I think that over time as we acquire businesses or even as cash flows of these businesses grow organically, I think that you would expect these distributions to increase. I just caution you from thinking that there is some kind of a 1.3 magic ratio, because there isn’t, and I also don’t think that an acquisition is required for us to consider increasing our distribution.
Larry Solow – CJS Securties
Right. Can you remind us what you actually paid for Aeroglide and Silvue? Do you have those numbers? Do you have a multiple?
Yeah. Aeroglide looked like about just under $50 million all in and represented about seven times. Let me ask you to comment on Silvue because it’s a little bit more complicated given the multiple classes of equity that went in there, but what was the TEV there?
The TEV was $44 million Joe, and it was roughly a little over seven times trailing EBITDA at the time of acquisition.
Your next question comes from Jon Arfstrom from RBC Capital Markets.
Jon Arfstrom – RBC Capital Markets
Question for you on Halo, especially when I look at the AFM numbers and the CBS numbers, obviously a little bit of slowing from the economy and the economic environment in general. At what point do you begin to see the order book for Halo start to build for the end of the year, and do you have any type of look into how the company is doing so far this year given the environment?
I think the point is now, and I refer to an earlier comment on clearly CBS shows the impact of the economy, clearly American Furniture does well, although I would caution you that the American Furniture numbers get better as the year goes on because you don’t have this sort of 3-week period that you are out of business because you have a fire. American Furniture numbers are actually a little bit harder to analyze. I would you argue that the business is doing substantially better from a performance point of view than just 6-month to 6-month comps would do because we don’t know. We certainly think of the fire as being an extraordinary event, but let me talk about Halo. Our view on Halo is that the business will be likely flat to slightly up year over year, excluding the impact of the Goldman acquisition that we made which is a small add on that we did, and so, counting year over year cash flow for that business might be down in the 10 to 20% range excluding Goldman, but then Goldman which is a very low-priced acquisition would make it flat to slightly up. And again, Jake, would you add any color to that?
No, Joe, I would concur with those thoughts.
We’re starting to see it now; same store will be down because it is cyclical, although not as deeply cyclical as [inaudible], impacted by marketing which is clearly going to be down, but it’s not the same kind of effect that you see in staffing or furniture, but particularly staffing where the business tends to lead in and out of cycles pretty consistently.
Jon Arfstrom – RBC Capital Markets
And on American Furniture, Jim, what did you say the insurance coverage was on the operating income number for 6 months?
We recorded $4.1 million of operating income related to insurance which is a combination of business interruption insurance plus other types of insurance.
Jon Arfstrom – RBC Capital Markets
And how much of your normalized operating income without the fire was covered by insurance? Was it all of it?
I would like to say all. Let me just make clear with what’s going on with the insurance. There are two components. There is the regular component which is the building, the inventory, and those kinds of business interruptions. The majority of the claim is the regular stuff, and actually we received to date $18.5 million, and it’s still the third and fourth inning, but we think we’re doing pretty well on the insurance claim, and our consultants feel pretty good about it, so the majority of that $4.1 million that you see in there is sort of not disputable or any question or subject to loss. A good deal of that I think is replacement of the inventory and more property related.
Jon Arfstrom – RBC Capital Markets
Is it fair to look at that $4.9 million and say that apples to apples hit, nothing happened?
Yes, although I think we are being conservative in our recording of business interruption insurance.
Jon Arfstrom – RBC Capital Markets
On CBS, Joe, your comment, I believe you used the word leading indicator, and I guess this is more of a question on CBS and also the economy in general. Just give us an idea of what you’re seeing out at CBS. Is there any hope for the economy, and give us a general overview?
I’m going to pass on that, and let the much better looking guys on CNBC do that. The only problem with the economy is talking about how the industry is doing. We are down in the order of about 6% in the first 6 months, and you can track the public comps probably better than we can, but they look like they’re down 8-10%, so we’re happy that we’re outperforming. Do we think we are gaining market share? Yes, but the point being that this market has slowed down right now. The second half of the year, we don’t think is going to be better than the first half of the year from a year over year comparable. It might be a little worse, so that would sort of be a gloomy picture, but I have to tell you it’s a little unusual because Advanced Circuit is doing very well, Fox is doing very, very well; knock on wood on both those counts. Halo is hanging in there. Anodyne is very well. So what we actually see is a little of a mixed story, and I have to tell you we have these separate board meetings where we go through with every company and we keep asking them what they see in the economy, and I personally emerge with a little bit muddled view. Certain pockets, like in Fox, we believe is driven by enthusiast purchases and today those enthusiasts appear to continue to be making their purchases and business is growing dramatically. Our business is up at Advanced Circuit, but interestingly the entire printed circuit board business in the United States is up a little bit, not as much as ours. Now some of that might be a dollar effect, maybe some of these circuit board companies are more competitive than they historically had been, but this is a sector that doesn’t seem to be as beat up, so I think it’s a little bit difficult to see the picture. Jim, do you have any things here?
James J. Bottiglieri
I wish I could tell you more Jon, but the way we’re planning and this has been absolutely an expectation, but the way we’re planning for CBS, just so you know, is that’09 will be a lot better than 2008. We are kind of hunkered; we don’t expect a big recovery in that business. The management team there is very good at this. This is nothing like the 2002 recession from a staffing point of view, and they really very successfully navigated through that, added hundreds of net customers during that period. Our philosophy at CBS is to sell through these downturns, to use this opportunity to motivate our sales people to pick up customers who may be left behind from smaller competitors who are not operating or larger competitors who have abandoned some of our markets where we have a lot of density, and kind of out the back-end, and there will be a back-end whether that is ’09 or ‘10 or whenever out the back-end, we found that our customer counts have been significantly higher and we already see encouraging signs in this downturn of increasing growth in customer count. That’s the way we feel you manage a cyclical and we’re doing the same thing with American Furniture. We’re very focused on shelf space there, and we know we’re adding customer accounts and we’re adding effective shelf space. That market will return, and the key is on the other side of the recession, do you have more shelf space and more customers than you had going in? Managing a cyclical is very different than managing a medical device company, and managing a cyclical is all about pouncing and not being obsessed with your quarter over quarter numbers but pouncing on opportunity and weaker competitors when the downturn hits, and that’s one of the beauties of buying cyclical; if you buy strong competitor and you capitalize it well, in and out of cycles, it will have dramatic growth prospects.
Jon Arfstrom - RBC Capital Markets
And then just one followup on that, you touched on it in a couple of spots, but would you entertain something like Staffmark again or given the size of CBS relative to the rest of your businesses, would you prefer to allocate capital in another industry?
We wouldn’t entertain something the size of Staffmark now, not necessarily because of capital allocation, but because there is a certain heavy integration going on right now. I don’t know if anyone from CBS is on the call, but I’m sure they’re sitting there nodding their head if they are. There’s a lot of work involved, you’ve got a systems integration, you’ve got branch mergers in 30 plus locations, so I think right now there’s a lot on the plate to handle. I also think that like what Jim said at our current size and with our current mix, I don’t think we would elect to acquire a business in that same industry of that magnitude because of what it does to the overall mix, which is not to say that if we were to look out 9 months from now if we’ve been successful at doing a couple of other acquisitions and we had an interesting opportunity that we wouldn’t go after. But I hesitate to put any kind of hard and firm boxes around it because this is the time you see opportunity, and the reason we’ve been pretty good at this over the last decade is when opportunity knocks you have to be ready to open the door and capitalize do that, so I don’t want to say we would never do it because I don’t know what the universal possibilities are, but we are not actively out seeking additional large acquisitions for CBS right now.
We’ll go next to Robert J. Dodd of Morgan Keegan & Co.
Robert J. Dodd – Morgan Keegan & Co.
Coming back to the economic issue but from the other end, kind of looking at a socks factory which did very well, a somewhat more discretionary item and even AMEX is pointing to you that your high income consumer is pulling back a little bit as well, so could you give us an idea where that stands and where particularly it is in the new product rollout cycle?
That’s a broad question. On the component of rollout cycle, I’m going to ask Alan to make some comments on that. Let me make a couple of comments; Fox’s improvement in performance is driven both by top line and operational improvements that we’ve been working on. So, there are two components to the growth. What I hear you talking about is the top line side of the business; we don’t see either from our OEM customers or from our own checking of sell-through into the retail base a decline in this market. In fact, we believe that within mountain-biking, the shift towards high income or high cost or more expensive mountain bikes continue. It’s a growth sport in Europe, so that’s been an additive factor for us, and in addition, we believe we have a higher percentage of high-end mountain bikes broadly defined to carry our suspension products now than a year ago. So, there are kind of multiple things going on there. Within biking, mountain biking is growing compared to road biking. Within biking, growth in mountain biking is particularly strong in Europe. Within mountain biking, the dollar per unit spend we think is increasing, and the within the high-end, we think our penetration has grown, but this is a business that while we are nervous about all our businesses, so this is the business we swept and we say let’s look at the data and man, it’s right there, you simply check the sell-through data to try to understand what’s going on. As far as we can tell, the sell-through is strong. Can you comment on where we were with product cycle development and how that would impact us over the rest of the year?
We’re constantly bringing new products to market, and we rolled out a number of new products for the 2009 model year that started shipping in April and May; most of those products are just evolutions of product that we have in the marketplace today, and so, I would say the majority of growth that we’ve experienced concurring with Joe is with Europe being considerably stronger this year. In addition, we did have some pretty significant. There were some price increases that went through both in Europe and domestically that helped carry revenues, and we believe that we took additional spec with a lot of the OEMs on some of the new 2009 model year products, so that was really the combination. There is no one single new product that we rolled out though that would account for the majority of the growth.
Robert J. Dodd – Morgan Keegan & Co.
And then if I could just toss in one more, on Anodyne; again, it did slightly better than I was looking for. Is there any change in terms of the pickup in buying patterns, the penetration with the product into the end markets? Are you gaining share with that product?
Yeah I think we continue to work on successfully developing contracts with our largest three or four customers who are the primary players in their end market from a distribution point of view. I don’t think there’s really a change. I actually think, knock on wood, this year is pretty much coming in as we expected. Obviously there is a mix shift, we have higher sales to one particular customer than another than we expected and they kind of offset, but by and large I think this year is a little better than our internal budget, again I don’t remember what you projected. It’s a little better than our internal budget, but by and large, it’s hitting our expectations for growth here; so I don’t think there’s anything particularly dynamic. There continues to be an increased demand for more dynamic support services and higher-end support services, and that’s something we’re enjoying, that’s something that has been prodded along by the insurance industry as you and I have discussed Robert, so, no, I don’t think there’s anything going on here at Anodyne that is any different than what we expected going into the year.
We’ll go next to Vernon C. Plack - BB&T Capital Markets
Vernon C. Plack - BB&T Capital Markets
Joe, my first question is for you, and that is, given the cash you have on your balance sheet, just curious in terms of other than keeping that for an acquisition, any thoughts to either paying down your facility or re-purchasing stock?
Let me answer the first one on facility. As part of proceeds from the sales of Aeroglide and Silvue, we did pay down $65 million of revolving borrowings outstanding. That brought them down to zero at June 30th. The only other debt that’s outstanding is our term debt, and obviously we look at that as long-term capital, so we chose not to pay that down at this point in time, and I’ll let Joe talk about the share repurchase.
The share re-purchase one, that’s a great question and one that we spend a lot of time talking about with our board, and there’s clearly at some price obviously it’s a no-brainer and you do it. From our point of view, given our liquidity and our capacity and the opportunities we are seeing now, the best long-term impact for our shareholders is to continue to put our heads down and apply our businesses that we think are interesting and work with management to grow them. Again, our cash flow per share was up like 12% this year among a set of businesses, at least one or two of which are reasonably cyclical, and so we think the model works very well. We’ve talked to our shareholders about this, at least our largest shareholders, and by and large, their view is let’s not manage for what the stock price looks like next week, let’s manage for growing the company and building it over time, and from our point of view, as we emerge and we look back a couple of years from now and even beyond, using this capital to capitalize in the current buying environment is going to be a good decision we think; but is it on the table? It’s always on the table. We manage money for our shareholders and we’re pretty significant shareholders ourselves, so we’re trying to make sure that the stock value moves. You follow the BDCs, Vernon, so you know as well as others that if you were chart us against some of these finance companies, our line pretty much moves not as steeply downward as theirs, but our stock price kind of floated along. We find ourselves now 2 years out from our IPO basically flat if you include our distributions and where our share price is, but it was a year ago that the stock was trading at $18 and seemed to have a lot of momentum behind it, and then some of these financials got hit. So, we’re trying. We’re not going to let the misclassification of our stock, which I think is clearly what’s happened here by the market, dictate our decision-making. We’re trading at 7 times cash flow. Our shareholders can see what we’re doing. They see our businesses are growing, and by and large, as I said, the largest of them think we should keep doing our job, so that’s kind of how we look at that, but it comes up a lot.
Vernon C. Plack - BB&T Capital Markets
That implies to me that you’re fairly confident that you’re going to put some of the cash to work within the next 12 months.
Yes. Whether we do or not, I don’t know, but if you’re saying am I confident, the answer is yes.
Vernon C. Plack - BB&T Capital Markets
Looking at second quarter results, I know Aeroglide and Silvue were sold. Outside of the realization of that gain in the financials, did the revenue or their operating income show up anywhere in the financials on a partial basis for any of those companies during the second quarter?
They show up as discontinued operations, but when you look at our 10-Q, we’ve broken it into detail, where you will be able to see the operating income for the 3- and 6-month periods of both companies, and the operating is also strong for both of those periods.
Vernon C. Plack - BB&T Capital Markets
Just one other question as it relates to very good results for most of the portfolio companies, America Furniture, my question there is you have your extraordinary event. Also, just curious in terms of, I believe, there is some seasonality there, and I think, isn’t the back half of the year typically less than the first half of the year?
Yes. The first quarter is typically the strongest, the second and third quarters slow down, and the fourth quarter begins to pick back up. So, yeah, the first half of the year, Vernon, is typically on the top line stronger than the second half of the year which made the timing of the fire actually bad. It’s never obviously a good timing to have a fire like they had, but in the context of their business having it in February this year was the worst possible timing because it eliminated their finished goods in the finished goods warehouse at a time where they were shipping and selling the most furniture.
Vernon C. Plack - BB&T Capital Markets
Is there a meaningful difference, you talked about the seasonality, typically, I know typical is a very broad word, but just trying to get a sense for where revenue is going to be for the rest of the year since I have it down for both the third and fourth quarter from where it is today.
The third quarter, I believe, Vernon, is typically their softest period in the year, and I think historically that’s been probably in the 20% or so of revenue range where the fourth quarter picks back up, where it is closer to probably 25% or 30% revenue.
(Operator instructions). Our next question come from Henry Coffey from Sterne Agee.
Henry Coffey - Sterne Agee
Congratulations on a great quarter! As you start to look at the staffing business where are you in the integration process, and I guess the most compelling question is what are you going to do next with the money? Have you actually sort of sat down and started coming up with a target list or is it really…
The integration is actually going pretty well. It doesn’t mean you see it all in the ’08 numbers necessarily. Let’s say, from an operational point of view, we feel like we’re hitting all our targets, especially ahead of target in some areas; there are some one-time costs associated with pulling off the integration, but I would say all in all we feel pretty good, and most importantly we’re really happy with the key senior executive team. If you look at the top 20 people and you combine the strong people at CBS with the many people that we’ve integrated from Staffmark, we’re really excited actually and we’re really excited about our geographic coverage and we’re excited about our ability to sell business in certain geographic markets where we already had a relationship with a customer in one geographic market and now we’re trying to extend it; so we actually think the integration is going very well, and we’re really happy to have done the transaction financially. From a quantitative point of view, our view that this integration would on a full-year basis create $7 million to $10 million of synergies. We feel pretty good about that, and we feel good about it at the highest end of that range. So, the integration is going well.
The process here isn’t one that’s kind of now that we found love, what are we going to do with it? It’s not a matter of, here’s this cash, and how do we go out and redeploy it. There are a number of opportunities that we’ve been evaluating for quite some time that have come to a head, and we believe that, someone asked, might have been Vernon, am I confident that it will happen over the next 12 months; absolutely, and there are things we’re working on that we’re pretty excited about that hopefully will come sooner than 12 months. So, it’s not a matter of sitting around and okay, now what do we do? Because we never got to a point where we didn’t have cash, and that was all kind of philosophically where we were while we did the follow-on offering last year; if we hadn’t sold Aeroglide and Silvue, we’d still be pursuing interesting opportunities right now. From our point of view, these were two great multiples on businesses that basically just bought up a lot more time before we had to think about pulling back our acquisition activity or raising additional debt or equity capital. So from our point of view, I don’t say we don’t; we of course care about the stock price, but we don’t care about it from the point of view of needing to raise capital. Right now raising capital is not a consideration. Managing our businesses through an economic downturn is consideration number one. Pursuing potentially interesting opportunities where we’re the only show in town in a lot of cases with committed financing is focus number two.
Henry Coffey - Sterne Agee
Your mailbox is probably pretty stuffed with people trying to sell you companies every morning. If you were to start to aggregate…
Our mailbox is always stuffed with those people. I actually think the mailbox has kind of skinnied down a little bit; in other words, if you’ve got a company and you don’t need to sell it now, it’s like a home, why would you, but what I’ll say is, where there are opportunities, people are selling companies, in some cases it is private equity firms, because they are trying to create IRRs, to raise another fund, or they are trying to create liquidity, or they are coming to the end of their own funds; in some cases, it’s family businesses, and in some cases it’s large corporates that are having trouble in their core businesses and are trying to raise money to pay down debt, and in other cases where you have a seller that wants to sell where I will tell you that hit rates are a lot higher. Where in the past our valuation might have been, “okay, that’s interesting, thanks for talking to us.” Right now, we say, “Well, here’s the valuation, and by the way, here’s the check behind it 60 days from now.” That’s a pretty interesting conversation starter.
Henry Coffey - Sterne Agee
So, it’s a better list; what do actually values look like compared to where we were say this time last year.
That’s a question we get a lot, and the problem is every company is so different that it’s hard to say. In general I would say the valuations have come down a little. I wouldn’t say valuations have come down a lot, but what I will say is that we are at our fairly conservative valuation, I think, from day one we’ve known each other Henry; we’ve always said valuation is critical for us and we will not overpay for this. We are not guys that are going to pay 14 times for a gem of a business, and that might make someone a lot of money, but that’s not our model. What I will say is our valuations that we think are appropriate, given our financing, the strike zone is broader. We’re now more interesting to people. There are certainly still companies out there where people are overpaying, there’s a lot of equity capital, I don’t want to make it seem like valuations have fallen off the cliff. I think our target zone has widened a little bit.
And we’ll take our final question from Larry Solow from CJS Securities.
Larry Solow - CJS Securities
Just a couple of follow-ups. Joe, you said on CBS Staffmark, your expectations for ’09 are more or less similar to ’08, but would you expect with the integration that you would, assuming revenue or performance was going flat in the industry, your integration would lead to better performance year over year.
Yeah, I think that’s a fair assumption, but I will say this. The first quarter which I know is not the biggest quarter in the staffing industry, my guess is that the first quarter of ’09 from a revenue point of view versus the first quarter of ’08 would be soft, not just for us, but for the industry. The comparison quarters won’t actually reach flat maybe until second or third quarter. So, in general, I hope that EBITDA was up, cash flow was up, on a total basis because of the impact of synergies? Absolutely, but I don’t necessarily think that ’09 revenues are going to be flat to ’08 revenues, but I think you still got may be another quarter of bad comparison. James, you might have better thoughts on this.
No Joe. I would concur with that. I think there will be some more synergies that we haven’t achieved in the first quarter that will impact ‘09 cash flow positively, but given where the Q2 trends were broadly in the staffing industry and just the seeming deterioration in the US economy throughout the first half of the year, if one thought that the economy was going to stay relatively weak over the next 6 to 9 months, it’s likely that Q1 will be a little softer next year in revenue generation than it was in 2008.
Mr. Massoud, at this time I’d like to turn the conference back over to you for any additional or closing remarks.
Thank you all for your time, and to tell you from our point of view, we’re pretty happy with the second quarter. We’re pretty happy with what we’re seeing. We think the model is performing as it should. We’re going to continue to work to make sure that the underlying performance, which I think has been very strong, translates into share price for all of you, and we’re excited about the future. We expect to have a good call here 3 months from now.
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