Presstek, Inc. Q2 2008 Earnings Call Transcript

Presstek, Inc. (PRST)

Q2 2008 Earnings Call

August 1, 2008 8:30 am ET

Executives

Kathleen Makrakis – Director of Investor Relations

Jeffrey Jacobson – President and Chief Executive Officer

Jeffrey Allan Cook – Executive Vice President and Chief Financial Officer

Analysts

Chuck Murphy – Sidoti & Company, LLC

Robert Brown – Craig-Hallum Capital Group LLC

James Ricchiuti – Needham & Company

Ben Carlin – Wachovia Securities

Matthew Campbell – Knott Partners Management, LLC

Joe Pratt – A.G. Edwards, Inc.

Scott Sorell – [Escoia] Technology

Presentation

Operator

Welcome to the second quarter 2008 Presstek, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Kathy Makrakis, Director of Investor Relations of Presstek.

Kathleen Makrakis

On the call today are Jeff Jacobson, Presstek’s President and Chief Executive Officer and Jeff Cook, Executive Vice President and Chief Financial Officer.

Before we begin we need to briefly cover the Safe Harbor provisions. Certain statements that will be made during this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are detailed in our press release dated today and in reports filed by the company with the SEC including its Form 10K. Investors should not place undue reliance on forward-looking statements as a prediction of actual results.

In addition, certain of the information in this presentation include non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP financial measures is provided in our press release. Today’s call is being recorded and a replay will be available. Information on how to access the replay is included in our release. On the call today Jeff Jacobson will make some overview comments on the quarter and Jeff Cook will go through the financials in more depth and then we’ll take a question.

With that I’ll turn the call over to Jeff Jacobson.

Jeffrey Jacobson

This morning I’ll make some brief comments on the quarterly results which Jeff will then expand upon. In the second quarter we reported a $5.4 million after tax profit improvement versus last year’s results. The year-over-year improvement was due primarily to improved margins and reduced operating expenses driven in large part by the business improvement plan we announced in October 2007.

Although last year’s results include a large impact from one time and special charges, we successfully offset a 21% reduction in revenue with the benefits of our business improvement plan. An area of key focus for us over the past year has been on improving controls and processes and we are pleased that the discipline we have implemented has prevented the recurrence of similar charges in 2008.

We achieved profitability in the quarter despite disappointing revenues of $54.3 million, a 21% reduction from prior year levels driven primarily by lower U.S. equipment sales. As you recall, in the first quarter of 2008 we reported weak European sales as a result of the impact of the extensive business reviews we conducted in the fourth quarter of 2007. On our first quarter call we indicated that we felt the European revenue weakness was a temporary setback and we expected second quarter consolidated revenues to exceed first quarter levels.

Second quarter European revenues did rebound with a 42% increase versus first quarter 2008 levels and our second quarter consolidated revenues did exceed first quarter levels but candidly not to the extent we were expecting due to increasingly weak economic conditions in the U.S. While we continue to feel good about the sales funnel we have developed, we are sensing a reticence on the part of some customers to commit to major capital equipment purchase decisions as a result of the current economic uncertainty. In fact, $11 million of the $14.5 million revenue decline was related to equipment sales. As a result we were unable to offset the expected erosion in our traditional business with increased sales in our growth business.

Despite reduced revenues in the quarter the company reported EPS of $0.02 in the second quarter of 2008, a $0.15 improvement over the prior year. Gross margins in our consumables and service businesses improved considerably in the quarter versus last year and operating expenses declined 30%. These improvements were driven in large part by our business improvement plan. In addition to improving our cost structure, we have also been successful in reducing debt net of cash from $32.7 million a year ago to $22.6 million as of the end of June. This level has been further reduced during the third quarter by the net proceeds of the recent $8.75 million sale of our Lasertel property in Arizona.

I am extremely pleased with our progress in significantly improving profitability and gross margin and reducing net debt. As we review year-to-date results it’s clear that our ability to fully achieve our desired operating margin targets has been challenged in the near term. At the end of the first half of 2008 our operating margin, excluding restructuring charges and stock based compensation expense, is 4%, a significant improvement over 2007. In the second half of 2007, when we developed operating margin targets of 6% to 8% for 2008 and 9% to 11% for 2009, we did not anticipate several factors that have impacted our June year-to-date 2008 performance.

First, we did not anticipate the low level of European sales in the first quarter of 2008 which resulted from our 2007 business reviews. Our thinking also did not anticipate the severity of the weakened U.S. economic picture and increased legal expenses of approximately $2 million annualized related to the defense of our intellectual property and regulatory matters.

While we are still driving the organization to achieve the operating margin targets we communicated, we believe it is prudent at this time to modify our 2008 operating margin guidance to a range between our current margin of 4% and the lower end of our target range as we are not optimistic about an economic recovery in the second half of this year. As we monitor the economic situation through the remainder of 2008 we will be in a better position to assess our 2009 financial goals.

While the economy is beyond our control, we made excellent progress in areas within our control. I am extremely proud of the Presstek team for delivering a year-to-date profit improvement of $6.4 million from continuing operations or $0.18 per share improvement. Results like this are only achieved with focus, extreme dedication and relentless hard work. We believe we have created a strong foundation that will benefit us when the economy recovers.

With that I’ll turn it over to Jeff.

Jeffrey Allan Cook

As Jeff mentioned, our revenue during Q2 was $54.3 million, a decline of $14.5 million or 21% versus a near record high of $68.8 million during the second quarter of 2007. Of this decrease, 76% or $11 million was from lower equipment sales and occurred primarily in the U.S. market. We are experiencing situations where customers are delaying major capital equipment decisions in the face of increasing economic anxiety.

Approximately 90% of the decrease in year-over-year consolidated sales occurred outside of Europe. Our European sales rebounded from the first quarter of 2008 although they were $1.6 million below 2007 levels which we believe is in part related to customer purchasing decisions tied to the Drupa trade show which occurred during early June. The decrease in equipment revenue impacted results from our growth portfolio of products which declined $7.2 million or 20%. Sales of our highest ticket product line, DI presses, decreased 37% and our growth CTP platesetters also declined. This area was hit particularly hard in the U.S. by economic conditions.

Growth portfolio consumables increased 8% driven by an 11% decrease in DI plate sales and a 5% increase in CTP plates. Lasertel’s external revenues improved 22% in the quarter versus 2007. Sales of our traditional portfolio declined 22% in the quarter. However, the sequential quarterly rate of decline has dropped steadily over the past four quarters. This continued erosion is the expected outcome of technological trends in the industry and our strategy is designed to more than offset this erosion by increasing sales of our growth portfolio products.

The current economic situation, particularly in the U.S., is having a negative impact on the timing of this transition. Service and parts revenues declined 13.7% driven to a large extent by declines in the traditional contract base and to some extent the impact of lower commercial print volumes due to the economic slowdown. We have been successful in improving U.S. and Canadian DI equipment attachment rates which grew from 10% in 2007 over 55% in 2008. While this progress is not yet evident in our financial results due to the warranty period, it is a positively an indicator of future sales growth.

Gross margin for the quarter was 32.5% as margins improved significantly in both our consumables and service businesses. This was due in large part to our business improvement plan. In addition, our higher margin consumables and services businesses represented a greater portion of total sales in the quarter which had a positive impact on gross margin. As part of our BIP initiatives we enhanced productivity in South Hadley, where our CTP plates are manufactured, improved supply chain management and inventory control, increased the utilization of field resources in our service business, lowered freight costs and increased prices on some of our consumable products to help offset higher raw material costs.

Operating expenses were $16.2 million in the quarter versus $23.1 million in 2007, a reduction of $6.9 million or 30%. 2008 results include $0.6 million in special charges while 2007 included $2.3 million in special and one time charges. Excluding special and one time charges in both years, the decline in operating expenses was still a sizeable 25%. Our sales, marketing and customer support expenses of $8.1 million decreased about 26% from last year as a result of our business improvement plan as well as lower revenue related expenses.

G&A decreased $3.3 million versus last year due to lower stock compensation and other expenses in 2008. Finally, we recorded special charges in the quarter of $0.6 million primarily due to adjustments to carrying values of certain fixed assets we’re preparing to offer for sale in line with our BIP initiatives. Lasertel recorded an operating loss of $0.7 million in the quarter due primarily to product mix and factory loading issues.

Interest and other income, which is comprised primarily of foreign exchange, was slightly positive in the quarter, a $1 million improvement versus 2007. Interest expense declined 59% or $498,000 versus last year as we have significantly reduced our debt levels. Our adjusted EBITDA was $4.2 million in the quarter, a 20% improvement versus last year. Cash and cash equivalents at the end of Q2 was $4.4 million and total debt at the end of the quarter was $27 million. Our debt net of cash was $22.6 million, a 31% improvement from the second quarter of 2007. The net proceeds of the July 2008 sale of the Lasertel land and building mentioned previously by Jeff will help to further reduce debt.

That concludes our formal comments and we would now like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chuck Murphy – Sidoti & Company, LLC.

Chuck Murphy – Sidoti & Company, LLC

Just wondering if you could explain the discrepancy between the CTP products and the DI products. DI picked back up in the second quarter; CTP was off some.

Jeffrey Allan Cook

The terms of the number of unit sales?

Chuck Murphy – Sidoti & Company, LLC

Yes.

Jeffrey Jacobson

Well, when you say discrepancy though, Chuck, is –

Chuck Murphy – Sidoti & Company, LLC

Well, I just mean why one went up and the other went down.

Jeffrey Allan Cook

The number of CTP unit sales, obviously it varies significantly by quarter but you’re seeing the same thing there that we saw in DI. I think why you’re seeing a discrepancy is DI was quite low in first quarter due to drop in the European sales. That put them in the DI area and so now they’re recovering in second quarter which is making the total number go up slightly but the drop in CTP is in line with, hit by the economy.

Jeffrey Jacobson

If you look both, Chuck, at DI prices and CTP platesetters they’re both down about the same amount.

Chuck Murphy – Sidoti & Company, LLC

You mean year-over-year?

Jeffrey Jacobson

Year-over-year, correct.

Chuck Murphy – Sidoti & Company, LLC

What do you expect the stock compen to average over the next few quarters?

Jeffrey Allan Cook

It’s probably around $500,000, $600,000 a quarter hit for us.

Chuck Murphy – Sidoti & Company, LLC

Just because it’s been running, I guess, closer to $400,000 the past couple quarters but you think it’ll get back up closer to $500,000 or $600,000?

Jeffrey Allan Cook

It varies gradually as you issue options here and there; it does start creeping up a bit.

Chuck Murphy – Sidoti & Company, LLC

In your interest income and other line, it was a benefit. Was there something included in that number?

Jeffrey Allan Cook

Yes. There was some foreign exchange benefits from overseas that helped offset the interest cost.

Chuck Murphy – Sidoti & Company, LLC

Can you say how much those were?

Jeffrey Allan Cook

Well, you can probably guess, given the interest costs were roughly around just under $400,000 and they were offset by some foreign exchange benefits.

Chuck Murphy – Sidoti & Company, LLC

But either way, the interest expense has come down?

Jeffrey Allan Cook

Oh yes, significantly. Last year at this time, we’re up around $800,000, $850,000 a quarter.

Jeffrey Jacobson

Yes. Remember, Chuck, early on when Jeff and I and the team started a little over a year ago we said one of the first things we wanted to try and do is drive down those interest expenses. Jeff said they were running all finance charges over $800,000 per quarter and over $3 million in annualized charges was a big hit to the company so a lot of hard work in driving those down.

Jeffrey Allan Cook

Yes. We brought that down by the lower debt and as the debt lowers, our interest rates per our agreement with the bank dropped too so we’ve gotten a lot of help there.

Chuck Murphy – Sidoti & Company, LLC

And my final question, the tax rate obviously very high. Is there something included there?

Jeffrey Allan Cook

Yes, each quarter when you do your taxes you’re targeting a year-to-date and total year target that you’re doing there. We had, given some changes and assumptions of where the earnings were going to be sourced be it foreign versus domestic, we took an increase in Q2 to adjust the year-to-date run rate. On a quarterly basis, we expect that to drop down a bit, probably down around 50% or so in future quarters. The biggest issue there is the subpar net income that we’re experiencing from Europe.

Chuck Murphy – Sidoti & Company, LLC

Do you think next two quarters more like 50%?

Jeffrey Allan Cook

Yes. That is what I’m thinking. We’re always looking for ways to minimize our tax hit but that’s what we’re expecting right now.

Operator

Your next question comes from Robert Brown – Craig-Hallum Capital Group LLC.

Robert Brown – Craig-Hallum Capital Group LLC

I wanted to get a little color on your outlook for the rest of the year. You’ve talked about it softening in the U.S. How do we think about the sequential step forward in your sales? Should we think of Q2 as more of the level that things stand or do you see that dropping down sequentially as we go forward? And then maybe any color on how Drupa might impact that would be good too.

Jeffrey Jacobson

Jeff and I had a lot of conversation about that, anticipating the question. I’d be very disappointed if we did not experience sequential increases in our revenue. As I mentioned going into the quarter, the second quarter I actually would have thought that our revenues would have been higher than they certainly were because we knew Europe would rebound; we felt very good about the funnel. We felt very good about what was there and to tell you the truth, back in April we felt very good about the U.S. funnel.

And we saw in April it was very strong and the funnel still is strong. May got a little more cautious and into June, as we said, there was reticence on the part of customers to spend the money on capital equipment I think until they see where the economy’s going; they want to get more comfortable. We’re not anticipating revenues to go down sequentially but very candidly, until we see what shakes out in the U.S. economy, it’s very difficult to predict what there’s going to be.

To give you a little color around what we’re seeing with the revenues and why we got hurt this quarter and what we have to overcome as we move forward, if you look at the mix of our revenues and you go back to when Presstek bought A.B. Dick at the end of 04 and I said this at the annual shareholder meeting to the people that were there, it was essentially about an $80 million company, Presstek, buying a $160 million A.B. Dick business.

So somebody had asked me was it a good acquisition if the revenues were declining because if you look at where the revenues are today for the first half of the year for those products, it’s pacing on an annualized rate of about $80 million. Let’s call it about a $20 million annual erosion in those products which if you think about it, with the DPM or polyester plate, the service business attached to the conventional hardware, you look at the service business as I said that’s attached to that, the supplies business and the conventional presses, those are all coming due to a technology shift.

So it should not have been unanticipated that that has been coming down about $20 million a year and if you look at the margin of those products on a cash basis, it was a good deal. So if you were a privately held company you would do it 10 times over again. When you’re a public company and you have a business that’s declining because it’s primarily analog business to the tune of about $20 million a year, you need to make sure that your newer businesses: your CTP, your DI presses, that those are growing.

So what we’re seeing is that our Presstek brand of DI plate business where it is today is offsetting the erosion of the QMDI consumables business. So that’s why we’re really focusing on getting into larger customers who will burn more of those products and we have to get the CTP business going a lot better than it has been. And that’s where the economy’s hurt us. If the economy was prospering the way we had hoped it was when we came on here 14 months ago or so, yes, that would have offset a lot of the hurt. So what we have to do now is ensure that the A.B. Dick erosion is stabilizing and hopefully the economy will come back. We get a lot more DI presses out there, more CTP which will then drive the consumables and services business.

Robert Brown – Craig-Hallum Capital Group LLC

Now, that’s good color. Are you seeing any distinction between the larger printers you’re going after and the smaller guys in terms of the economic impact or is it really across the board?

Jeffrey Jacobson

I think logically the larger ones would have a little more comfort but if you look at some of the results that have been issued already in the industry, I think the good thing is I don’t think anybody anticipated the U.S. economy really to the extent where it is today. In all my years, this is probably as difficult as I have seen it. The good news from our standpoint is we really got ahead of the cost curve. I think you see a lot of companies who are issuing their results now and they have significant profit erosion year-over-year where we had significant profit increases year-over-year and that’s because we really got ahead of the cost curve; 30% operating expense decline and those are the things you have to do in these tough economies.

What you have to do now is do all the blocking and tackling, do all the fundamentals, run your business the way it should be run, take care of the things you can control and then when the economy comes back, you’ll be in a better position. But the short answer is, the larger company will be more inclined to spend the money but I don’t want to portray for a second that they don’t feel the economy the way everybody else does.

Robert Brown – Craig-Hallum Capital Group LLC

Maybe one follow into that. Do you see, I guess maybe I think you said that you do not see this happening in Europe though; this is U.S. phenomenon at this point.

Jeffrey Jacobson

I think to think that what goes on in U.S. doesn’t affect the rest of the world. We’ve already seen a little bit of weakness in the U.K. and I don’t know that you can have a weak U.S. economy without having some impact on the rest of the globe.

Robert Brown – Craig-Hallum Capital Group LLC

That makes sense. And then I think you mentioned some legal expenses. Do you see those continuing the rest of the year or should they really drop off?

Jeffrey Allan Cook

Yes. No, we do. We, no, been roughly average around $500,000 a quarter, maybe a little bit more in Q2 but, yes, the $2,000,000 for the year is a pretty good figure.

Operator

Your next question comes from James Ricchiuti – Needham & Company.

James Ricchiuti – Needham & Company

Question, Jeff, just with respect to the slowing U.S. economy and your efforts to go after larger customers, I’m just wondering given that they’re probably not pulling the trigger on other equipment purchases, does this give you any, I’m wondering if it helps in the long run as you try to target this market because it gives you a little bit more time to go after these customers.

Jeffrey Jacobson

Jim, you must have been sitting in our conference room last night because we feel that way; we hope we’re right. We think the slowdown does give us a chance to gain some traction in that they’re not pulling the trigger on some other things, absolutely. And we also think that where our DI is priced and our CTP is priced gives us an opportunity for those customers who may have been looking to buy some offset machines that perhaps they were going to spend $1 million, $2 million, $3 million, $4 million and the fact that we have machines that can meet their needs in the neighborhood of $500,000 plus; we think that could be a benefit.

So while certainly these economic headwinds are hurt, we do see somewhat of a silver lining to some degree.

James Ricchiuti – Needham & Company

Do you see much of a negative impact from the economy going forward on your consumables business in that maybe folks are going to be burning a little bit less?

Jeffrey Jacobson

Yes, certainly, one of the first things people do in tough times is they cut their advertising budgets so certainly that will impact print but as Jeff said, of our $14.5 million erosion, $11 million was on the equipment side so we’re certainly feeling a lot more but we won’t get as much of the uptick in consumables that you would hope because certainly advertising dollars have been down and we anticipate will be down, and that does affect print to some extent.

James Ricchiuti – Needham & Company

And just shifting gears a little bit, I wonder if you can give us an update on how some of the newer products that you’ve introduced since going back to Drupa have been received so far in the market.

Jeffrey Jacobson

Yes, many of these, as we said in the press releases, are being rolled out in the second half of the year. When we presented them at Drupa or introduced them at Drupa, we said they’ll be rolled out in the third or fourth quarter. So right now it’s really fully commercializing them in terms of doing the WebExes and the training with our own internal people, our own internal sales force with our dealers, getting them up to speed so I don’t think you’ll see a tremendous impact from that in the second half of the year. And what we’re trying to do is get geared up, have it certainly showing at Graph Expo which is the last week of October and then start getting sales towards fourth quarter and the beginning of next year.

James Ricchiuti – Needham & Company

What’s your sense, Jeff, as we look at Compass for instance, the new CTP system. Do you see that giving, yes, as you roll that out, giving a jump start to that business?

Jeffrey Jacobson

Yes, we certainly think when that’s fully rolled out, that’s as good as platesetter as any in the industry. We believe it’ll help get us into some of the larger customers and the real key is to get the platesetters out there so that we can get the places.

James Ricchiuti – Needham & Company

On the cost side of the business, right now it looks like you’re sitting tight even with the weakening you’re seeing in the U.S. business in terms of taking any further initiatives but I guess given what is increased concern people are having now about Europe and how that’s come back nicely for you this quarter, how concerned are you, just that you mentioned a little bit of a slowdown in the U.K. business, but how concerned are you that you could see some further perhaps unexpected weakness in Europe and any plans to take any further actions on cost if the business weakens further?

Jeffrey Jacobson

Yes, no, certainly not in Europe. If anything, we’re thinking more about further investment in Europe as we try to grow the business, putting some more people into the countries to work with our dealers to get more focus, more attention and more visibility to the Presstek products. But look, the way we run our business and we got way ahead of the cost curve and we’re very pleased about that is we monitor this thing and we stay close enough to the business, the entire team does, that we try and turn on a dime when we need to.

So we’re certainly cautious about the economy but there are areas that we have declining business in and declining product lines and we have to take as much cost out of those areas as we can, that we can invest in the areas especially internationally where we want to grow. So I think the two areas of investment you’ll see from us is investing in the up market, the larger customers, and in certainly investing internationally.

James Ricchiuti – Needham & Company

And last question from me. Jeff Cook, maybe this one for you. I think you alluded a little bit to the higher materials cost and I’m wondering how much of a problem is that right now and do you see that perhaps intensifying or where do you see that going over the next couple of quarters?

Jeffrey Allan Cook

Aluminum has been up for quite a while now; we had a lot of ups and downs with it but since the second half of last year it’s been up quite a bit. We did have some year-over-year increase; it wasn’t a significant number for us in terms of the cost of the aluminum. We have some contracts on the polyester plates so that gives us some protection but that’s how we work our price increases in tune with what we think is going to happen to the cost of materials.

I can’t forecast what’s going to happen going forward. It’s anybody’s guess but we watch it every month and adjust accordingly.

James Ricchiuti – Needham & Company

But you’ve basically taken your pricing actions.

Jeffrey Allan Cook

Oh yes, yes.

James Ricchiuti – Needham & Company

Is there anything else anticipated this year or have you basically rolled through the year increases through –

Jeffrey Allan Cook

It’s not a one time thing. It’s constantly something we revisit and do as appropriate. So we don’t really have a one point that we come out and do them all and that’s it for a year. So we always leave open the possibility that we’ll have further adjustments as we see it needed.

James Ricchiuti – Needham & Company

If I could just slip in one other question and they’ll I turn it over to somebody else, certainly back to the U.S. business, how confident are you that there’s not also a competitive issue here? Do you feel that you’re, has there been any sense that a competitor might have won some business at certain customers?

Jeffrey Jacobson

Yes, no, I mean look, I’m sure there’s some of that, Jim, but that’s really not the concern for us. What I tell our team quite frankly is really the opposite. From a relative market standpoint in terms of Presstek being a $200 million plus business versus the addressable market we’re going after, we have relatively such little share that even in a tough economic time, what you want to do in a tough economic time is go out and get as much share as you can get.

So I’ve got to be very candid, I’m very tough with our people on that point saying I don’t want to hear anything about the economy internally. Yes, it’s tough; yes, it’s difficult. Yes, customers are slowing down purchasing decisions but you’ve got a lot of room and a lot of grass to graze out there in the field. It’s not where we’re in a number one market position today from a graphic communications or graphic arts standpoint. We have a relatively small market share and we better go out and get some of that share.

Operator

Your next question comes from Ben Carlin – Wachovia Securities.

Ben Carlin – Wachovia Securities

Jeff Cook, you guys have done a great job managing the receivables and inventories over the last year but I saw a reversal of that trend this quarter. Inventories popped up. Was that planned or does that reflect the fact that you had sales you thought you were going to make that didn’t occur in the second quarter?

Jeffrey Allan Cook

Yes, it’s the latter. We were ordering, particularly in the DI machines which is a big capital investment for us. We probably got ahead of ourselves a little bit in terms of our order and requests from [inaudible]. We have a four month lead on those machines so we have to try to look far out into the future and we’ve got more on hand than I would like so we have cut way back on the orders and we’ll start to whittle away at that in the second half of the year. But you’re absolutely right; that’s the one area I struggle with in cash right now is inventory.

Ben Carlin – Wachovia Securities

And then a second question would be, Jeff Jacobson, if you ranked the top 30 print shops in the country, how many of those print shops has Presstek penetrated historically or to date and then how many of that 30 will you hope to penetrate by the end of 09?

Jeffrey Jacobson

I think on the first part of that question’s, Ben, without doing an order I can say with really good confidence that we penetrated zero of those top 30 and to me that’s the opportunity. That’s why, when I gave the answer to Jim Ricchiuti about, I tell my people all the time yes, the economy’s difficult; I understand that as well as anyone but the opportunity is there for us not only in the top 30 but in the top 400 in the U.S. as an example. Number one is Donnelly at $10 billion in revenues; number 400’s about $10 million in revenues which in the Presstek history would still be a relatively large customer.

So the beauty of when you talk about the top 30, many of those are national accounts such as Donnelly, Quad/Graphics, Cenveo, Consolidated Graphics, Quebecor World, etc., so it’s not just where you’re calling on one account when you’re calling on those, you’re calling on anywhere from 50 to 120 purchasing locations and plants. So one of the things we will be doing hopefully within the next couple of months is hiring somebody to just call on those, what I call the national accounts, in our U.S. market; just to do nothing but focus and penetrate in those. Now that will hopefully position us much better and get us much better exposure for 2009.

Operator

Your next question comes from Matthew Campbell – Knott Partners Management, LLC.

Matthew Campbell – Knott Partners Management, LLC

Just was curious if you could talk a little bit more about your traditional portfolio. It looks like the rate of slowdown in the revenue there seems to be troughing. What level do you feel like you’ll see it bottom out or continue to slow the rate of decreasing revenue there?

Jeffrey Jacobson

Yes, we’re down at around the 22% percent mark year-over-year right now but you’re right, in terms of sequentially it is slowing down, Matt, so that’s very good that you’re looking at it that closely. If you look at the thing, some of it will slow down if you took, for example, our conventional offset presses. We did about a little less than $3 million for the first half of the year so almost by definition it will slow down in the basis that you’re almost at the bottom of it where last year we sold about 60% more. We’re up around $6.8 million in conventional offset presses for the first half of the year. We’re under about $7.2 million in terms of this year.

If you look at things like our polyester business. That’s down; the consumable side is not down as much but the hardware side is going down even more and that’s because the technological shift to CTP and probably some of the aluminum. Our supplies business, the pure supplies business is down let’s call it 10%, 11% which is not that bad; that’s probably consistent with where the industry’s going. So we would hope that when you look at that consolidated base we can get that into somewhere in the 10% to 13%, 14% year-over-year erosion which is about where the market’s declining.

But I’ll tell you, one of the thing with Kathy McHugh, our new Chief Marketing Officer being on board now, she was just in the middle of a strategy session with her team yesterday saying yes, that from a market standpoint, those products are declining but there are a lot of inks, there are a lot of blankets, there are a lot of supplies and one of the things that we feel is very strategic is what we call that A.B. Dick customer base and the products that go around it and how do we go get more share in that base? So if we can be successful in that, perhaps we can do even better than the numbers that I gave you but that will take some time to develop and that’s all part of the strategy that we’re developing and that Kathy was hired to do.

Matthew Campbell – Knott Partners Management, LLC

And in Europe you recently signed up a new distributor in German. Was just wondering how you feel about your European distribution network at this point?

Jeffrey Jacobson

Good. Feels very good about Germany. Actually, we brought in two new distributors: one is the Bauman Company, one of the largest distributors if not the largest in Germany; and the other is the Schmidt Company. Certainly, Drupa is a great place to kick that off because there was a lot of activity; more activity in Germany that we’ve had and we see our funnel of prospects in Germany at the highest level it’s been certainly since I’ve been here.

And I think that’s a tribute to two things and the reason we do want to supplement and add some more Presstek people into the countries is we recently hired a very good person from an industry company in Germany and he’s been on board I want to say since about February, in that time frame, and that person being on board now working with our new distributors, we see that we are getting a lot more focus, a lot more activity; the funnel is building and we know we want to do is take that model to many of the other European countries.

Matthew Campbell – Knott Partners Management, LLC

Two more, if I may. Your U.S., how many salespeople, direct salespeople do you have today and what’s that turnover look like or last year since you’ve been there?

Jeffrey Jacobson

We have roughly 40, what I call territories, that obviously you have support people, service people, regional managers, applications people so it’s a lot more than 40 people touching the customers. I don’t have any turnover figures off the top of my head I wouldn’t think but again, I’d have to quantify that it’s any greater than anywhere else in the industry. As a matter of fact we’ve just been hiring some people who we feel are some of the top people in the industry who do have the experience in calling on some of the larger customers.

Operator

Your next question comes from James Ricchiuti – Needham & Company.

James Ricchiuti – Needham & Company

I know you don’t give guidance but it sounds like, Jeff, you said I believe you’d be disappointed if revenues weren’t up sequentially as we look at over the balance of the year and I wondered just as we think about the seasonality to the business, particularly in Europe, what kind of assumptions are we thinking about with the U.S. business? Thinks deteriorating further or stabilizing here and just in Europe, we do normally see some seasonality don’t you in that business?

Jeffrey Jacobson

Yes, the European seasonality’s going to be a little more difficult to assess because typically, I think what you’re implying, Jim, is that Europe would typically be slower during the summer months in Q3. And that’s a definite true statement for every company, virtually every company in this industry, but Drupa will offset some of that because you have a funnel from all the Drupa orders that were placed which again, the reason we never gave the number of what we had in orders for Drupa was a lot of companies do that. And what I always say is: number one, is you never know how many of those orders were directly attributable to Drupa as opposed to they would have happened anyway; and number two is inevitably some of those orders do fall off.

But we’re very pleased with the funnel; the vast majority of the orders we took at Drupa were from Europe so we think that will really help Europe in the third quarter and we won’t see the normal seasonal slowdown that you will or that perhaps you would see in 09 when you don’t have a Drupa year.

In terms of the U.S. we would hope and think that the U.S. did stabilize. Again, yes, we’re very pleased with the funnel of accounts; we track year-over-year, quarter-over-quarter funnel, the types of account, the confident level we have whether it’s 95% done, 90% done, 80% done. And when we look at it we feel very good about it. It’s now a matter of getting the customers to have the confident to spend the capital.

Operator

Your next question comes from Joe Pratt – A.G. Edwards, Inc.

Joe Pratt – A.G. Edwards, Inc.

Just on the CTP line, I noticed the CTP plate sales were up a bit and in particular, could you just address the status of Aurora with the number of images in is that plate will run and to what extent are you spending R&D dollars in the CTP plate business? I believe your long term ambition is to be a significant player in the CTP plate business.

Jeffrey Jacobson

Aurora, Joe, is rated at about 25,000 impressions. Today, we obviously are continuing to work on that; to try and improve that and get it up to 50,000 and then something more over. Right now, we conservatively rate it at 25,000. As you know the product has been in beta so it’s been in less than 20 customers. We’re now at a point where we want to take it to what we cal controlled sales; have it branch out further. And through the rest of this year we want to get the number of accounts on Aurora up to about 50 accounts so that we can do an even better assessment.

The response we’ve received thus far from the customers we have it and some of the dealers that have seen it has been very positive. We’re being very cautious with it obviously as you know because we want the rollout to be as flawless as a rollout can be but we’re feeling very good about the customer feedback we’re getting and we’re going to increase from something less than 20 accounts. And now we’re going to authorize our sales force to go out and get up to about 50 accounts.

Joe Pratt – A.G. Edwards, Inc.

As a followup to that, Jeff, can you just, I know I’m beating a dead horse here, but the size of the CTP plate market and the right now amongst all the competitors in the no-process, no-chemistry area where Aurora resides, what would those sales in dollars represent as a percentage of the total CTP plate sales?

Jeffrey Jacobson

In total CTP plate sales, you could say total CTP plate sales would be, well, let me start from the beginning. Let’s say graphic plate market is over 600 million square meters, of which about 60% of that would be CTP. So let’s call it 360 million square meters. In terms of where Aurora with the no-process would rank, it would still be in the single digits of the no-process market but it’s still a multi, not Aurora, but CTP plates is still a multi-billion dollar market.

Joe Pratt – A.G. Edwards, Inc.

So if the CTP section’s roughly 3.6 billion, what would the percentage be of the no-process? And what would be the names of the players in no-process and what would be the percentage of the 3.6 billion if that’s the right number?

Jeffrey Jacobson

I don’t like to advertise for my competitors, Joe, but basically most of the big plate manufacturers have a no-process plate but in terms of no-process today as a percentage of CTP, it’s still in the single digits in terms of volumes but growing.

Operator

Your last question comes Scott Sorell – [Escoia] Technology.

Scott Sorell – [Escoia] Technology

Two questions, I apologize if you addressed this earlier but op ex, on a sequential basis and into September, ex Drupa should be thinking about overall absolute or op ex dollars being down sequentially a little bit?

Jeffrey Allan Cook

Is there so many gives and takes in that? Obviously it’s very dependent on revenue levels with commission. We won’t have Drupa but we will be starting to get in a couple other trade shows so partially offset that. Graph Expo’s coming up later, I guess it’s what, late in the quarter, early in fourth quarter so –

Jeffrey Jacobson

Mid-October.

Jeffrey Allan Cook

Mid-October so that we’ll start ramping up for that. So we’re always looking to keep it down lower each quarter but I think on a sequential basis probably fairly safe.

Scott Sorell – [Escoia] Technology

The other item, Lasertel, big improvement from the March quarter but it’s still I think you indicated it’s costing about $700,000 or a penny or so a quarter. What’s the resolution in the timeline for resolution with that?

Jeffrey Jacobson

Could you just clarify when you say resolution in timeline resolution? I just want to make sure we’re answering in the right question.

Scott Sorell – [Escoia] Technology

In terms of do you continue to have Lasertel? Do you continue to look or do you look for opportunities to sell it, shut it down and use external suppliers for Lasertel?

Jeffrey Jacobson

Well, where we are, first we’re very pleased with the revenue aspect of it. They’re attracting a lot of new customers but there’s no question when you look at $6.4 million year-to-date profit improvement and you see where Lasertel is today, that’s certainly not what we anticipated quite frankly. When I said the three things we anticipated as why we were modifying our guidance a little bit, we actually had Lasertel obviously projected at higher profits than certainly where they came in so there’s no question that the financial performance has been disappointing.

We’re going to assess as we always go through our annual strategic plan through the summer and then the early fall where we are with all of our businesses and how we move forward. And we’re not ready to make any decisions at this point but we need to improve the performance of the business; there’s no question about it.

Scott Sorell – [Escoia] Technology

Do you think there’s enough opportunity there for you guys to make it a stand alone profitable entity within Presstek?

Jeffrey Jacobson

Yes, I think we have to look at it more from an industry standpoint. I don’t think there’s any question there’s a need in that sector for some type of consolidation and rollup. I think there are a number of plays in that sector which are just too small to thrive on their own. And also I think you always have to be fair to a business that a relatively small part of the total company there, are you giving it the focus and are you lending a lot to it or sometimes they’re better off being part of a different entity but those are the things, there’s a number of our businesses that you look at as you go through the strategic planning.

Operator

There are no further questions.

Jeffrey Jacobson

I’d like to thank everybody for calling in. My summary of the quarter is, as I said, I am very, very proud of what our team has done. I know we’ve talked a lot about the economy and rightfully so because when you look at where revenues are, I think we have to talk about the economy. But as I tell our team every day you have to do the things that you can control and you don’t use the economy as an excuse so I don’t see many companies today that are showing the year-over-year profit improvement and I’m very proud of our team that we got way out ahead of the cost curve.

When we came on board a little over a year ago we said that it was our goal to improve the balance sheet, pay down our debt, drive down interest cost and we’ve seen a $500,000 improvement there, take out costs and certainly become a much more disciplined business and minimize the surprises. And I’m very proud of the team that they’ve done that, that they’ve improved the EPS on a first half basis by $0.18 but there’s no question that what we’ve done at this point is control what we could control and we’ve leveraged our business so when our sales do improve and the economy will help, that we’ll be well positioned.

That’s what I keep telling our team: do the blocking and tackling, keep plugging away; eventually, the economy will turn around but even if it doesn’t, we’ve still got a lot of grass to graze and lot of field to plow in terms of opportunities for us to grow. So I wish we didn’t have the economic headwinds but I’m still very, very pleased with we’ve controlled what we can and I’m very pleased with the profit improvement we’ve seen. Thank you very much.

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