By Jan Stoddard of Raine Consulting July 28, 2003 -- Consolidated Graphics, Inc. (CGX) (NYSE:CGX) today announced results for its first quarter that ended June 30th, 2003. Chairman and Chief Executive Officer, Joe R. Davis, and Executive Vice President and Chief Financial Officer, Christopher Colville, conducted today's investor relations call. Editor's Note: Consolidate Graphics continues to rebound from a tough March quarter. Even with essentially flat revenues, CGX was able to generate a significant improvement in operating margins versus the March quarter. This quarter also put CGX back on the acquisition/consolidation trail with its' Ohio operations merger with Custom Graphics. According to CEO Joe Davis, there are plenty of other companies 'knocking on the door' for a similar opportunity. (Source: CGX Website, Investor Relations) An interesting side-note: Raine Radar analysis of March/April quarterly calls found that the "hot" question from analyst to management teams revolved around SARS and its' possible impacts. The new hot topic heard on many calls this quarter has to do with the new, nationwide "No Call Telemarketing List Program" and the potential positive upside for direct mail programs and production. It is interesting to note that CGX indicated they have already had customers making the switch from outbound telemarketing to printed direct mail. Topics: * Chairman Comments * Additional Financial Highlights * Future Guidance * Q&A Chairman Comments Overall, industry conditions were more favorable than in the March quarter, however this quarter's results continue to reflect sluggishness of economy and softness in the commercial printing industry. Sales were essentially flat. Revenues for the June quarter were $165.8 million, compared to $166.1 million in the March quarter but down 7% compared to one year ago ($176.1 million) due to market conditions. Net income for the June quarter was $3.6 million, or $0.26 per diluted share. This exceeded, by 18%, the previously predicted target. This compares to a net loss of $29.1 million, or ($2.13) per diluted share, for the March 2003 quarter; and a net loss of $69.3 million, or ($5.11) per diluted share, a year ago. More importantly, according to Davis, CGX sequentially improved operating margins to 4.7% and executed on its' commitment to further streamline operations in light of current industry conditions. There was an additional 3% headcount reduction in the June quarter (in addition to the previous reduction in March quarter). Davis highlighted these accomplishments for the quarter including: * Tightly managing CGX cost structure and capital expenditures: The priority to tightly manage costs resulted in an additional headcount reduction and continued wage freeze. CGX will continue to maintain its technology advantage noting a $3.0 million in capital expenditures for June quarter (against $16.0 million spend projected for the year); not taking into account additional requirements if significant economic changes or potential acquisitions occur. (Note: CGX has spent $208 million in capital expenditures since 1987.) * Strengthening our balance sheet: CGX generated operating cash flow of $20.2 million from operations (exceeding the initial target by $9.0 million) due to better than expected margins and contraction of working capital. Excess cash flow was used to pay down debt by $18 million net during the quarter reducing debt to a total debt capitalization 39.4% by quarter-end. * Maintaining a competitive market position as leading commercial printing company: Davis notes, "As the sector downturn persists, CGX will continue to thrive based on the fundamental strength of its business and its superior financial position; while the smaller, weaker companies in our industry will struggle to remain afloat." * Acquisition completed: CGX has completed its previously announced merger of its existing operations in Cleveland with Ohio-based Custom Graphics, Inc. to form AGS Custom Graphics, Inc. The new company will offer a full range of sheet-fed printing, fulfillment and e-commerce capabilities to customers in Cleveland and surrounding areas in Ohio. * CGX Media Growing and New Product Launch: CGX Media had a 7% increase in customer sites for the quarter. Soon-to-be released GOLD (Graphics Online Layout Design) an e-solution is designed for end users to manage text, images and corporate layouts through a proprietary web page. GOLD will be integrated with other existing CGX applications. * Leadership Development Program: There are a total of 107 associates in the program (approximately 3 per company on average). CGX's 4th Annual National Associates Conference (stressing best practices and business improvements) is scheduled for this weekend. Financial Summary Christopher Colville, EVP & CFO, presented additional financial highlights including: * Depreciation for the June quarter was $8.8 million expense resulting in EBITDA of $16.6 million. * Outstanding debt remains at $146.3 million (of which 51% was floating debt with a weighted average interest rate of 3% and 49% was fixed rate debt with a weighted average rate of 5.4%). Net debt was $135.9 million as of June 30, 2003 or $18.2 million below the March quarter balance, and 31% down from prior year June quarter. Future Guidance According to Davis, "Our visibility remains poor… and the near term outlook for our industry remains uncertain." Davis predicts that operating margins will remain sequentially flat, and anticipates $170 million in revenue with diluted earnings per share of approximately $0.28 for the next quarter. Q & A Session: 1. The reason for the operating margin jump from March to June: Much of the operating margin jump was related to headcount/staffing versus the ability of sales force to better gauge profitability when bidding jobs. Davis replied that the increase was partially due to the focus on maintaining costs. However, a bigger reason was that while CGX had a really poor January and February due to the War, the March to June period were steadier in volumes. When asked what was going to be done to control September quarter margins with predicted same-store revenue weakness, Davis replied that the seasonal trends (i.e. seasonal increase in revenue) planned for the September quarter are somewhat on the conservative side. Headcount remains as one of CGX's largest variable expenses, which is being monitored on a daily basis. At this point, Davis said he doesn't expect any further headcount reductions through Sept 4th if conditions stay the same. 2. Impact of Do Not Call List: Davis first noted that impact from the war (January through March) has caused a change in the seasonal patterns of their customers. Typically, July is a light month in printing sales throughout the industry. However, Davis stated that there is good potential that July will be stronger because companies are gearing up for an improvement in the economy. "Certainly with the Do Not Call List, companies dependent on telemarketing in the past will likely increase their direct marketing. In fact, CGX is already seeing that in some of their companies already." 3. CGX future acquisition strategy: When asked whether CGX will expand its' footprint nationwide or to continue the current process of rolling new acquisitions into current operations, Davis noted that the CGX strategy is to acquire good companies with good markets. They have found they can be successful with multiple companies in the same market. There are only a few metropolitan markets that CGX is not in that it would like to be. Davis stated CGX has not changed its strategy at all, noting, "What we are seeing is an opportunistic merge to improve customer service levels and efficiencies in companies that provide reasonably good shareholder return. We are having a lot of discussions with a lot of companies. We expect more acquisition activities as we move forward." 4. Double-digit operating margins are still the goal even with industry challenges. Since 1996, there has been an internal target of 12.5% operating income each month for each company. Davis commented that CGX expects to achieve this goal when the economy improves. For the June quarter, over 33% of CGX companies had double-digit operating income (above 10%) and 20% above 12.5%.