Consolidated Graphics (CGX)

F2Q09 Earnings Call

November 5, 2008, 11 am ET

Executives

Joe R. Davis – Chairman, CEO

Aaron Grohs – EVP Sales & Mktg

Jon Biro – EVP, CFO

Analysts

Alice Kramer - FD

Arnie Ursaner – CJS Securities

Jamie Glemet – Sedore & Company

Chas Cobular – Stone Harbor Investments

Atin Agrawal – Longbow Research

Presentation

Operator

Good day ladies and gentlemen and welcome to the CGX Second Quarter Fiscal Year 2009 Conference Call. My name is Erica and I’ll be your coordinator today. At this time, all participants are on a listen only mode. We’ll be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would like to turn the presentation over to your host for today’s call, Ms. Alice Kramer, of FD, you may proceed ma’am.

Alice Kramer

Thank you and good morning. Welcome to the Consolidated Graphics Conference Call. During the call, management will discuss the companies results to the quarter September 30, 2008. You may receive a copy of today’s press release by called FD at 212-850-6500, or by visiting Consolidated Graphics’ website.

This conference is being broadcast live on the internet at www.cgx.com, and a subsequent archive will be available. Before we begin, I would like to remind everyone the remarks made by management during the course of this mornings call contain forward looking statements which involve known and unknown risks, uncertainties or other factors that could cause actual results to differ materially from results, performance or other expectations expressed or implied by these forward-looking statements.

Consolidated Graphics’ expectations regarding future sales and profitability assume, among other things, continuing weakness in the economy and reasonable demands for its products. The continued availability of raw materials at affordable prices. The retention of its key management and operating personnel. And satisfactory labor relations, as well as other factors detailed in Consolidated Graphics filings with the Securities and Exchange Commission. Including the risk factors set forth in our most recently filed Annual Report on Form 10K.

Forward looking statements, assumptions or factors stated or referred to on this conference call are based on information available on Consolidated Graphics as of today. Consolidated Graphics expressly disclaims any duty to provide updates to these forward looking statements, assumptions or other factors after the date of this call to reflect the occurrence of the events or circumstances, or changes in expectations.

In addition, during the course of this call, management of the company may make reference to certain non-gap financial performance measures. Management’s opinion regarding the usefulness of such measures, together with the reconciliation of such measures for the most directly comparable gap measures for historical periods are included in the company’s previous filings with the Securities and Exchange Commission.

Now with these formalities out of the way, I would like to turn the call over to Joe Davis, Chairman and Chief Executive Officer. Mr. Davis, you may begin.

Joe Davis

Thank you. Good morning. With me on the call today is Jon Biro, Executive Vice President, Chief Financial Officer, and Aaron Grohs, Executive Vice President Sales and Marketing.

This morning we released our results for September quarter. The results of the quarter include revenue of $297.0 million which is a new quarter record for Consolidated Graphics, up 14% compared to the prior year. The growth in sales compared to the second quarter of last year was primarily due to our recent acquisitions and to election-related printing, which it continues to ramp up into the next quarter. These sales increases were partially offset by decline in our same store sales, excluding election-related business.

Acquisitions continue to be a meaningful contributor to our growth strategy. As you know we acquired two first class companies in the last 10 months, PBM Graphics and the Cyril-Scott Company. Acquisitions contributed $34.7 million to our sales growth in the second quarter compared to last year.

All these acquisitions broadened our service offerings, particularly in specialty packaging, collectable cards, and direct mail. During the September quarter, and today, we are seeing the adverse impact of the weakness in the US economy, on our sales volume and selling prices. Once again, I would like to emphasize that we are not seeing what I would consider an erosion of market share, or the loss of any significant customers. But rather a reduction in demand across our customer base.

I would add that we believe our sales are holding up much better than the industry averages according to industry sources. In light of the current economic environment, we are keeping a very close eye on our operating expenses. We are reacting quickly by adjusting our cost structure. In particular, labor, when customer demand decline.

Although we were successful in maintaining our margins at many of our operations during the September quarter, lower margins of our recent acquisitions had a negative impact on our consolidated operating margins. We also had significant lower foreign currency gains in the current year quarter. As a result of our operating margin declined to 7.2% from 8.9% in the prior year.

A bright spot, is the fact that revenues of digital printing grew to $35 million in the second quarter, representing nearly 12% of our overall revenues. This represents an increase of over 160% from last year. We expect this part of our business to continue to grow at a healthy pace.

We have invested approximately $46 million in digital printing presses and related technology over the last 18 months. Today, Consolidated Graphics has the largest integrated fleet of high speed digital presses in the commercial printing industry, both in terms of number of presses, and strategic locations. We will continue to invest in state-of-the-art digital technology to satisfy our customers growing demand for digital printing solutions.

Now I’d like to step back and provide some historical perspective of Consolidated Graphics. I believe that it is important to reflect on history as we are in the midst of a serious recession and financial crisis.

I founded Consolidated Graphics in 1985 with the purchase of a single company, Western Lithograph of Houston, Texas. Shortly after this time, Houston entered a deep recession due to the oil bust and interest rates were over 13%. Despite the economic conditions, we continued our acquisition strategy and purchased several printing companies, mainly in the Houston market.

We were profitable every year through 1994 when we went public with $50 million annual revenues. (Inaudible) our IPO, we continued making acquisitions and have reported a profit each and every year since. In fact, excluding goodwill write-off, we’ve had a profit each quarter since 1985.

Our business has matured over the years and we now operate from a position of strength, not only financially, but also from an economic, geographic, and technological standpoint. Let me share with you some of these advantages.

First, we have built a world class digital printing platform that is unrivaled in our industry. The last 90 days, we have enhanced our digital print infrastructure even further by expanding our four digital print centers in the US. These fully integrated digital print facilities boast the latest digital print technology, complete finishing services, mailing as fulfillment and are strategically located in Medford, Oregon, Minneapolis, St. Louis, and our newest location in Memphis. In addition, we are pleased to announce the opening of our first European facility, located in Prague.

By concentrating our digital investments, we will maximize our returns and the value provided to our customers. Storefront, our proprietary online print management solution now has enhanced functionality that will enable our customers to leverage digital technology and transition to a more efficient print on demand model. Our ability to work with large companies on a national level will provide innovative technology solutions and create real value is a substantial competitive advantage.

The general commercial is a $50 billion industry and it's highly fragmented. In past recessions we’ve had the opportunity to buy attractive businesses, and this time around should be no different. Additionally, as many businesses in the industry struggle, we will have the opportunity to hire good people, and in particular, sales people. In times like these, Consolidated Graphics’ financial strength, network of operating facilities, and leading technology offerings, including our unmatched distribute and print capabilities, will server us very well.

We will continue to invest in our business by hiring sales people, associates for our leadership development program, and making the necessary capital investments in equipment and technology that set us apart from the competition.

Today, Consolidated Graphics has the best group of employees that we have every had in the history of the company. Our executive team, the presidents that run our 70 companies, the dedicated employees that sell our products and services, and others that produce the work, are the best in the business.

I believe our leadership development program is the best investment we’ve ever made and continues to position us with the brightest and most technologically savvy group of leaders to support our continued growth.

As I mentioned earlier, we will remain proactive in managing our operating expenses as customer demand fluctuates. We recently held our fall presidents meeting and I have confidence that the presidents will carefully manage their cost structures. And in particular their labor metrics as the business changes.

Furthermore, I’m now receiving weekly updates from each of the 70 presidents in an effort to closely monitor the state of the business. So far business is a lot better on Main Street than it is on Wall Street.

I will now turn the call over to Aaron Grohs, Executive Vice President, Sales and Marketing, who will provide more details about our offerings to the market place. Following Aaron, Jon Biro, our Chief Financial Officer will provide you with additional financial information. Aaron.

Aaron Grohs

Thank you Joe. As mentioned, we continue to invest in our industry-leading technology and our growing digital print solutions. Today, we boast a world class, digital print infrastructure that is unmatched in the industry.

Consolidated Graphics is capable of digitally producing over 15 million four color pages in a 24 hour period. Further, to support the growing needs of our customers for international print solutions, our new facility in Prague is ideally situated to manufacture and distribute product more efficiently across Europe, helping our customers reduce shipping costs and delivering product to end users faster.

Our investment in online digital print technology supports our customers’ growing need to find better, more efficient, cost effective ways to design, source, manufacture, fulfill and distribute printed products.

Some of our competitors have built their value proposition around price per piece and guaranteed cost savings. They say they achieve savings by brokering work across a network of printers that have excess capacity. We don’t believe that it's strategy built on price alone is a long term, sustainable business strategy and is ultimately risky for customers.

At Consolidated Graphics we stand fast in our position that we can provide overall value and cost savings to our customers without having to always produce product at the lowest per unit price.

Furthermore, we own and operate our manufacturing facilities and can assure customers quality, consistency, and on-time delivery. Our value proposition is centered on our experience in delivering the lowest total cost of ownership, and the greatest return on investment for our customers.

I would like to expand on our solutions further. As uncertainty continues to build around the economy, we have seen an increase in demand from customers to help them find new and better ways to manage their print spend. The cost of printed, a printed piece, is certainly and important part of this conversation. However, it is a small part of the overall cost of ownership.

Several recent industry studies have been conducted, and the results indicate that for every dollar spent on printing, there’s at least an additional $3 to $6 in additional cost associated with the process, and the ancillary services, surrounding the printed piece.

Through our unmatched manufacturing footprint, and complimentary technology, we offer a best in class solution for helping customers transition their current marketing and fulfillment strategy to one that is better aligned with the company’s business goals, including their bottom line.

Our solutions are designed to transition a client through the entire process that includes creative design, sourcing, manufacturing, fulfillment, distribution and information reporting.

As an example, Consolidated Graphics was recently awarded a contract with a leading financial insurance service organization. This customer conducted a lengthy analysis of the leading print service providers in the US. They recognized an opportunity to aggregate their print volume to drive a lower cost.

Consolidated Graphics can not only help them leverage their volume, but more importantly, help them drive on-going savings through managing their print procurement process more efficiently. We educated them on the total cost of ownership and introduced them to a number of innovative solutions.

We won the business because we offered the most creative solution and the best overall value. Let’s review a few of the cost savings opportunities we presented and are implementing today for this customer as well as others.

Creative Design. Consolidated Graphics offers a proprietary online storefront application that gives users the complete control over the design, purchase, management and distribution of personalized marketing collateral from any location, at any time, on any deadline. This solution enables customers to reduce costs associated with redesigning and creating products over and over again.

Sourcing. With our 70 locations equipped with unique capabilities, Consolidated Graphics is the only company providing true best-fit manufacturing models, while at the same time taking full responsibility for the quality and timeliness of the finished product.

In addition, there is a growing demand for outsourcing non-core business functions as a way to reduce costs. Our ability to leverage highly trained associates from our leadership development program to work on-site with our customers is a significant value and a competitive advantage.

Manufacturing. Our growing fleet of digital print solutions, combined with our unmatched printing capability, enables us to offer clients a print-on-demand model that gives customers the flexibility to respond to market changes and manage printed materials more efficiently. In many cases, print-on-demand can virtually eliminate warehousing and storage fees, and the need for large inventories that may become obsolete.

Fulfillment Distribution. Consolidated Graphics has engineered a print management system, including hardware, software and business processes. Orders are received electronically, prepared for production, and distributed across our digital print centers for manufacturing and efficient distribution. This distribute then print model also helps customers meet their sustainability objectives by reducing energy consumption and emissions associated with long distance shipping.

Information Reporting. Our solutions enable customers to have up to the minute access to reporting and centralized accounting for every job, regardless of location or distribution point. Reviewing real time inventory, reorder points, and inventory turns provide the needed visibility and transparency customers need to manage their print spend among stakeholders that are often times decentralized.

Consolidated Graphics is increasingly becoming a recognized name in the marketplace, and customers appreciate our diverse solution offering supported by our financial strength. It is an exciting time to be part of an organization that’s setting the pace in the industry. Customers are looking to suppliers for innovation and creative solutions to help them reduce their cost of business.

We are in a position of strength to capitalize on this expectation and we look forward to helping our customers achieve their short term and long term objective. I will turn the call over to Jon Biro.

Jon Biro

Thanks Aaron and good morning. As a reminder, earlier this morning, we filed with the Securities and Exchange Commission the basis for our use and reconciliations of certain non-GAAP financial measures, including adjusted operating margin, adjusted EBITA, adjusted EBITA margin and free cash flow. Please refer to this filing for additional information.

As Joe mentioned, we enjoyed record revenues for the quarter as a result of our recent acquisitions and election-related business. Overall, revenues increase year over year during the September quarter by $37.3 million to $297 million. $34.7 million of this increase was due to our prior year acquisitions, namely PBM and Cyril-Scott, and additional $6.9 million was due to election-related business.

These revenue gains were offset by decline in same store sales excluding election-related business of $4.3 million. Overall, same store sales increased 1%. Gross margins were down from 25.5% last year to 24.4% this year. This drop was due to lower gross margins generated by our recent acquisitions relative to our base business.

On a same source sales basis, our gross margins actually improved 110 basis points over last year. Thanks in large part to our continued cost management efforts and the increase in election-related and digital print business. As a result of lower overall gross margins, gross profit rose less in revenues, increasing 10% year over year, to $72.6 million.

Selling expenses rose due to higher sales volumes and declined as a percentage of revenue due to the recent acquisitions. General administrative expenses increased $5.6 million, or 30% to $24.7 million for the quarter compared to $19.1 million last year. 30% of this increase was due to the recent acquisitions and the remaining increase was due to higher (inaudible) 123R expense, bad debt expense, and salaries compared to the prior year.

Second quarter adjusted operating income, excluding foreign currency gain of $300, 000 declined 4% to $21.1 million or a 7.1% of revenues. This compares to last years adjusted operating income of $22 million or 8.5% of revenues. Again, excluding the $1.2 million foreign currency gain in that quarter.

Incidentally, the foreign currency gains are included in the other income or expense line on the face of our income statement, and as I stated last year, or excuse me, last conference call, thankfully we have not effectively hedged the foreign currency exposure that caused a large prior year gain.

We had lower adjusted net income of $10.1 million compared to last year’s quarter of $12.3 million, again excluding the foreign currency gains. Fully diluted EPS based on these adjusted amounts was .88 for the September 2008 quarter, compared to last years adjusted EPS of .91. Our adjusted EBITA improved year over year, to $39.4 million from $35.6 million in the prior year quarter, an increase of $3.8 million, or 11%.

Capital expenditures total $26.5 million in the September quarter and was $34.5 million year to date primarily due to the timing of the purchase of the number of new digital presses.

We currently expect 2009 capital expenditures to run between $65 and $70 million, approximately our annual depreciation amortization expense. We consider the lion’s share of these expenditures to be investments to expand our business. And in particular, expansion of our digital print capabilities and equipment to serve collectable trading card market.

In today’s economic uncertainty in the unsettled credit markets, we believe that we continue to have a strong balance sheet and have the liquidity to make the necessary investments in our business. At September 30th, our total debt outstanding was $378.5 million, consisting of $266 million of floating bank rate debt during an average interest rate of 4.3%, and $112 million of fixed rate debt bearing an average interest rate of 5.8%.

Cash on hand was $15.5 million at the end of the quarter. And our available credit, under existing credit facilities was $106.6 million. Currently our debt stands at $364 million and we have $114.5 million of credit available. Our primary US credit facility doesn’t expire until October 2011 and we are currently in compliance by a healthy margin with a financial covenants under the agreement.

Before I discuss our outlook for the December quarter, please keep in mind that forecasting our revenues and earnings in this environment is incredibly difficult. Not only due to the economic headwinds we are facing, but also due to the nature of the business. We do not operate under long term contracts. Rather we tend to generate our revenues on a job by job basis.

As a result, clear visibility of our revenues is only a few weeks out. Having said that, in the December quarter we expect revenues of between $300 and $320 million, and diluted EPS of .75 to .95. Our December projections assume, among other things, a year over year same source sales decline, excluding election-related business of between 6% and 12% at competitive pricing environment, higher (inaudible) 123R expense relative to the prior year, and an effective tax rate of between 37% and 40% for the quarter.

Including election-related business, we are assuming a same stores sales decline of between 3% and 9%. I will now turn the call back over to Joe.

Joe Davis

Thank you Jon. Operator, we’re now available for any questions anyone might have.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you would like to ask a question, please press star, followed by one on your touchtone telephone. If your question has been answered, or you wish to withdraw your question, please press star followed by two. All questions must be submitted at this time in order for it to be registered. Please hold a brief moment while we compile a list. And your first question comes from the line of Charlie Strauzer from CJS Securities. You may proceed.

Arnie Ursaner – CJS Securities

Hi, good morning gentlemen. It's actually Arnie Ursaner backing up Charlie on the call today. How are you?

Joe Davis

Good Arnie.

Arnie Ursaner – CJS Securities

A couple questions if I can Joe, and Jon I know you just gave us the math, but I could use a little bit of help. In your guidance for Q4, one of the questions I had was the amount of election business you had. You mentioned $6.9 million in Q3, then you gave us this number excluding, you know you gave, that if you include election-related business it would be a decline of 3% to 9%. What is, can you just give us the election business that’s embedded in that guidance?

Joe Davis

Yeah, Arnie, as you know, I’ve said we’ve done $24 million in the 2007 election cycle. That includes ballot printing as well as election persuasion printing, political persuasion printing.

Arnie Ursaner – CJS Securities

Okay.

Joe Davis

And (inaudible) that means that we still have to report in the December quarter something on the range of $13, $15 million.

Arnie Ursaner – CJS Securities

Perfect, thank you. Okay. My second question Joe, you mentioned that you built a facility in digital printing in Prague.

Joe Davis

Yes.

Arnie Ursaner – CJS Securities

Can you perhaps expand, is this a one off or a specific request from your client, or do you really have more of an international strategy for the entire company CGX, and how might that play out over the next year or so.

Joe Davis

Well we’re getting continued interest from our customers for service, not only in Europe, but in Asia as well. And we’ve had a relationship, if you will, along with some equipment we’ve placed in Prague, to service a particular customer the last couple years. We now have continued that relationship, we also have put, we own our own facility in Prague, we lease a facility in Prague, and we have our own equipment and hired our people. So we have a fully operational facility in Prague. Initially to service one particular customer, but we were seeing a lot of increased demand from other customers who want to be able to use that facility. So it’s a great location, and we can service, overnight, almost any European location. It does not necessarily say that we are on the look to expand outside the US except to service particular customer needs.

Arnie Ursaner – CJS Securities

Okay. My final question if I can Joe, I think you said something your prepared remarks that you are now getting weekly updates from the seven, 70 managers you have. And I’m assuming that’s somewhat in response to the uncertain economic environment.

Joe Davis

Right.

Arnie Ursaner – CJS Securities

But can you give us a feel for what the process had been before this and now that you are getting these reports on a weekly basis from your 70 managers, how many branches to this point have needed what I would call executive action, and what are the factors that would lead you to take, once you get this information, what’s the next step and what’s should we look for for you to take, how would you take these actions? And how many branches might be exposed to it already?

Joe Davis

We, first of all, we refer to our people, our presidents and their companies. But we have 70 presidents and 70 companies, 26 states, plus Toronto and Prague today. We get, I receive from each of these companies monthly, a president’s report which includes a written report, a couple pages as well as a lot of financial metrics. And that, I study those very carefully each month. We also have a lot of interaction with our presidents on a daily basis, email, telephone, whatever, and we’re always available to assist them. But we have a great group of presidents.

And they run a very decentralized organization from an operational standpoint. If somebody calls them in the day, calls on a Friday, wants a job delivered on Monday, we’re not involved in that. They take are of that service at the local level. And that’s one of our big strengths in this company.

Having said that, these are different economic times. We just had the fall presidents meeting, we had a great September, we’ve had, we’re having a decent you know, it was a fairly good month in October. Yet I’m talking to them in October about the headwinds I see potentially coming. And I want to be sure that we’re addressing those headwinds as they arrive very promptly. So I’ve asked them to give me a every Friday update about what’s happening in their marketplace.

And I’m pleased to say to date, certainly have some mixed reviews, but you know, I got one company running 24/7, and guess what they’re printing? Going out of sale signs. 10 million going out of sale signs, because their customer, a major retail liquidator, is handing a going out of sale promotions for two major retailers.

And, you know, we have a lot of variety of businesses. We do a lot of insurance type work, year end type insurance work that, you know, it's required no matter what the economy is. We have a lot of other work that’s, is necessary to operate a business. So, we can have some headwinds, but we’re still seeing a lot of demand for our services.

Aaron Ursaner – CJS Securities

I guess where I was heading with this Joe is, you’ve had some, what I would politely call, variability in your quarterly results. And I guess, you know, if you’re able to do this now, why wouldn’t you try to have more real time reporting from your branches with the intent of reducing the volatility around your results? But moreover, if you do hear some information, and given the fact you do give your branch managers a lot of autonomy what actions are you likely to take?

Joe Davis

Well, first of all, I said we don’t have branch managers, we have presidents.

Aaron Ursaner – CJS Securities

Sorry. Presidents.

Joe Davis

The presidents take the action on their own. Now, if they weren’t taking the action, I would certainly remind the things we might need to do. But, we don’t manage this company, these companies from Houston. I don’t need real time information to make knee jerk decisions for these company presidents. They’re very, very smart people. They know what the metrics are. They make those decisions day-to-day. So we don’t need real time information here, I wouldn’t want it.

You know, there was one sale consolidator that I went to see when they were failing. And they were so proud, they could sit in their corporate office and tell me, they were so proud of their system. They could dial up a press at a location, actually they were in Memphis. They dialed up a Houston location. And they could show me the speed that a press was running. Which presses were running. And what speed and what job. You know what, I said that’s worthless information to me. We don’t manage our business that way. So we really don’t need real time information. That make sense to you?

Aaron Ursaner – CJS Securities

It does. I’ll jump back in queue, thank you.

Operator

Your next question comes from the line of Jamie Glemet from Sedore & Company, you may proceed.

Jamie Glemet – Sedore & Company

Good morning gentlemen.

Joe Davis

Good morning

Jamie Glemet – Sedore & Company

Joe, I don’t know if you’re prepared to disclose this, but is the Prague business, is that primarily photo book these days?

Joe Davis

We’re not prepared to discuss, but it...

Jamie Glemet – Sedore & Company

Fair enough.

Joe Davis

Is for a large customer.

Jamie Glemet – Sedore & Company

Okay, fair enough. And to look out over the next couple of months, it sounds as if your month of October, you know, really wasn’t that bad, and you know, with what people read in the paper and that sort of thing, I mean you know, maybe some of us, myself included were perhaps overly alarmist here. Looking out over the next couple of months, as you’ve constructed your guidance range, it sounds to me, compared to some quarters in the past, this is a quarter where you know you’re offering guidance more on what you think you might have to deal with, rather than where you are today. Is, am I interpreting that properly?

Joe Davis

Let me say a couple things. In our quarterly press release this morning, we said we had, October was a fairly good month. Now we don’t have the books closed on October yet. I want to be very clear about that. You know, you can get a lot of information, but until you close the books, its 70 locations and to get the information in here and analyzed, and summarized and digested. It's hard to say, you know, what the earnings per share were for the month. We believe that it will be a fairly good month, and we don't think we've dropped off the cliff yet in November. So, we think that, you know, this quarter we said we've taken some approach that we might have as much as 6% to 12% decline in same store sales. I think that, you know, we hope it turns out to be a conservative estimate with it. Who knows what December's going to be like in this economy.

Jamie Glemet – Sedore & Company

Absolutely. And Joe, just to kind of, just to cut in. I guess the reason I asked the question is over the years I've always interpreted your guidance as being kind of a well based on what we see today, here's our guidance. Now in this economy, I mean it, you know, maybe we've got a bad holiday season and that sort of thing. So, I guess what I was just trying to clarify was it sounds as in constructing your guidance is that you're being, you know, realistically cautious about what we may see over the next couple of months. And this was not a, you know, based on what we see today. It was rather a, you know, what we may see in the next couple of weeks.

Joe Davis

That's true.

Jamie Glemet – Sedore & Company

Okay.

Joe Davis

We've seen, you know, every the 70 locations, I mentioned one is running 24/7, a lot of them are not running 24/7.

Jamie Glemet – Sedore & Company

Sure.

Joe Davis

But that happens every month.

Jamie Glemet – Sedore & Company

Absolutely.

Joe Davis

That’s the nature of our business. You know, we don't move work from one facility to another to try to level out the workload, that's just, people talk about that all the time and that doesn't work in our business.

Jamie Glemet – Sedore & Company

Okay. Let me…

Joe Davis

If we have a crisis somewhere, you know, we help out each other. But, we don't just routinely move, remember our average job you know, maybe $6,000 or $8,000 moving them around the country doesn't make a lot of sense.

Jamie Glemet – Sedore & Company

And if I could ask a question. I don't know if Aaron's available for questions. But…

Joe Davis

Aaron is right here.

Jamie Glemet – Sedore & Company

Can, Aaron, can you talk a little bit about how, does a tough economic environment, does that make it more challenging or easier to actually get meetings with potential national accounts to try to, you know, explain the cost deficiencies by, you know, by basically consolidating work with one supplier?

Aaron Grohs

I think that, you know, what we've been seeing over the last, you know, six months in particular, is a pretty good increase in the number of companies, really looking at fulfillment distribution, cost savings, and you know to a certain degree, I think our value proposition and the things that I laid out in, you know, in our conversation here on the phone, really plays to our strength. You know, I think from a competitive standpoint, I think we're in a great position to take advantage of this sort of growing need, growing trend to find ways to, you know, manage costs more efficiently. And you know it's helped us introduce things beyond just you know, the price per piece. I mean we're really focused on helping customers run their business more efficiently, and that's pretty darned appealing right now in these times.

Jamie Glemet – Sedore & Company

Sure. And then, I don't know if this question should go to Jon or to Joe, but guys, you know, it's, I think in past down cycles, you've had a lot of very interesting acquisition opportunities pop up as maybe some smaller guys get a little bit desperate. What, you know, as you look out over the next couple of months, I mean are you all more inclined to kind of wait for people to come to you? Or should we not be surprised if there was a deal by the end of the year?

Joe Davis

Well first of all, we have a very active acquisition program, run by Jim Cohen, Executive Vice President. And we reach out to printers all the time, good printers around the country. Some are in, you know, having some financial difficulties, some are not. We have a continuing dialogue with, you know, a number of printers. We've said in the past, almost $500 million in revenue we have confidentiality agreements with and probably still have that much today. I didn't really get it ready for this call.

But, a number of those are going to have some financial difficulty. A number of them have been growing and have large bank lines of credit that they've personally guaranteed. And that is going to be a concern to a print owner. Some, on the other hand have some real financial difficulties and care a lot about their employees. One of the things, in the printing business, I find that really people who run good companies care a lot about their employees. And they want a good home for their employees if their company goes away.

So, we're seeing a lot of opportunities to tuck in companies today. And a tuck in, to an owner with a little financial trouble, is a real plus. First of all, if their sales people come to work for us, we will agree to help them collect their accounts receivable. And you know if you're not doing business with a company sometimes that's a little more difficult to do. We will purchase their work in process inventory. We will purchase their other inventory. We will purchase some of their equipment. Or we'll help dispose of their equipment.

I've got people today whose full time job is selling, you know, used equipment. We have contacts all over the world for that. And so we can really help an owner who is feeling some stress realize the maximum value out of his company, and hopefully pay off his bank debt he's guaranteed. Maybe all his vendors don't get paid, but all his bank debt would be paid. That's his biggest concern.

So along with caring for the employees and helping him get his bank debt paid, we're seeing a lot of opportunities like that, and I think we'll continue to see those opportunities.

Jamie Glemet – Sedore & Company

Okay. Thank you very much for your time.

Operator

Your next question comes from the line of Chas Cobular from Stone Harbor Investments, you may proceed.

Chas Cobular – Stone Harbor Investments

Good morning.

Joe Davis

Morning.

Chas Cobular – Stone Harbor Investments

I was trying to check my notes for what you're election revenues were in the December 2007 quarter and I wrote down it was around $5 million, is that correct?

Joe Davis

About, December 2007, was in the $13 million range, $13, $14 million range.

Chas Cobular – Stone Harbor Investments

Oh okay. So they're going to be roughly flat.

Joe Davis

Just a minute. I didn't say they were going to be 50% more than that. What I said was they were going to be 50% more than they were in the prior election cycle.

Chas Cobular – Stone Harbor Investments

Okay.

Joe Davis

But, not 50% more than that quarter.

Chas Cobular – Stone Harbor Investments

Okay, fine. All right. And then regarding your addressable market, do you have a feel for what the amount of the decline is in this December quarter?

Joe Davis

Well, industry sources don't really do much in the way of predicting the decline. We just looked at the historical declines, and they've been, Jon do you remember the numbers?

Jon Biro

Yeah.

Joe Davis

3% or 4%?

Jon Biro

For our business?

Joe Davis

Yeah.

Jon Biro

Yeah, I mean the last recession we were down almost seven.

Joe Davis

Oh, I'm talking about in the reported NAPL numbers…

Jon Biro

Yeah.

Joe Davis

They're in the 3% or 4% range. We've actually had a 1% same store sales increase this quarter versus the prior year.

Chas Cobular – Stone Harbor Investments

Right.

Joe Davis

2.7% of that is election-related, 1.7% is same store sales. So we feel that we've done a lot better than the industry average with regard to sales growth.

Chas Cobular – Stone Harbor Investments

Okay. Can you say which, any product lines or geographic areas that are especially weaker for your company?

Joe Davis

You know, it really depends upon the customer in a particular area. If our customers are servicing financial institutions, if our companies are servicing financial institutions, we've got one or two of those, their volume is going to be off. We have one customer whose parent company, and they've been a good operating, but they've had their parent company name on their stuff, this was a big deal. Their volume is off, because their parent company's under stress. So, it really depends upon who our major customers are at that location.

As far as looking across our 26 states, I really am looking at the moment at my map on the wall here, I really can't see any area of the country that is under particular stress as far as our business is concerned.

Chas Cobular – Stone Harbor Investments

Okay. And last question…

Joe Davis

Aaron do you agree with that?

Aaron Grohs

No I agree in total.

Chas Cobular – Stone Harbor Investments

Last question. Do you know roughly what percentage of your revenues are from financial institutions?

Joe Davis

We don't really have that, but it is not a giant percentage. I wish it were more, many, many times. But, it's, I mean, if it's 4% or 5%, would be a big number, wouldn't you say?

Aaron Grohs

Yes.

Chas Cobular – Stone Harbor Investments

All right. Thank you.

Joe Davis

We don't have as much of that data as you might think. But, you know, if it's 4% or 5% I'd be surprised, 2% or 3% maybe, I don't even know.

Operator

Your next question comes from the line of Atin Agrawal from Longbow Research, you may proceed.

Atin Agrawal – Longbow Research

Hi good morning.

Joe Davis

Morning

Atin Agrawal – Longbow Research

Can you tell what was the contribution of national sales in September quarter?

Joe Davis

National accounts?

Atin Agrawal – Longbow Research

Yes.

Joe Davis

Jon do you have that?

Jon Biro

Yeah, and…

Joe Davis

(Inaudible)

Jon Biro

Yeah, we're changing the way we bring that information together, but for the quarter, you know, we had 17% growth. So good solid growth year over year.

Atin Agrawal – Longbow Research

17%, okay. And Joe, any thoughts on share repurchase program? I know, I mean, you're current governance don't allow it, but, can you go back to your bank and maybe try to renegotiate on this?

Joe Davis

Certainly, that would be a possibility. We've had some discussion about that. I just don't think, in today's climate, and in today's banking environment, that would be the wisest thing for us to do at this point. (Inaudible) conclusion to date that could change from time to time. But today, we don't really have any plans at the company level to be buying back shares, or asking our bank to, you know, change their loan agreement to allow that.

Atin Agrawal – Longbow Research

Okay.

Joe Davis

I mean, speaking of loan agreements, Jon covered this very well. But, you know, we're comfortably within all of our ratios and covenants. We don't have any problems there. We don't predict to have any problems there. And we've done, you know, modeling to show us what if, and most of our financial covenants are based on a trailing 12 month numbers, EBITA being a very important one. And we don't expect to have any problems in that area.

Atin Agrawal – Longbow Research

Okay, great thanks.

Joe Davis

Thank you.

Operator

Again, if you would like to ask a question, please press star one. Your next question is a follow up question from the line of Charlie Strauzer from CJS Securities, you may proceed.

Arnie Ursaner – CJS Securities

Hi, it's actually still Arnie for Charlie. Just as a follow up to the last question you got Joe. Can you just clarify. Were the discussions regarding sharing purchases one you've had internally, or have you actually had any formal discussions with your banks about…?

Joe Davis

That's completely internal discussion.

Arnie Ursaner – CJS Securities

So you've never even approached your bank.

Joe Davis

We haven't approached the bank. I just don't think now is the time to do that. That'd be my judgment.

Arnie Ursaner – CJS Securities

Well the only question I would have is given your share price, knowing your business versus acquisition opportunities, it would seem your shares are at least, if not more, compelling than unknown acquisitions you might consider.

Joe Davis

Well, we haven't announced any acquisitions, big acquisitions either have we.

Arnie Ursaner – CJS Securities

Okay.

Joe Davis

But, you know, we are emphasizing and certainly spending a lot of time looking at acquisitions. And we have to be in that marketplace all the time. But, you know, tuck ins are probably the most favorable thing that we're looking at at this point. Some of those are very minimal cost to us. And might even be paid based on, you know, future revenue streams.

Arnie Ursaner – CJS Securities

Sure. Going back to the digital printing segment of your business, can you remind us, I know you had a fairly sizeable capital spending program related to that. So a two part question. One, where are we in the capital spending for your digital printing piece? And now that the capital has been invested, can you give us some sense of the returns your earning on that capital? And then more generally, what your Cap-X budget and DNA budgets are for the balance of this year? And what is likely to be your Cap-X number for next year?

Joe Davis

I'll address the return part. You know, that's a part of our operation, it's an integrated part of our operation. We think our returns are, you know, reasonably decent, but we don't disclose those particular returns. And there's always start up costs in connection with that too. So sometimes they hurt your returns for a while with (inaudible).

Jon Biro

Right, and Arnie, through the six months, about two-thirds of our capital expenditures is related to digital. So the lions share of our digital investment for the year is behind us.

Joe Davis

Digital as well expansion Cap-X to expand a particular line of business.

Arnie Ursaner – CJS Securities

And what is your Cap-X expectation for all of '08 and for '09 at this point?

Jon Biro

For fiscal year '09.

Joe Davis

March 31, year end is March 31, 2009, is…

Jon Biro

Yeah $65 to $70 million.

Arnie Ursaner – CJS Securities

Okay. And your DNA?

Joe Davis

Which, what percentage will be digital and expansion Cap-X.

Jon Biro

Well, digitals going to end up being probably around 50% and expansion Cap-X is going to end up being around 70%.

Joe Davis

Seven?

Jon Biro

70%.

Arnie Ursaner – CJS Securities

That's 120%.

Jon Biro

120% of the total.

Joe Davis

So digital and expansion Cap-X is 70% of the total number?

Jon Biro

Well, digital's going to end up being about half of our investments (inaudible). And of this $65 to $70 million, I would say 70% is expansion related.

Joe Davis

Right.

Jon Biro

So we've got some digital, we've got some other business lines where we're expanding.

Arnie Ursaner – CJS Securities

Sure. And Joe I think you mentioned you're now in the collectible trading card market. Is that new for you, and if not, don't bother answering? But if it is new, maybe expand a little bit on what you're doing there?

Joe Davis

It all came with out PBM acquisition. They are the world leader in collectible cards of various types, including, you know the things that you'd know more about would be baseball trading cards. They're the world leader in that area.

Arnie Ursaner – CJS Securities

Okay, thank you very much.

Operator

This concludes the question and answer portion of the call. I would now like to turn it over to management for closing remarks.

Joe Davis

Okay, thank you very much. We appreciate everybody's interest. A couple other things that happened during the quarter I'd like to tell you about.

We lost a good friend, employee and chairman of the board with the Cyril-Scott Company, when Mr. Leslie "Mac" McClellan passed away in October. I got to know Mac very well as I negotiated with him on our, for over four years, attempting to acquire his company. He was an inventor, a leader, and a great family man who cared a lot about his employees. Our condolences go out to his family, particularly his wife Betty, during these difficult times.

Another of our former company owners, Mr. Arthur Wetzel of the Wetzel Company in Milwaukee, we bought his company from him when he was 95. He celebrated his 105th birthday August 15th, at Pine Lake near Milwaukee. And someone asked me if, after I attended that, if Mr. Wetzel was still, you know, in good mental and physical condition, still with it. I think I can explain that by relating a little story to you.

I'm talking to Mr. Wetzel, telling him about all the great things that we've got, you know, particularly our digital printing where we can produce a coffee table book, you know, one at a time. How we have national accounts, big demand, and all of the growth and the good things we're doing at CGX. And he listened very patiently while until I was finished telling this story. Then he said, Joe, that all sounds good, but when is it going to be reflected in the stock price? So, Mr. Wetzel is very much alert, and very much follows our company very closely.

And at this time, I plan to attend his 106th birthday which will be August 15, 2009, assuming I get invited. I certainly hope I do.

With that, I would like to say that we appreciate your continued interest in our company. We appreciate the continuous support of our customers in these particular difficult times, our employees, and our shareholders. And we look forward to reporting to you on our December results. Thank you for your interest today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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