Compass Diversified Holdings (CODI) 2009 Q2 法說會逐字稿

Good morning, and welcome to Compass Diversified Holdings 2009 second quarter conference call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions).

At this time I would like to turn the conference over to Michael Cimini of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings' second quarter 2009 conference call. Representing the company today are Joe Massoud, CEO; and Jim Bottiglieri, CFO.

Before we begin, I would like to point out that the Q2 press release, including the financial tables, is available on the company's website at www.CompassDiversifiedHoldings.com. In addition, management expects to file the Form 10-Q for the quarter ended June 30, 2009 with the SEC later today.

Please note that throughout this call we will refer to Compass Diversified Holdings as CODI, or the company.

Now allow me to read the following Safe Harbor statement. During this conference call we may make certain forward-looking statements including statements with regard to the future performance of CODI. Words such as believe, expect, project, and future or similar expressions are intended to identify forward-looking statements. These statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factors discussion in the Form 10-K filed by CODI with the SEC for the year ended December 31, 2008, as well as other SEC filings.

In particular, the domestic and global economic environment has a significant impact on CODI's subsidiary companies. Furthermore, we are uncertain as to our ability to consummate acquisitions which are accretive to shareholders, either in 2009 or beyond.

CODI undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time I would like to turn the call over to Joe Massoud.

Thank you Mike. And welcome everyone to today's call.

I'll begin today by offering some general comments on CODI's performance during the second quarter as well as talk about how we're positioning the company for future performance. After that, I'll turn the call over to Jim to discuss our operating results on a subsidiary by subsidiary basis.

During the second quarter we generated cash flow in excess of our expectations due to a number of factors.

First, each of our subsidiary management teams continued to aggressively manage costs while retaining the infrastructure necessary to be well positioned for future growth. These efforts have been focused on materials and direct labor costs as well as SG&A expense levels at each of our companies.

Second, at a number of our business as we were able to achieve tangible increases in customer penetration and market share.

And third, as a general comment, we believe overall business fundamentals began to stabilize across our family of companies.

We were pleased by the operating performance of our subsidiaries relative to their competition. We believe the difficult economic times present an outstanding opportunity for strong companies like ours to grow and take market share. This is a time of opportunity. Our businesses are leaders in their various industry niches, and they are not being manned for short-term performance optimization. And our strong balance sheet allows them significant financial and operational flexibility. As a result we have confidence that each of our companies will emerge from the downturn substantially stronger than they entered.

With regard to the proactive cost containment measures I just mentioned, these are broad and vary across our subsidiaries. At a number of companies, including American Furniture, Anodyne and Fox, our management teams have successfully worked on material costs, established additional sources of products, and gained efficiencies, resulting in higher gross profit as a percentage of sales during the second quarter.

Management of SG&A expenses including compensation was also a focus at each of our companies. For example, Staffmark was able to reduce SG&A by a whopping 35% in Q2 as compared to a year ago, while Halo, Advanced Circuits, and Anodyne also made notable progress in this area.

In addition to managing costs, we continue to draw upon our financial strength to make attractive add-on acquisitions. As a specific example, during the past quarter Advanced Circuits completed a tuck-in acquisition of Circuit Board Express. This type of acquisition is a truly win-win-win for us, the seller, and for the seller's historic customers.

Going forward we will remain focused on consolidating this industry with further acquisitions. This strategy is also one we continue to pursue aggressively Halo.

The importance strides we've made to effectively manage the downturn from both an operational and financial standpoint bode well for Compass Diversified Holdings to continue to deliver stable results for shareholders and to grow through this difficult environment.

We remain on track to meet or potentially exceed our previously stated guidance of CAD between $21 million to $24.5 million for 2009. We also expect to grow CAD year-over-year in 2010, even excluding the impact of future acquisitions, any of which we would expect to be highly accretive.

As you are aware we paid a second quarter distribution of $0.34 per share. Since going public in May 2006 we've paid cumulative event dividends to our shareholders of approximately $4 dollars per share. Our Board declares distributions to shareholders based upon its evaluation of the normalized cash flow generation power of our company.

While for the current quarter or year, as a result of the economic environment as well as the sale of two of our businesses in the second quarter last year and our conservative approach to redeploying that capital, we may generate less cash flow than our total distributions. However, over the cumulative period since our IPO we continue to have earned excess cash flows over distributions paid to date.

Additionally and separately, we have realized gains to date of approximately $109 million for modernization of our interests in subsidiaries, including the sales of Aeroglide and Silvue in June of 2008. None of these games or the results from those monetizations are included in the way we think about CAD, as you know.

Looking forward, as I mentioned we expect that any acquisitions we consummate, whether of new platform businesses or add-ons to our existing subsidiaries, will be highly accretive to our cash flow. We are excited about the current and coming acquisition environments and believe the substantial bid/ask gap that exists in the private company sale market continues to narrow.

We are in an unusually advantageous position to deploy capital without the need for third-party debt financing, utilizing cash on hand or availability under our revolving line of credit. In support of this long-term growth strategy, we further strengthened our balance sheet by completing a 5.1 million share offering in June, resulting in net proceeds of approximately $42 million and demonstrating the continued confidence that capital markets have on our future prospects.

As of June 30, 2009 as a result, we had $241.5 million in total liquidity comprised of $58.2 million in cash on hand and approximately $183.3 million available under our $340 million revolving credit facility.

In terms of debt currently outstanding as of quarter end, we only had $77.5 million outstanding with no material maturities till 2013, so we feel very good about our liquidity.

With those introductory comments complete, I'd like to turn the call over to Jim Bottiglieri to have his comments on company by company second-quarter financial results.

Today I will discuss our financial results for the quarter and six months ended June 30, 2009 including a review of the operating results of each of our subsidiary companies, and a brief mention of some of the factors affecting each of the businesses.

On a consolidated basis revenue for the quarter and six months ended June 30, 2009 was $287.5 million and $398.9 million, respectively.

Net income attribute to the company for the quarter was $0.6 million or $0.02 or per share. For the six months ended June 30, 2009 we reported a net loss of $26.7 million or negative $0.82 per share.

As a reminder, during the first quarter of 2009 we recorded a $59.8 million non-cash impairment expense for the company's Staffmark subsidiary, partially offset by the associated tax benefit of $22.5 million, $12.7 million for the minority shareholders' portion of this impairment expense and an $8.2 million supplement put expense reversal.

Now turning to results of each of our individual businesses beginning with Advanced Circuits. For the quarter ended June 30, 2009 Advanced Circuits' revenue was $10.8 million compared to $14.3 million for the quarter ended June 30, 2008. The decrease in sales was primarily attributable to a $2.4 million decline in long-run and subcontracted production sales resulting from the economic slowdown.

Income from operations for the second quarter was $4.4 million compared to $4.5 million for the same period in 2008. due to the lower sales volume largely being offset by $1.3 million of lower loan forgiveness accruals expected to be granted to the Advanced Circuits management for achieving specified targets in fiscal 2010.

For the six months ended June 30, 2009 Advanced Circuits' revenue was $22.8 million compared to $28.6 million for the prior-year period, due primarily to $3.8 million of lower sales in long-run and subcontracted production sales stemming from the overall economic slowdown.

Income from operations was $8 million compared to $9.2 million for the prior period. Operating income decreased due to lower sales volumes, partially offset by $1.2 million of lower loan forgiveness accruals.

Overall we are pleased with Advanced Circuits' performance during the second quarter. We continue to see strong demand for our core or prototyping quick-turn PCBs and expect sales in these categories to remain till fiscal 2009 to be only slightly down from the prior year.

As we maintain our focus on controlling costs, we continue to add to our customer list with accretive acquisitions of Circuit Board Express, as Joe had mentioned earlier on the call. By taking advantage of the current weakness in the broad circuit board market and successfully consolidating the industry, we intend to further strengthen Advanced Circuits' leadership position and long-term growth prospects.

Now I'd like to turn the call over to American Furniture Manufacturing, or AFM. For the quarter ended June 30, 2009 AFM's revenue increased to $34.1 million compared to $31.3 million in the prior-year quarter, due to a notable performance in stationery product sales, which climbed approximately $4.3 million in the quarter.

Operating income for the second quarter of 2009 increased to $2 million compared to operating income of $1.2 million for the same period of last year. This increase is attributable to decreased overall material prices, particularly foam and steel, as well as increased efficiencies realized in the manufacturing recovery process following the fire in February 2008. We also benefited from lower fuel costs in 2009 compared to last year.

For the six months ended June 30, 2009, revenue increased to $75.6 million compared to $68.4 million in the year-earlier period. Operating income was $4.2 million compared to $4.9 million for the six months ended June 30, 2008. This decrease in operating income was largely due to the recognition of approximately $2.9 million of lower business interruption insurance proceeds that were recorded during the six-month period ended June 30, 2008.

AFM has demonstrated tremendous resilience since the fire last year and continues to gain market share in the current downturn. As we stated on our previous conference call, AFM has benefited from a retail drop-down effect as retail sales at the lower end of the pricing curve may outperform those at the higher end. At the same time we have increased sales to our top customers, which reflects our ongoing commitment to providing high-quality service during a challenging market.

In addition, we have added a number of potentially large customers seeking to expand the breadth of their product offerings or to work with a more financially strong supplier of furniture.

On the cost side, we are pleased by our continuous efforts to control costs in line with the soft retail environment and believe AFM's leading presence in the promotional furniture niche positions the company well for growth in 2009.

Moving onto Anodyne Medical Device, for the quarter ended June 30, 2009 revenue was $14 million compared to $13 million for the same period last year. Once again, Anodyne's strong quarterly performance was due to the company's new product offerings, which totaled $2.6 million in the second quarter, partially offset by a decrease in sales of powered products as a result of reducing spend -- reduced spending among healthcare institutions.

The company's income from operations for the second quarter increased to $1.7 million from $1.1 million for the same period in 2008 due to higher sales as well as lower manufacturing, overhead, and labor costs.

For the six months ended June 30, 2009 revenue increased to $25.6 million compared to $24.4 million for the same period last year, largely due to sales from new product rollouts.

Income from operations increased to $2.9 million compared to $1.6 million for the same period in 2008. The increase in operating income is primarily due to higher sales and greater operating efficiencies.

We are very pleased by Anodyne's ability to post record results during the second quarter. The successful rollout of new product offerings has largely offset the difficult macroeconomic conditions, as planned.

Going forward we expect to experience continued growth in this business based upon our diverse set of leading product technologies that is unmatched in the medical support circuits industry.

Fox Racing Shox. For the quarter ended June 30, 2009 the company's revenue was $29.9 million compared to $34.4 million in the prior-year period. The decrease in revenue is primarily a result of lower net sales to original equipment manufacturers.

Income from operations was $2.0 million during the second quarter of 2009 compared to $3.2 million for the quarter ended June 30, 2008. The decrease was attributable to the decline in sales partially offset by a favorable sales mix as a larger portion of our sales were in aftermarket categories, and more efficient production and procurement.

For the six months ended June 30, 2009 revenue was $50 million compared to $57.9 million in the prior-year period. Income from operations was $1.2 million compared to $3 million for the prior year period.

Fox continues to benefit from strong brand recognition as we seek the profits from entering into new verticals including military and new off-road applications such as partnering with Ford on the F-150 Raptor. Demand among market enthusiasts remains strong despite the weak economic conditions. By leveraging our brand equity and realizing the gains from our operation initiatives, we intend to drive future performance in this business.

Moving onto Halo, for the quarter ended June 30, 2009, the company's revenues decreased to $29.5 million compared to $35.8 million for the same period last year, principally due to lower spending in advertising and merchandising by its corporate customers. The reduction in net sales of partially offset by $2.5 million in net sales to accounts acquired since June 30, 2008.

Loss from operations was approximately $0.1 million versus income from operations of $0.5 million for the prior-year period, which is primarily a result of the lower net sales.

For the six months ended June 30, 2009, Halo's revenues were $56.2 million compared to $64.6 million for the same period last year. The loss from operations was $2.1 million versus a loss of approximately $0.2 million for the prior-year period.

As we have stated in the past, the distribution of promotional products is seasonal. Typically Halo realizes more than three-fourths of its annual EBITDA during the second half of the year, due principally to calendar sales and corporate holiday promotions.

That said, we believe this trend to reduce spending on marketing and related products will remain throughout 2009. We expect the combination of net sales from recent add-on acquisitions and the aggressive recruitment of new account representatives to mitigate the decline in spending of our customers as well will position the company well for strong growth once the economy turns around.

Staffmark, formerly CBS Personnel. For the quarter ended June 30, 2009, the company reported revenue of $169.4 million compared to $270.2 million for the same period last year. The reduction is primarily the result of decreased demand for staffing services as Staffmark's clients were deeply impacted by weaker economic conditions.

The loss from operations was $1.5 million for the second quarter of 2009 compared to income from operations of $4.3 million for the second quarter of 2008, due principally to lower sales offset by approximately $1.1 million in lower transition and integration expenses related to our Staffmark acquisition and by lower costs from the achievement of planned synergies.

For the six months ended June 30, 2009, revenue was $332.4 million compared to $537.2 million, which was prepared on a pro forma basis to include the acquisition of Staffmark as if it was completed on January 1, 2008.

The loss from operations was $59.9 million, which includes the previously discussed impairment charge as compared to income from operations of $5 million in the year '08 period.

For Staffmark, while we have seen strong potential sequential revenue performance on a quarter over quarter basis, the industry is still suffering a large decline as compared to the prior year, as are we. Our focus here is on maintaining our presence with our customer base while simultaneously taking out as many costs as possible. We are pleased by management's efforts on this front as well as in the company's maintenance of its customer base and the positive impact of our geographic entity.

While we expect results to be significantly lower from a year ago, we are still anticipating this business to generate positive cash flow in 2009. We expect Staffmark and the entire staffing industry to continue to be the leading indicators of the economy and expect performance of these companies to strengthen substantially as the economy improves.

Turning now to our balance sheet. We had $58.2 million in cash and cash equivalents on hand, and networking capital of $151.7 million as of June 30, 2009. Subject to borrowing base restrictions, at June 30, 2009 CODI had $340 million under its revolving credit facilities to be used to fund acquisitions and working capital requirements.

I will now turn the call back over to Joe.

Before opening the call to questions, I would like to reiterate that we are pleased by the steps that we and our subsidiary management teams have taken in this challenging environment to stabilize the results of our niche-leading businesses in further strengthening their ability to benefit from an economic recovery.

Again, over a longer period of time than one or two or three quarters, we really believe the way strong companies must view this downturn is as an opportunity to grow. We feel like our companies are capitalizing on that.

Our company has a very strong balance sheet, well-capitalized to allow our existing subsidiaries to prosper as well as to allow us the ability to acquire businesses at attractive points in the economic cycle.

Our past and current experiences make us confident in the CODI business model, and we look forward to continuing to work for you to drive future performance and enhance long-term shareholder value.

With that said, I'd like to thank everyone again for their time this morning, and we'll take any questions anyone might have. Operator, please open the phone lines for questions.

(Operator Instructions). Larry Solow, CJS Securities.

Good morning. Could you maybe, Joe, just discuss some sequential trends through the quarter? I know you gave guidance in early June, and it appears like, considering you beat your guidance, it looks like June was much better than expected. Is that more of a cost-driven phenomenon? Or what are you seeing at there?

I would say it was a little -- again, it varied subsidiary by subsidiary. June was a good month. We had some revenue, I would say, outside performance, notably at Anodyne and at AFM. And I think our costs responded to some of the efforts we have been taking earlier in the year, our management teams have been taking both on the SG&A and the cost side. So I think it's a little of both. I would caution -- I think we beat the number, I think we will meet or potentially even beat our number for the year. But I don't think anyone is declaring a big victory here.

Right. And then just in some of your more economically sensitive businesses, particularly AFM and Staffmark, it sounds like AFM had an up year over year. I imagine that is skewed somewhat because of the fire last year?

Yes. There's no doubt that we entered the second quarter last year with reduced finished goods inventory, and so we are hamstrung. So that's clear that that's true, is that there is a skewing there.

Having said that, I think our performance quarter-over-quarter is better, second quarter versus first quarter at AFM. It feels better than the industry compares we track, and we also just know factually the team down there has done a superior job of adding SKUs at its most important customers and in some cases adding new potential (technical difficulty) [important] customers that they didn't have before. That team has really worked very hard to kind of outperform.

So I think it's kind of a -- clearly the comps are impossible to use because of the fire last year, both on the revenue side but also on the income side where we booked all this business interruption. Really the so really -- the best thing we can do to get a sense of the business is to compare it to its competitors and to also just look at the core operational data, which for us revolves around how many SKUs are we selling to our customers? How are we performing at our largest customers?

And just to give you a sense, one of the things that the company did last year after the fire was ensure that it served its top 50 customers in a sort of totally committed way, meaning if we didn't have enough finished goods inventory to serve someone, it wasn't going to be the top 50 or 75 or 100 customers that were going to suffer from that, right? So in that case, we do have a pure ability to look at how do this year's sales look to the top 100 customers as compared to last year? And I would suggest that that comp actually looks pretty favorable too, in addition to just how do we do -- how did we do across the whole company? Where it might be skewed by the fact that we were unable to fully provide product to certain of our smaller customers last year.

It's a little bit of a complicated explanation, but does that make sense?

Yes, it does. Absolutely. And then just (multiple speakers)

And I think you asked about -- Staffmark was the other?

Yes.

You said AFM and something?

Yes, I said Staffmark. So I was just looking at it, obviously the industry's still struggling and your sales were down 35%, 37%. How does that compare to other temporary staffing companies? And are you seeing any (multiple speakers)

Yes, I mean (multiple speakers) You know what? The best thing I can say is I think it's comparable. I'm not going to say we are outperforming, and here's -- there's a couple of reasons why it's difficult. First, when you look at the other staffing companies, you got to try to strip out foreign earnings, which may be better or worse than US, and in some cases that's possible, and in some cases it's not.

Then other companies that have more or less permanent placement, and I can tell you the permanent placement business has gotten hurt worse than the -- if you look at our actual temp staffing decline, it's less than our overall decline that we report here, so businesses have a different mix.

Geography is a big player, where -- not just non-US and US, but even within the US kind of where you sit in terms of geography.

I believe -- I don't want to overstate the company performance. Despite the fact that we think they're doing well and anecdotally we don't appear to be losing customers and in fact customer list -- total customer numbers increased, I think it will be a stretch to say we're doing anything but performing with the market right here, because it's hard to get the data, and all the data we can get looks like we are performing -- when I say with the market, I'm talking about -- because there's a lot of comps out there -- I'm talking about people who are more mainline temporary staffing companies as opposed to the kind of permanent placement or, say, day labor or, say, IT staffing.

If you just took a look at clerical and light industrial staffing companies, our feeling is we're probably performing in line with those companies right now.

Now that's from a revenue basis. I think from a -- from what we have seen and what analysts are saying, a number of our larger competitors, there's talk about going sort of cash flow negative and EBITDA negative for the year. We don't think that's going to happen here at all.

What I would say is our ability to take out -- and I think it's 35% of SG&A costs on a year-to-year basis -- is to some extent driven by the business model, right? One of the advantages that we have always believed in having kind of a very dense business model, is the ability to kind of rein in costs while still serving our customer base. You're not really abandoning markets, you can stay within a market and still cut back costs.

The other thing is you can still sell through, right? You only need -- you need a certain number of people who are regional salespeople to serve a specific area, and if that's supported by a more dense business model or by more revenue driven through that particular geographic area, your ability to sustain that salesperson and not lighten up and feel like you need to terminate them is strengthened.

So we believe -- and that's what happened in the last recession, but the last recession and this recession are all different. But we really came out of the last recession with quite a nice bump in customer count and revenue growth. But this business will not generally rebound in revenues until the entire industry comes back, which ought to look like a few months to a year before employment in general comes back. It's a leading indicator, but no one knows when that's going to sort of kick in I think.

Now month-to-month declines, I know there's some seasonality to maybe looking at it year over year. Are they -- and obviously the comps probably ease in (multiple speakers)

It's getting better. It's getting -- there's no doubt the month-to-month declines are better. I would caution against the sequential Q1/Q2 improvement story, which we have, which all the staffing companies have, you have to understand is part of a norm, also --

Seasonal, right?

Yes. Part of also a normal seasonal business. So a little bit sometimes we chuckle when we hear people talking about, look, how much better Q2 was then Q1 for the staffing industry. Well, that's supposed to happen.

Having said that, if you look at year-over-year, which might be a better kind of analysis of that, that's clearly moderating and declining. Our year-over-year declines month-to-month have consistently, since the end of the first quarter, gotten better. And that trend continues.

And then just looking at the acquisition environment, I know you touched on the acquisition environment briefly. But just maybe a little more color? And would it be reasonable to expect you get something done by end of calendar year 2009?

Yes, I think that's a reasonable expectation. That's certainly something that we would like to accomplish as well, it's something we are working towards and something that was on our mind obviously as we did the follow-on, is whether that -- whether the factor that's a reasonable expectation means that it occurs or it spills over into early next year, I don't know, but it's certainly reasonable for one to think, look, you've got a lot of economic strength, you're saying that results are stabilizing, you're saying that the bid/ask gap is narrowing -- certainly one would add those things up and that's a reasonable conclusion.

Thank you.

Vernon Plack, BB&T Capital Markets.

Thanks very much. Jim, how much availability do you have on your revolver?

As of June 30, we've got about $183 million.

$183 million?

We also have $58 million of cash on the balance sheet as well.

And Joe, looking (multiple speakers)

The only other thing I would add to that is then the math becomes a little bit iterative, right? Because that's availability based on existing EBITDA (multiple speakers) the calculations of pro forma, so you'd have to say, well, you deployed that and you pro forma bought more EBITDAR, so then you could draw on that. The spreadsheet that actually shows how much you can draw is iteratively and includes the benefit of any cash flow that you might acquire.

Okay. And given that you had a reversal on your supplemental put line, that tells me that you believe the value of your businesses has actually either stabilized or gone up a little bit?

No, the reversal actually would be the other way, right, because that means that at one point we had booked the expectation that if the businesses were monetized, we would have a certain amount. And then the reversal means that we think that certain amount would be lower. So it's our expectation that as of June 30, because of market multiples and our cash flow, the businesses are worth less fair market value than they were the quarter before. But not material (multiple speakers)

It's only -- it was about $250,000. So it was not a very [material] (multiple speakers) number.

Right. It was essentially insignificant, which tells me that you -- the business is -- the value of the business (multiple speakers)

I think that's right. I think that's a fair comment.

Thank you.

Greg Mason, Stifel Nicolaus.

Hey Joe. Could you tell us when you say the bid/ask spread is narrowing in the market, could you tell us which one is coming in? Are bids coming -- are bids coming up or asking prices coming down? What's driving the narrowing?

That's one of those chicken and the egg questions. I -- largely I think -- just to try not to give too confusing an answer. I think the asks are coming down, meaning when we are talking to intermediaries, they're leading with the commentary, look, we know this business is not worth what it was worth a year ago, or we know it's not worth X times. So I think it's mostly the ask.

If you're saying, why isn't it 100% the ask? I think three months ago when -- or six months ago when people were talking about, is this going to be a multiyear depression, and is it going to look like Japan? By definition all the models that acquirers built on companies probably had even more pessimistic cases than they have today. So to the extent that you're thinking about the future of business and you're taking 1929 through 1933 kind of a scenario and laying it over the business, it impacts your bid.

So I do think there is a slight increase in the bid, but from a multiples point of view, which is what I interpret your question to be, I think that most of that compression has happened because on the ask side there are more realistic expectations, or there is a little more urgency on the part of the seller. So we- those are the situations we are looking at.

Okay. And then looking at Staffmark, I want to take a little longer view. We had heard an interview with an executive at Manpower expressing concerns that some of these job losses in the temporary staffing may be gone permanently as businesses realize they can run even leaner or maybe outsource to foreign sources even more. What's your -- I know you think it's a leading indicator and will come back, but do you think it can come back to the level that it was? Or is there some permanent impairment there?

My personal view, and we've talked about this extensively, I think as a firm the view across a our company is that it will come back to its level or stronger. But I think there's sort of layers to that, meaning -- I think that many of the jobs in the US economy that have been lost, whether temporary or permanent, may not come back so rapidly, either because they will be outsourced -- I'm less concerned about that -- or because of productivity gains, or quite honestly demand levels may not return across the economy to the point they were at three or four years -- it might just be that we have too much capacity in a lot of these industries.

So I think a lot -- there's going to be to some -- to some extent the comments that you're saying the Manpower executive said is true across all jobs. I don't think that's specifically true for temp jobs, I think that's true across all jobs.

Having said that -- so take some percentage of the jobs that that might apply to, 5% or 10%. I don't even know what that percentage is, but that's true.

When we then look at the bigger picture, which is the ability and tendency of this industry to respond to downturns with greater market share, meaning if you look at the BLS statistics and you realize that contract labor represented like 0.5% in the early 1970s of the total workforce, and it got up to almost 3% here in the last several years, it's because coming out of downturns employment managers have been cautious or nervous or quite honestly relieved to be able to manage their workforce in a more lean way and have shifted their employment force towards temporary.

So our outlook on this is that there may be jobs lost throughout the US that don't come back, but that that will be a small impact compared to the number of jobs that -- to me it wouldn't be shocking at all to see 2020, 5% of the US labor force be contract labor -- or 4.5%. The impact of that kind of a movement on the industry as a whole would overwhelm -- not good for the US economy maybe, because maybe net/net there is job loss in the US economy, but for temporary staffing sector, the impact would overwhelm. That's one point.

The second point I think is if you look specifically at our business, we are reasonably heavily skewed towards a logistics business. And so to some extent one of the things that's helped our company over the last decade as jobs have already been lost to manufacturing overseas is our ability to sort of add people in distribution centers and logistics, and there's a strong element of the Staffmark business that's actually driven by distribution of product manufactured overseas. So there's a little bit kind of a bumper there, it's impossible to make a direct correlation.

But my view -- and we've -- you never know until it plays out, but my view is that the shift towards contract labor will bode very well for this entire industry, not just for Staffmark, notwithstanding any potential kind of overall loss of jobs due to productivity gains during this downturn as a result of layoffs.

Does that answer -- whether or not you agree, does that answer make sense?

Yes, it does. One more thing about acquisitions, not -- going away from the new business acquisitions, but what kind of acquisition opportunities are available in your current businesses? Some more of the Advanced [Circuit] kind of acquisitions that you made this (multiple speakers)

Advanced Circuits I think is working on a number, and the kinds of acquisitions look like they're acquisitions of equipment and customer lists, and what we do with equipment will depend on what the equipment is, and in many cases it will be to try to sell those. But most importantly it's got to be a customer base that looks like it's going to blend well with our customer base, it is going to tuck well into our facility, and we think there's a large handful of those that ought to be available.

On the Halo side, our company is very good at what it does there, and it's very well known in the industry. To the extent there are people who want to think about divesting in their businesses, I think that we get the first or second call because our team there and our CEO in particular has spent a lot of time focusing on this over the last decade, more or less, and so we are well known in the business, and we are known to pay a very fair price. And then we think we run an efficient machine, so we think, as I say that that becomes a win-win-win. It's a win for the seller, it's a win for us because of our ability to achieve efficiencies, and it's a win for the seller's customers, which a lot of times is just as important to the seller as mine. So we think there's a lot of opportunity there.

On the Anodyne side, not sure it's add-ons necessarily, but we are definitely looking at a very -- we have a very interesting joint venture that we are looking at that will allow us to capture, sort of capitalize on our product channel. We are pretty excited about that.

And that's really -- at this point I think those are three where we are looking at situations. I know at American Furniture there's been consideration of certain facility types expansions where rather than buying a business you might buy facilities, but I think out growth there is going to be organic.

So there's a number. But the two drivers of that I expect to be Advanced Circuits and I expect to be Halo, and both -- I'm sorry -- yes, Advanced Circuits and Halo, and both our teams there know that we are fully behind them and capitalized to support them.

Care to make additional staffing acquisitions?

You know, I wouldn't rule that out because I think that there could be the time here in the next several months when these things are being bought for a very low price. There's nothing that we are looking at particularly now, and we think there is a lot of opportunity to grow organically.

To the extent that there are weaker competitors out there, it's not clear to me that that business can't be approached through internal sources as opposed to kind of actually paying a price for it. But -- so there is nothing on the cooker now in that space.

I will say this, though, because I know people say, well, are you going to make more staffing acquisitions? And you've got a lot of exposure as it is. One, we don't, because it's going to -- we're going to produce something at a pretty healthy level of EBITDA this year without a lot of contribution from CBS. Number two, I think when this thing -- when the economy comes out, whether it's kind of next year or 2011, any student of kind of historic staffing results, even if there are some job losses, this thing will kind of motor out I think pretty quickly.

So if we saw the right staffing acquisition opportunity, we wouldn't be afraid of it. But there is nothing on the burner now.

Okay.

Henry Coffey, Sterne, Agee.

Yes. I'm sorry. I had a call coming in at the same time. Can't hear both items.

Do you want to take that?

No. I take it from your comments that you are expecting all of your businesses to generate some sort of level of basic operating or EBITDA profitability, including Staffmark this year?

Oh yes, clearly.

So -- and (multiple speakers)

And for the others I think it's -- Staffmark is the only one I think there was ever a question when -- in first quarter, how deep it was going to get. Now we are very confident on Staffmark as well.

Right. Yes. No. I think that's a major change. And how does that leave you thinking about the dividend for the fourth quarter? I mean, is there any risk there (multiple speakers)

Our Board makes that decision, and it's heavily discussed ever since we went public the first quarter. So it's not really my decision to make.

Having said that, I think our view is certainly not more pessimistic than it was last quarter when I said, given our outlook for this year and what we think is going to happen next year, which should be some material improvement even without acquisitions, we feel good about paying our distribution -- our outlook on that has not changed. Our outlook on that has not changed. It's -- clearly there is no increasing position (multiple speakers)

But I just -- it just -- the overall tone of the call just simply sounds better.

Yes. Well, maybe that's right. I think you're probably -- each of our businesses I would say in the second quarter, each of the six, every single one of them I think showed reasons to believe that the -- there is light at the end of the tunnel, and in some of the cases we are kind of -- we're emerging from the tunnel. So I think that's a fair comment.

Having said that, for a number of them -- still in the tunnel.

I know you made some comments about your M&A opportunities, but one thing we are noticing, for good or for bad, in every asset class, whether it's agency mortgages or whole loans -- and I can go through the whole list -- just the large volumes of fire sale deals, they don't seem to be happening in those asset classes, even with companies like A. Katz and Allied pretty badly strapped.

That's absolutely right. I mean, look -- and we (multiple speakers) and I think my partner, Elias Sabo, is on the phone. I don't know how many times Elias and I have talked about -- and not to pick on A. Katz. I'm sure -- I actually know nothing about it. So I'm just going to say I am sure it's a very well-run company. But to be honest with you, I don't know about them, so I'm not going to make any comment at all.

But we have said, at what point does A. Katz sell all these businesses? And we have lobbed in calls to them repeatedly, and I think that they are not getting pressure to sell, they are probably being smart to hold because the businesses are probably going to be worth more in a couple years than they are now.

And we don't see LBO firms being pressed by the banks as much as we expected, and maybe that's because the banks have other issues, and maybe the banks are being smart. Maybe the banks don't want to own the businesses, and they are thinking, hey, you know what, if I can just modify this and jack up the interest rate and take a fee, I'm going to be happier in two years. So maybe that's a smart decision.

So I agree. There's not a deluge of -- we are not sitting around going, I can't believe we've got 15 transactions on our desk that are all being sold at three to four times cash flow.

Having said that, our business models involve acquiring one to two to three businesses every year or two that are ones that we are going to work with management to grow that we can build. We don't -- unlike a BDC, we don't need to book a lot of transactions. For us, making a couple of acquisitions here over the next 12 months sets us up extraordinarily well to continue paying our dividend and potentially growing it over time and enjoying the economic uptick.

So I fully agree with your comment that there is not a huge deluge of these transactions. But the trickle is heartening, particularly given that there aren't a whole lot of people who have the cash to respond to the trickle.

And Joe -- and I'm sorry, I caught all the numbers except the ACI. Just for the June quarter, what was the revenue and operating profitability?

Have you got it here, Jim, faster? Go ahead. It's faster.

Our revenue was $10.8 million, and the operating income was $4.4 million.

Thank you very much. And no, it seems like things are moving in the right direction. Thank you.

(Operator Instructions). Robert Dodd, Morgan Keegan.

Just one question from me. You've had a lot of success so far with new product introductions. Obviously we know we've got the Raptor Fox coming still. Is there any other new products at any of the other businesses? Or anything that's just been put on the drawing board at Fox that we can expect in the next six to nine months?

Let's go through this almost company by company, because it's something we focus on. But that one is easy, right, and it's somewhat -- I don't know. It depends on how -- what you think of off-road vehicles. But I consider that example somewhat sexy. But that may just be me.

But so it's easy to talk about because you can picture it, right? But it's something at every one of our companies, I think we are very hesitant to squeeze down to such an extent that there's not product introduction. And I would say we kicked in a year and a half ago into the mode with most of our companies of talking about, how do we gain additional customers?

So if you go through it kind of company by company, you will see many examples. And I'll just give you a few. For example, at American Furniture. What kind of a product can you introduce? Obviously we are not inventing some new key piece of furniture you've never heard of, right ? But in that particular case, you're talking about new designs, new patterns.

In that case we're talking about a situation which we responded to our customers' needs to supply entire room packages, and so we are sourcing case goods like tables and rugs to put with the room package to give our customers the ability to kind of source an entire room package. We are talking about larger sofas.

So it's talking about response to customers' needs and product introductions, and I think if you were to talk to our guys at AFM, they would give you a litany of product introductions, and they might just not as be kind of as obvious as, here, we are now on a truck when we formerly were only on bikes.

If you look at Anodyne, similar thing. We have customers there who are saying to us, here is a specific product that we need, it's a product that has some type of a foam component, some type of an air component. Or how can you make this product more functional for us? Or easier to transport? And I would say in that particular case, a significant amount of the revenue growth has been driven by what the company would consider to be new and very exciting product introductions.

And then Fox is pretty clear there. We are working on personal watercraft where we've been -- we are constantly developing. We have the -- every year there are material improvements in the core bike product line where if you are an off-road enthusiast, you might think that the next advance from 2009 to 2010 was as material as me saying to you now we are going to be on a military vehicle, or we are going to be on Ford.

So my broad commentary on this is -- and I think those are probably the three where I think R&D, if you will, has been most significant over the past 12 months. I think that product innovation is a constant here.

If you want to talk about Fox specifically, we are very optimistic. We were in a bid package on a large military program, which is awarded to someone else, but we learned a lot through that process. And it was one of the first times we've been involved in that kind of a program, we are optimistic over the next couple or three years, and we are adding infrastructure from a personnel point of view to pursue those opportunities. So we feel good over the next two or three years about what military opportunities would look like. We certainly see the Ford F-150 as a springboard to similar opportunities.

So I think Fox is -- the next five years should involve a number of, if not entirely new product categories, but sort of new product innovations. I can tell you we have added significantly into this company's management team. We've hired an extraordinary CFO, COO. We've now brought on a head -- person to work on military specifically. We've rearranged the management team to make it more responsive to new product opportunities. So that's a company that we are attempting to position for significant growth over the next three to five years. There should be a lot of exciting things coming out of that.

Great. Thank you.

John Rogers, Janney Montgomery.

I've got a couple of questions here. On ACI, some of your competitors have talked about an improving environment. I understand that you all don't have a lot of visibility. I guess it's about two weeks. But have you seen any indications that this market may be improving?

I wonder who those competitors are.

The -- yes. I mean, I -- clearly our -- sort of our number looks like orders per day and bookings, and I think those have affirmed up in the last couple or three months versus what they looked like at the end of the first quarter.

I think our favorite thing about what's happened at ACI in my view, and then Elias I'll give you a chance to prep some thoughts, and then I'll turn that over to you, because maybe you follow the competitors or the company more closely.

To me it feels a little more predictable. There was a point in the first quarter when the orders per day varied to a greater extent day or day or week over week than we had historically ever seen, and it was -- I wouldn't say it was unnerving, but it was strange. So what we like the best is not only has the volume returned to some extent, but it's feeling a little more predictable and stable, which is what a company with 10,000 customers, none of which represent more than 1%, should be.

Like that company ought to be the model of stable demand. So when you get kind fluctuations, it's interesting in not a positive way. So I would say there has been some firming and there's been some stabilization.

Elias, how would you respond to that?

I would say, JT, we are probably seeing a little bit more increased order activity, but what we are seeing is that the orders are smaller in size than what we had seen over the last, call it 18 months. I think that's consistent with a lot of the longer lead time, larger production runs continuing to be under pressure based on kind of the economy being squeezed. And some of those longer lead runs are going overseas, maybe at a faster clip than what they had been over the last couple of years.

So we are encouraged that the number of orders are picking up a little bit. That being said, I would echo some of Joe's comments. This is a pretty consistent business given the large customer base. It doesn't move radically in one direction or another, but it kind of moves over time a little bit more slowly. And we are seeing more stability and not as wild a swing. But the increase in the number of orders is encouraging, and that's really our bread and butter, which is the quicker return, higher profit margin orders that are coming in.

Great. And then on ASM, I think one of your customers recently said that they are seeing slowing sales on home furnishings. Have you all kept up the momentum that you saw in the second quarter? Obviously the results were really strong, given -- all things considered. And then I guess do you expect the margin improvements to continue with -- steel looks like it's starting to rise again. Steel prices are starting to rise again.

That's a -- it's two parts. Yes. Actually, the third quarter looks like it's doing okay. So far so good. You'd have to tell me which customer, and then we could sort of peel it apart and try to figure out what segment of their business they said it about. But yes, we feel pretty good.

We feel, again, particularly good about some of our -- going -- or harking back to Robert's question, some of our new SKUs in some of our new lines are doing particularly well. I think the drop-down effect is so material in fact that we are performing more strongly in stationary than we are in motion furniture, which we attribute to the fact -- we are performing well on both, but we attribute that to the fact that the motion -- or the stationary furniture is actually the even lower priced, more valued component of the line than the motion side.

In terms of margins, that's a very good question. Look the momentum that we all got -- we being all people involved in manufacturing things in general -- in the first half of the year in our particular case because of declining foam prices and maybe driven by declining oil prices and declining steel prices, I don't think there's a lot more there because I agree with you that it looks like commodities are going to flatten out or now to (technical difficulty) increase.

I think our company has done a particularly good job of doing some forward sourcing and forward contracting, particularly on the foam side, so I think we should be okay there for a while. We've also worked very hard on our transportation costs and feel pretty good about that. So we expect margins to stabilize. But I don't think there's a lot more room in terms of margin growth. But we're doing -- we're always working on it, but it's not clear to me where that next step comes from.

Is there any difference in the margins between your stationary and motion? Would you see a benefit or would you be hurt by the changing mix?

Interestingly, no. We wouldn't be hurt. Interestingly, if you broke it down, stationary is slightly higher, in fact. But let's say there is not much. For purposes of the analysis you're going to do, there's not much difference. We're just as happy to send -- sell a recliner, a motion piece of furniture at $100, $200, $400, whatever it is, $800, as we would be a stationary. Really indifferent.

Great. And then on Anodyne, it looks like there's good results here. Do you think this is more from a growing end market, or are you taking market share? And then if it's a market share gain, is this -- you're building Anodyne inventories at your distribution customers and sort of as you replace some of your competitors, who are losing share? So --?

Our believe is -- well, I think the end markets are -- it would be hard to characterize the end markets, housing markets as being strong. Our belief is that our revenue growth is greater than the overall pace of growth of support services. And so we believe we are taking market share, we have anecdotal evidence with a number of our customers where we think we've replaced people, we know we've replaced people, so we think we are taking market share.

I wouldn't overemphasize this whole notion though of -- it's not really a razor blade razor model, like where particularly some of our growth has occurred in the reactive line as opposed to the active line of our business, so the reactive being primarily foam-based. To me that doesn't necessarily mean though therefore we have more beds in the hospitals, and that's going to be recurring, and now we've taken permanent market share -- if that's what you're suggesting. I don't think it quite looks like that.

But I think it's market share growth, and again, I think it's because of the number of products we've been working on for in some cases many years, but a year-plus development.

Again, Elias or Pat, if you have any comments to clarify for JT here, that would be great.

No Joe, I think you've hit it. We've got some new products that have taken share, but I would say that it's a combination that the end markets are stable to growing a little bit and our -- we think our growth has been a little bit stronger by virtue of some new product introductions that have taken share.

And I guess (multiple speakers)

I can settle the second part of your question. Like now we are replacing them in the markets. I think we have to constantly innovate. The hope is that customers become accustomed to the increased technology that we bring this product, and they like it, and they were more likely to reorder. But it's not -- again, it's not a razor or razor blade kind of thing.

I guess to clarify my question a little bit, you say you're selling more Anodyne reactive services through Hill-Rom because they move exclusively to you, or they've eliminated another supplier. Is there any kind of inventory build component that you benefited from in the second quarter (multiple speakers)

Oh, you want to know if these are stocking orders basically. I don't think so. It's hard to know, but in general these companies don't carry a lot of inventory. They run pretty lean businesses that are reasonably inventory-less. So it's not my perception that our sales are up because we've gained market share and now basically they're again -- I'll call them stocking orders, which I know is a retail term, but that's the phenomena you're describing.

And Elias, you would agree with me on that? Or is there --?

Yes. To a large degree I think most of the product that we are selling right now is sold through to the end customer. There is a little bit that goes into the rental market where we are selling to customers that are than renting. But the vast majority of our business is going to be for end market sales.

And then some of our business, and the business that actually performing best right now at Anodyne, is the truly consumable business, and that's where we have a lot of stabilizer products. If you get in an accident and you need to stabilize a knee or something, those are one-use foam products. That business is seeing extraordinary growth, less sensitive because it's not a capital equipment type of purchase to the economy. And so that business is clearly a one-time use, and there is an inventory issues.

But by and large, most of our sales are to end customers, and there is not a material amount of I would say inventory building for rental our customers that took place throughout 2009 so far.

Just last question on Staffmark, again, we hear commentary on other -- similar staffing providers are saying they're seeing slight improvements. I think Manpower said that they are actually -- some of their customers are actually talking about adding staff. Is this really just normal seasonal improvement, or are you seeing any stabilization?

Well, I think it's both. I think there's definitely a normal seasonal improvement. I do think that in this economy people cut very effectively, very quickly, more than we were used in the past, and kudos to all the American companies for being leaner than we historically have been in terms of responding. I do you think that any uptick in business, even if it's in response to inventory stocking issues throughout the general industrial markets, may lead to people -- again, subject to the question asked earlier about, are they going to try to do more with fewer people? Of course they are. But there's some things you just can't do with fewer people, and I think that any increase in production levels is in fact driving opportunity.

So by way of example, we have some auto customers, right? Clearly that business has been decimated, and what we have seen over the last several weeks is as they've -- as sort of the US manufacturers are kind of getting back on pace, to even restart at some level of production -- forget that they'll never reach the old level of production, but at least they're sort of kick starting above a extraordinary low baseline, we're starting to see some demand come from the -- sort of the secondary tier 2 or tier 3 suppliers that may be we supply because they're getting a knock-on effect. To the extent their stimulus package has begun to create some sort of jobs in the middle of the country, we are seeing some comeback from that.

So my point wasn't to say that we aren't seeing some stabilizations and we aren't seeing some customers come back, because we clearly are. It was more of a cautionary that in this industry, sequential is not what it's about. Right? Unless you know the sequentials really well, one shouldn't just blindly look at it and say, oh, Q2 is better than Q1, no-brainer, things are going well. It's really more about how are we doing versus prior year than how we are doing with specific customers. So it's both.

Great. Thanks a lot.

This will conclude today's question-and-answer session. At this time I'd like to turn the conference back to Mr. Massoud for any closing or additional remarks.

Thank you all for your time. We are very excited about what's going on here. We just concluded our week of meetings with our management teams, and I think we emerged pretty pleased with the people that we have running the subsidiaries and the actions that we have worked together on to kind of manage through the downturn, and very importantly, position for growth.

None of these businesses are being managed for this quarter's cash flow or next quarter's cash flow. They are each being managed to emerge as even stronger, higher cash flow generating businesses out the back end of this downturn. And we really think we are making good traction on that.

So appreciate your time and appreciate your support, and look forward to talking to you again in about three months.

This does conclude today's conference. We thank you for your (technical difficulty) [participation].