Franklin Covey Co (FC) 2007 Q4 法說會逐字稿

Ladies and gentlemen, welcome to your fourth-quarter 2007 FranklinCovey Company earnings conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). We will be taking questions at the conclusion of the presentation.

At this time, I would like to turn the call over to your host, Mr. Hatch. Sir, please proceed.

Good morning. On behalf of the management of the Company, I'd like to welcome you all to our investor call this morning.

Before we begin, I would just like to remind everyone that this presentation contains forward-looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties, including the ability of the Company to stabilize and grow revenues, hire productive sales (inaudible), general economic conditions, competition in the Company's targeted marketplace, market acceptance of its products or services and marketing strategies, increases or decreases in the Company's market share, growth or contraction in its overall market for the products offer by the Company and its competitors, changes in the training and spending policies of the Company's clients and other factors identified and discussed in our fiscal 2007 10-K report and subsequent 10-Q and 8-K reports that will be filed with the Securities and Exchange Commission, many of which of these conditions are beyond the control or influence of the Company. There can be no assurance that the Company's actual future performance will meet management's expectations. These forward-looking statements are based on management's expectations as of the date hereof, and are subject to the outcome of various factors, including those listed above and any one of which may cause future results to differ materially from the Company's current expectations. The Company undertakes no duty to update any forward-looking statements.

With that being said, I would like to turn the time over to Steve Young, our Chief Financial Officer, who will review financial results.

Good morning, everyone. Derek, that was beautiful. I'm pleased to be with everyone this morning to talk about our fourth-quarter and our year-end financial results. I will do an overview or a summary of those financial results, and then later Bob Whitman and Sarah Merz will talk more about the individual components of the business and some of the business things that are going on.

As I was looking at our filed information, I was pleased to see the information and remember that since FY 2003, our operating income has increased around $65.8 million. So that's a positive thing. What I wanted to start off was just to remember where we've been compared to where we are now.

I hope everyone has had a chance to look at our press release and our filing. If you haven't had the chance to study those now, I hope you do after, a lot of good information contained there about the Company and the financial results of the Company.

So for this [filing], let me first talk about sales. Our sales increased for the quarter by a little over $2.5 million and increased by the year for just a little over $5.5 million. Our training and consulting business, the OSBU, is up double-digit -- in fact well into double-digit, 14%, 15% -- for the quarter and the year, and the increases we're seeing in both the domestic and the international side of the business.

Those significant increases in training and consulting were somewhat offset by a decrease in product sales that are due to, as we often talk about closed stores, our decreased technology sales. It's also due to decreases in the conversion rate and our experience in our consumer direct business and some reductions in our retail business, tempered a little bit in the product side by increases in the quarter and slight increases in the year in our wholesale business.

So sales up for the quarter and for the year, and that being a combination of some aspects of the business being significantly up and some being down.

Our gross margin -- as we look at our gross margin, we see that gross margin has increased and our gross margin percentage has also increased. The increased revenues that we just talked about are primarily in the domestic and international training and consulting, and the increases in wholesale are all high-margin revenue sources for us compared to retail, consumer direct and especially technology sales.

So we have a mix shift toward higher gross margin business, and that creates our -- that's a primary reason for our increase in gross margin percentage. We also experienced gross margin percentage increase in our OSBU division. So the combination of that is that not only are our sales up, but also our gross margin percentage has also increased.

Going down our income statement, would have our SG&A expense, which has also increased for the quarter and for the year. This increase is primarily due to the investments that we've talked about before that we would make and have made in new client partners or salespeople and training consultants in our training and consulting business, and the commissions that are a result of increased sales in that side of the business. Then we've also spent additional monies in our research and our development efforts. So those are the investments that we have talked about that we feel are important to drive the business forward, particularly in the very strategic and important areas of the domestic and international training and consulting sales.

So, as a net result of all of that, our operating income has increased or did increase for the quarter and for the year -- $1.9 million for the quarter and $4 million for the year. We are pleased that each year that we report in our five-year summaries we have an increase in the operating results, like I talked about before.

So going again down our income statement a little bit, we notice that our net of interest expense and interest income, our interest expense has increased for the year. That's due to us entering into the revolving credit agreements and spending our cash primarily to redeem preferred, so our interest expense is up, as we would expect, and the offset of that is that our preferred dividend has decreased, and in fact decreased to zero and will be zero going forward, since we have paid off the preferred.

So last item on the income statement -- each quarter this year, we have discussed the tax benefit of more than $20 million that was taken in our fourth quarter of last year. So, while I wish we had a $20 million positive tax adjustment that we could record each year, we don't. So that makes that line very interesting. So FY 2006 is extremely unusual tax expense because of that $20 million benefit. Our tax expense recorded in this year is more what we would call normal. Now that we are looking at a normal tax rate, we will see that our effective rate is a little higher than some might expect, and that's due primarily to the interest on the management stock loans that we record and, as yet, our inability to take full advantage of domestic foreign tax credits. Some will be interested to know that we still have well over $20 million of net operating loss carryforward available for future use that will reduce the amount of cash that goes out for taxes, again for a little bit longer.

Before we go off the P&L, please remember or note that on August 31st of this year, we sold our Brazil and the majority of our Mexico operations. We transitioned those previously owned offices into licensees. So as a result of that, our sales number, which last year was $6.5 million for those two operations and a slight profit recorded for the to operations combined of around $100,000. Next year, what we will be recording is a royalty revenue on those two operations.

So, as we look at our revenue number, notice that we start the year, in effect, being down 85% of $6.5 million, as we are looking simply at year-over-year revenue growth. So, even though that gives us a bad comp, if you will, comparing revenue, we do expect to have increased profitability from those two operations as a result of converting them to licensees.

Also please note that in FY 2007, we recorded a $1.2 million gain on the sale of our printing facility. That is a benefit or an increase to our operating income of $1.2 million. We don't have any other printing facilities to sell, so that won't be in next year. As you would expect, our interest expense at the first part of the year will be higher than last year. Our taxes will be normal, and our dividends will be zero.

Now, if we spend just a minute on the balance sheet, to me the very positive thing related to the balance sheet is we did redeem the remaining more than $37 million worth of preferred, more than $87 million redeemed over the last couple of years. We talk about a little bit later that preferred, as you remember, carried a 10% non-tax-deductible dividend.

So that has been a significant change to our balance sheet and a use of cash. As part of redeeming that preferred, we did enter into credit facilities totaling $25 million, and at the end of the year we were $16 million into those credit agreements.

When talking about the income statement, we talked about a mix shift, if you well, from the OSBU training consulting -- or towards the training side of our business. As that mix shift continues, our accounts receivable balance will increase proportionately or near proportionately, due to the fact that our training consulting business is primarily on terms, while the product side of our business, excluding wholesale, is primarily cash sales.

So as our training consulting business grows, our receivable business will also grow and our inventories -- we see some increase this year. That's primarily due to our desire to be fully in stock and in stock earlier for our busy season this year.

Last year,we also did spend a little more than $2.5 million on the purchase of common shares under a $10 million buyback allowance, if you will, put in place by the Board, of which we spent about $7.5 million of the $10 million currently authorized to buy back common shares. So we all know this is a significant decrease in our cash balance for the year, and as explained, that's primarily the result of redeeming the preferred stock.

We also did transition in -- as we sold our old printing facility, transitioned into a new printing operation with new presses. So we spent additional money on fixed assets this year, compared to what we normally would, and we're also spending a bit more than we have historically, but good money spent on our development of new curriculum. Then I've also talked about increases in our receivables and inventory that impact our cash balance.

So I guess, in summary, very pleased about how the training and consulting side of the business grew in this last quarter and in the last year, and that growth is both on the domestic and on the international side. Pleased about how the wholesale high-margin operation is going, pleased about the payoff of the preferred shares, our new manufacturing facility here, a wonderful state-of-the-art type of facility that we're very pleased with. As I said at the very beginning, pleased that of all the years that we're reporting, we have another year of increased income from operations and a total of more than $65 million over the last few years.

So that's a summary of our financial results. Again, I hope you look at our filed financial information, and pleased about what we're able to report.

Now, I would like to turn the time over to Bob Whitman for more discussion about details related to the business.

Thanks, Steve. I appreciate everyone being with us today. Normally, Bill Bennett would be doing this section on OSBU, but he's traveling in our Asian operations this week and is actually on a plane, which he couldn't get where he needs to be on any other plane. So he's not joining us today.

So I'll just quickly review highlights or headlines from the OSBU, and then get back and do what I normally do and talk about the overall business. Sera Merz is with us and will be talking about the CSBU.

In OSBU, the fourth quarter, as Steve mentioned, revenue grew $4.9 million, which is 15%. EBITDA, segment EBITDA, grew $2.7 million, which is 56%, driven by strong gains in both the domestic and international operations, offset somewhat by weaker performances in the Sales Performance Group and what we term promotional revenue, which is books and audios and speaking fees, et cetera. For the full year, OSBU's revenue was up $18.5 million, which is 15%, with EBITDA up $7.1 million, which was up 51%.

The breakout of that, and I'm going to give you just four subsegments -- for the domestic regions, and these are our regional offices in the various geographic or vertical market regions, Q4 -- and it's probably worth noting, although I think you all know that we had five fewer business days in our fourth quarter this year than in the prior year, and so that, of course, impacts sales a little bit.

But that notwithstanding, domestically, Q4 revenue was up, as I mentioned, $2.6 million, which is 14%, with EBITDA up $2.3 million or 41%. Felt very good about the flow-through of the incremental revenue to profit, which is part of our model. It's higher than our model, but we had some [particularly] good things in the fourth quarter. Six of the seven domestic regions grew both revenue and EBITDA during the quarter.

For the year, for the domestic regions, revenue was up $8.2 million, which is 14%. EBITDA was up $5.2 million, which is 31%. Both revenue and EBITDA grew in all seven of the regions. We feel good about those operations, feel that fundamentally each of them is on a good footing and pretty consistent quarter to quarter.

Normally reported in our domestic numbers also are the results of SPG, which after a very strong first half of the year had the fourth quarter both revenue and EBITDA were down to prior year. For the full year, SPG's revenues grew just under $1 million, $900,000, which is 13%. With their investments in new client partners and consultants, EBITDA grew, actually, less -- 9%, also reflecting the nonrepeat of an intellectual property license which we had in the prior year.

So that has been a challenge for us, actually. SPG has a lot of very big clients. They do sales training for some very large clients. You've noticed in this last couple of years feast or famine quarter to quarter. We are determined -- we believe that softness is going to continue into the first quarter for SPG. Thankfully, it's a smaller unit. But we expect, based on bookings now and some restructuring we've done at the operation, we are determined to have that be a business that we can count on quarter after quarter, as we seem to be able to now in most of our other operations on the organizational side, and believe that that will be -- that we will see strengthening in the second and third quarters as we broaden the base of our clients in SPG.

Promotional revenue channels, as I mentioned, which are book royalties, speaking fees, et cetera -- revenue was down about $100,00; EBITDA was up a couple of hundred thousand. It's not a big operation, but again, rather than viewing this just as ancillary revenue, we have organized this now to function as a real revenue-producing unit that is expected to grow quarter by quarter. So OSBU overall on the domestic side had a good quarter and a very good year.

For international, Q4's revenue was up $2.9 million, which is 24%. Our international licensees as a group and five of our six direct offices generated double-digit revenue growth versus prior year. EBITDA grew $1.6 million on that revenue gain, which was 69%. For the full year, revenue for international was up $8.7 million, which is 18%. EBITDA was up $3.9 million, which is 42%. So again, good, strong operations in OSBU.

If you look at slide six, these are the numbers we most often refer to. We have what we call a momentum index, which is an early indicator of revenue, and it's looking at the momentum of its combination of bookings and facilitator sales and other contracts that we sign, regardless of when they may be delivered. You see that for the year and for the fourth quarter, the momentum remained solid. We booked about $1.3 million more revenue in our fourth quarter of this year than in the prior year, for delivery in future quarters. We believe we've established a foundation for solid revenue growth and related profit flow-through also for the first quarter in our domestic and also in our international operations.

Slide seven -- as you know, our most important bet, so to speak, in our five-year plan continued to be that we can, number one, successfully hire and ramp up new client partners; and, number two, that we can consistently increase the productivity of what we call our alumni client partners, those that were with us as of the end of 2004, before this strategy of -- this initiative to hire a lot of new client partners began.

Those two, as you see on slide seven and eight, continue to be on track. Several quarters ago, we gave you a ramp rate, I think, as one of the slides which you can refer to, to show you what we expect. But for the year-end initiative to date, since 2005, the performance of new client partners has actually been slightly ahead of the ramp, both domestically and internationally. Importantly, this last year and for the year as a whole, $18.4 million of revenue came from new client partners hired since 2005. So we believe this is an important growth vehicle for us going forward.

The second element of that is the productivity of our alumni, which is forecasted in our planning, in our mindset, to be at least 5% a year compounded. Particularly as you see on slide eight, it was higher than that. We were up approximately 11%. It was very broad-based, so it wasn't just in pockets and a few client partners we had. It was very strong growth across the board.

So all in all, we feel good about the overall performance of OSBU. Like I say, we've got a couple of warts, which are the inconsistency of the SPG operation and inconsistency quarter to quarter on the promotional revenue. We expect to have both of those be resolved by midyear of this year, so that we'll see quarter-to-quarter growth in those.

Now, turning to the Consumer Solutions Business Unit, slide nine, that might be useful because, rather than just going into operating numbers, which I'll ask Sarah to do in a minute, is just to at least give you my perspective on the Consumer business. We've focused most of our attention in recent webcasts on the Organizational business, I think with good reason, since its our primary growth vehicle.

But I think, as shown on slide 10, there are three basic stories, so to speak, that at least I think of when I think of the CSBU. There's a turnaround story. There is actually a growth story, and then there's the stabilization story, which has had some faltering in recent quarters but is fundamentally, we believe, sound.

On the turnaround story, in 2002, we made the decision to deemphasize our Consumer business or to emphasize the Organizational business to try to reduce our reliance on our own channels of distribution at both the cost and the complexity of operating those and to, instead, leverage our brand by distributing through third-party sources and try to dramatically reduce our cost structure and our capital involved in that business.

As you see in slide 11, at the time we began this restructuring strategy and repositioning strategy for CSBU, we had approximately 180 stores at that time. Our plan in our mind was to take that store count down to somewhere between 60 and 80 stores. Today, we're down to just a little over 80 stores today. But at the same time, then, to utilize the brand, which has continued to be strong, particularly in the consumer product side and to move from somewhere -- if you look at the right scale, somewhere around 2,000 third-party outlets, and that has moved to to, now, approximately 9,500, and we believe that can move to more than 12,000 this year.

So that fundamental shift in distribution was a key element of the strategy. We would expect, in future years, to see our number of retail stores reduced somewhat as leases roll out, but that will slow, and we've got pretty good stability now in most of the stores, but to have continued expansion in the wholesale business, which we'll speak to end a minute.

On slide 12, an interesting thing is there is -- of course, with the significant reductions in reported sales, some have come up with the perception that, therefore, the Planner business must be down overall or that our brand must be being diminished in the marketplace. I suppose there are some viewpoints where that would be -- through certain lenses, I suppose you could argue that.

But the way that we look at it on page 12 is that we've traded our business model from having all of the risk ourselves of all of the inventory and all of the capital, et cetera, to this wholesale model. Even within the wholesale model, we've made the determination to protect ourselves to the greatest extent we can from inventory risk, et cetera, in that channel by going on a royalty model, where as much as half of the profitability is shared with other partners who take on the distribution, responsibility and risk.

Slide 12 just shows -- and maybe a complex concept, but the royalty revenue itself, which you see as a small portion, has grown a lot, from a few hundred thousand dollars to approximately $4 million. But if we look at making an estimate -- and of course, we don't of the exact retail price of each thing that is sold through these third parties. But given the approximate retail value, this has increased about $60 million at retail value of the products sold, which roughly matches -- in fact, probably a little more than offsets, if those estimates are right -- a little more than offsets the decline in our own channels.

So in other words, on an overall basis, we believe our retail footprint and our brand footprint in the marketplace has actually grown somewhat over the period of years. Yet it has allowed us to dramatically reduce our fixed costs, increase the profitability of those channels and reduce the capital invested in those channels by more than $30 million during that period of time.

Of course, what has happened -- the reason why we (inaudible) a turnaround, besides strategic, of course, is and (inaudible) capital is that during that period of time, there has been something like a $20 million improvement in EBITDA, moving from somewhere close to $10 million in negative EBITDA to a little more than $10 million in positive EBITDA. Our segments shift a little bit year to year, so they are not exactly comparable, but in rough terms, management believes there has been somewhere around a $20 million to $22 million improvement in profitability associated with that.

So the first story is this turnaround story. We believe it's fundamentally been -- and that has been implemented. The results which we hoped to have from it have largely materialized. Really, my congratulations go to Sarah and Bob Sumbot and their wonderful team for the tremendous efforts in that first story.

The second story, so to speak, is the growth story. On slide 13, you see there are four elements of that. Sarah, I would like to ask you to just quickly, if you would, perhaps go over each of those in terms of the growth that we have already experienced in some of these areas and what we see in the future.

I'd love to, Bob. Thank you. So on slide 13, you see there are four components of growth that the organization is focused on -- the domestic wholesale, international licensee business, international wholesale, and because always we are looking at new products.

If we started on the first one, the domestic wholesale business, we think about this in two pieces -- the number of outlets that are carrying our products and the revenue per outlet, the efficiency of the sales in the existing outlets. On the number of outlets, as you saw earlier on the slide, by our estimates we've grown close to 10,000 outlets that have chainwide distribution of FranklinCovey products. Those include retailers like Target Stores, Office Depot, Staples, OfficeMax, Wal-Mart and many other including some strong regional chains.

So our product has certainly achieved a much broader distribution, and we believe that we are very accessible to customers who have planning and organization needs, and then can purchase the FranklinCovey items. A big piece of getting into those outlets is working with strong distribution partners, and so we are constantly investing in our distribution relationships and are working to add new distribution partners who have strong buyer relationships, particularly in classes of trade that we have not fully penetrated and that are on our radar screen. So we are working constantly on expanding that number of outlets, and attained some very strong results and expect to continue seeing strong results.

On the revenue per outlet side, the FranklinCovey assortment is growing far beyond the classic paper refill. We've seen very nice pickup and sell-through in our wirebound planners. We've also seeing greater pickup and sell-through in binders, particularly more fashion-oriented binders, and a newer category, for us -- business, totes and cases as well as our software business.

So on a revenue per outlet basis, we continue to work to broaden the mix and keep the line fresh, so that the turns are improving with each year. Our [high amount of] the Senior VP of Wholesale and Product and Marketing are out calling directly on those accounts our alongside our distribution partners.

So, as Steve mentioned and Bob has mentioned, domestic wholesale has been growing, and we continue to expect to see that growth. It is highly profitable, since the royalty revenues drop straight to the bottom line.

If we turn to the international licensee business, Bob referenced this earlier when he was talking about the Organizational Solutions Business Unit. The training business has built a global network of partners that are reaching out into parts of the world and spreading the word about FranklinCovey and building a strong following of trained individuals and organizations that have embraced FranklinCovey.

That network has built an installed base of hundreds of thousands of FranklinCovey advocates. We are partnering and have been partnering in this last year with the strongest of those international partners, as we started with the top 15 and have been working with them to build out their consumer businesses.

The strategy is primarily a Web-based network with regional fulfillment centers, because that is an easy entry into the business and we have a great infrastructure that they can leverage. So we have been working with them on building up their databases, strengthening their marketing resources, certainly leveraging the great resources we have here in the United States and helping them grow their consumer businesses.

So we are very optimistic about it. They have been very enthusiastic, and we are working to gear them up and will likely also look for additional, more product-oriented licensees as we move forward.

There's another opportunity in international, which is the wholesale business, and we would really like to replicate the success we have seen on the domestic side. We believe there is the opportunity, particularly now, as the international training business has built to a critical mass and the brand equity and brand awareness is growing in these international markets.

So we are talking with well-entrenched distribution partners who have already built relationships on complementary product lines with the office superstore and mass retail chains, so that we can add our products to their portfolio and their existing distribution infrastructure. We hope to have the first of those agreements signed before year end, and are well into discussions with several others. So we see that as a really untouched opportunity today, but we understand how to run that business, and so we are moving forward on that and think there will have great growth potential.

The final area, which really extends across both domestic and international, is the category of new products. We are always working to keep the line fresh, and our goal is to always keep close to a third of our sales coming from products that we've launched in the last year. That's a combination of both refreshing the designs in our core Planner business as well as finding new product categories. The wirebound category is a line that has been doing very, very well for us, both in our channels as well as in wholesale.

Now, more recently, we are seeing it roll out internationally. We think that will continue to be a great product for new customers, individuals new to the FranklinCovey line and people who are looking for more sleek formats that would complement the smartphone or a handheld device.

We have also been really delighted in the growth and our business tote and wheeled computer case business. We haven't talked about this in past years. If we look back into fiscal 2003, this was a business that was less than $0.5 million in our channel and today, is approaching $15 million just in our channels and is a significant additional volume in wholesale, a lot of that being royalty based and others where we sell to the distributor. So that's a business that has virtually come out of nowhere in the last couple of years, and is now a nice volume of business for us and a great area of growth.

We are also seeing the software business go through a bit of a turnaround in and of itself. For many of you who had been FranklinCovey fans for many years, we've offered planning software for probably over a decade. Some of the early software was ASCEND, and that had a very strong following. Then we launched PlanPlus for Outlook, PlanPlus for Windows. Just this week, we are shipping Version 5 of PlanPlus for Outlook with new enhancements to it.

The sales have been modest, and they have hovered around $3.5 million, $4.5 million, trending downward over the last couple of years. We have a small but loyal group of customers. So our challenge has been, how do you extend beyond that loyal group of customers who eagerly await the upgrade, but reach out to new customers, particularly enterprise customers?

We think we're onto something here in the last year with our new offering, which is PlanPlus Online. This is a product which is a service model, so it's Internet-based. There's a subscription fee. It has our planning methodology and a certain rescheduling functionality, task management, the things that people think about when they think of FranklinCovey and time management. But this application also has a fairly robust CRM function and a very strong activity tracking and management feature.

So we are finding that particularly small and mid-sized enterprises find this very attractive because it is easy to understand, very low cost of entry. When they lines this up versus other offerings in the marketplace such as salesforce.com, they see this as an easier investment to make and quicker to adapt.

So we are seeing very nice growth there. It is growing at a very healthy clip monthly, and we're particularly delighted that it is attracting new users to FranklinCovey and a lot of mid-sized enterprises that are buying 10, 15, 20 seats at a time, and come back to the us with very positive results and add to that user base.

So we think there's a very nice new product growth story here. We continue to look for new categories beyond the ones I've shared with you, and are looking for partners who will innovate with us, and are very optimistic about the different opportunities on the product side.

So those are the three aspects of the growth story that the management team thinks about every day and [has been] planning on implementing.

Thanks, Sarah. Maybe just go to slide 14, if you would. The stabilization story, as I said, has faltered a little bit in the recent quarters. But this takes reported -- this chart tends to reconcile back to the core product lines. We call it core comp, but core revenue, which is from our core products of planners and binders and accessories and so forth.

So it nets our from reported revenue public programs which really are primarily an OSBU function -- in fact, which will be over in OSBU in this fiscal year again. Again, it was just a question of where they were managed in the past, but it's primarily training revenue.

The revenue from closed stores -- so we get same-store, and then, as you know, there's been a big deemphasis on the technology devices of selling handheld, et cetera. So your people have plenty of places they can get those, and we make very little margin on those.

So netting those out, you see over the last three years $127 million and then up to $133 million and back to about $130 million. So there has been some softness this last year. Part of it was self-inflicted, part of it because of some inventory problems that we had, supply chain problems we had during the early part of the high season last year, which, as Steve referred to, we've rectified and have a good -- we're in a good inventory position everywhere this year. Some of it is just some softness in the channels, partially cost by, frankly, the expansion in our wholesale businesses; it causes some competition with your own channels.

But we believe fundamentally that this is -- if you've got a restructured business model, which is kind of the turnaround side of it, with a model that has a lot more flow-through and less capital, you've got opportunities for growth, we believe, that well exceed any downside risk on the stabilization side and some good plans for stabilization, which we won't go into this morning but which you can see the headlines of on slide 15 and 16, just the different programs we've talked about in the past. We can answer questions about those, if you'd like to, but I think we'll just move on so we have time for question and answers.

We think, fundamentally, the consumer business is -- while a different story, is nevertheless one which, if investors and the public could understand it better -- and perhaps we could certainly do better at helping them to do that -- that really this has been a very, very good operating job by Sarah and her team strategically; it's very different.

It should be clear now that the emphasis is on the Organizational business in terms of growth. But at the same time, this is a business that can grow bottom line. It's top line will be more modest because of the model, but the bottom-line growth, we think, can still be significant.

The final slide, and then we'll just open it to questions, is, of course, that notwithstanding the continued progress, the share price has continued to be very soft. Of course, the questions I think we get are, well, why aren't you buying shares or whatever, and are you going to buy shares? What are you going to do to change that? I think that will be a good discussion here as we open this to questions.

But slide 17 -- we would love to buy shares, and in fact, slide 17 shows that over the past three years, we have actually taken $95 million of our cash and repurchased shares. Most of that has been preferred because we needed to be able to, under the restructure of the preferred, our rights to buy common were linked to the extent to which we actually repurchased the preferred, and we only had until December of this year to eliminate the preferred altogether.

So that became a priority. We had a positive arbitrage for doing so, and used very little debt in the end to ultimately complete it. That debt we expect to have paid off, and the balance on our credit line be close to the zero by the end of January. But at the time, the last couple of quarters, we have not had a lot of excess liquidity to do more than just what we've done with buying the preferred and the common, which was purchased under the $10 million authorization to which Steve referred.

At the same time, over the last couple of years, we have put ourselves in a position where we could, in fact, buy large amounts of common if we wanted to because we, number one, through restructuring the preferred, which otherwise we had no rights to do it, eliminating the conversion rights, et cetera. The second is getting the loan program shares into escrow, which more than 3.5 million of those shares are sitting in escrow, so that at such point as the share price crosses over the loan amount, we would immediately get 3.5 million shares, reduce the outstandings by 3.5 million without putting any additional cash out.

As you know, we do not show on our balance sheet the receivable, which is the other side of this 3.5 million shares. But sometimes I find that people who wonder what the real outstanding number is, which isn't an easy one to know exactly, forget that you've either got 3.5 million fewer shares or you've got a lot more receivable for the Company.

I think the basic idea would be that we would like to put ourselves in a position -- we have not had, as I say, the cash resources to do so in the last quarters, and the debt environment hasn't been particularly attractive over the last 60 days. But through a combination of continuing to work on reducing assets to generate more cash, some transactions that perhaps can be done in the context of in the course of this year, our hope would be that we would be able to be aggressively in the market for our shares on some basis during the back half of the year, if not before.

At that point, I'm now going to turn the time back over to our operator and see if he can put it in Q&A mode, and we'll then respond to questions for the next 15 minutes.

(OPERATOR INSTRUCTIONS). [Andy Horvitz], [Old School Partners].

I think you guys have done a really good job at getting rid of that debt preferred, if I can call it that. Come January, you guys will be in a position where you should start generating excess cash flow and not have this debt on your balance sheet. At that point in time, will you be doing -- announcing a major share repurchase program? Could you comment on that?

I tried to give some indication of that. I appreciate your question. The combination of buying the preferred and investing tons in inventory and the new manufacturing facility, as I mentioned, has constrained us. With the sell-through of that inventory during the high season, which we expect, we expect to be out of our line by the end of January or so. So we would, under our existing facility, have both some cash and $25 million of credit availability to use for something.

So I think our anticipation is to really try to find some way, if the share price continues to not reflect what we think is real value, to purchase back -- either through just an authorization to buy in the market or through some bigger program, to try during the course of this year to raise the capital resources necessary, or to apply them to some version of something that would increase shareholder value. Whether that's stock repurchase or dividending or recap, there are a bunch of different things we're working on.

But it's not a passive effort, I can tell you that, any more than these efforts that led to the ultimate repurchase of $95 million of securities were passive. I know there's always a feeling, and maybe correct, that we're moving too slowly on it. If we knew now to move faster, we would, and we're happy to take advice.

But I think one of the goals is, of course, to try to get the share price to the point where it can reflect the story, which I think the underlying story of which now is one that we are very happy to tell, growth story on one side and the restructuring side on the other. So I would anticipate that during the year, we will be having a public discussion of some kind about something that will affect shareholders. But there are a couple of pieces to be put in place before that will happen.

What can we expect for next year, 2008, in terms of growth rates, both in the OSBU and as well in the product sales? Can you give us some guidance as to what you guys feel? Can we be comfortable with that 14%, 15% top-line growth in the OSBU for next year as well?

Let me answer it in this way. We don't really -- we're not giving guidance on specific growth. But the basic initiatives that underpinned the growth in last year domestically we expect to continue. We've continued to add new client partners. They have continued to ramp up according to plan. We have an aggressive hiring plan in place this year. We've hired our first five domestically already, and expect to add another 5 to 15 during the back half of the year.

So I think the basic factors that have driven this, which are the productivity and ramp-up of new client partners as well as the productivity of existing client partners, we expect to continue this year. On a quarter-by-quarter basis, obviously we will be comping against some transactions and things from the prior year that may not be as strong. But overall, we expect a strong growth rate in the domestic side.

Internationally, we expect [to enter] direct offices. But as noted earlier, because we've sold Brazil and Mexico, which generated almost no profit for us but had revenue, the reported revenue on the international side will be flatter. But if you look beneath the covers, we expect the four remaining domestic offices to again benefit from continued solid growth due to the same bet. Our international client partner hires have produced as much or more in ramp-up than have our domestic, and our productivity of our existing client partners has been good. Our licensee partners are growing. We see opportunities for further expanding our reach in certain portions of the world like India in China, and Bill Bennett is actually in India this week. We have had very good growth through our license partners there, but we're trying to --

(technical difficulty). Sorry about that. That's my phone going off.

My other question is I think you guys generated -- I looked at the 10-K pretty quickly -- I think it was around $25 million, $26 million of cash flow this past year. I think that would be ongoing cash flow, not one-time items. Is that correct?

Do you want to respond to the exact number?

Well, generated cash flow -- if you --

Including depreciation and amortization.

Yes, I think that number is accurate. Cash flow generated by operations, yes, and then you have another -- yes, I believe you understood that right. There are some one-time things that we've talked about, like the sale of our printing facility, the sale of Brazil and Mexico, et cetera. But yes, I think you are reading that right.

But you have a situation right now, is you've got a -- if you do the enterprise to EBITDA, and I'm assuming that the debt goes away at the end of the year, you're trading at around five times enterprise to EBITDA, correct? If I take your capitalization and basically divide it by this number, because debt goes away by year end. This is really, to me at least, too cheap to trade at five times, given that you have a business now that is passing 50%, that is actually growing double digits. It's making it too cheap, and I think the reason it is cheap, and if I may give you some advice, is that basically, outside of these last three conference calls, you have not actually communicated to the Street the story behind the Company.

If I may say, I think it would behoove you to consider taking the story and starting to talk to the Street once again. I see no reason at this point why you would want to wait on this, actually.

If you could just comment? Because I think there's many sharing the same frustration. I think the fact that the story is not known is one of the reasons why the stock seems to just drift and go lower on a daily basis.

I appreciate the advice on that. Would your advice be to do the before or after we buy a large block of shares?

Okay, I guess after. But it would be good for all of us, if that is your, I guess, reason for waiting.

But I think it's time. I think you guys are at a point where more or less, you've stabilized the product side, and on the OSBU side we are starting to see -- we're passing that 50% mark, which I think significant, both on an EBITDA expansion from a margin perspective, as well as in terms of the growth rate. I see no reason why the stock should -- we're all frustrated -- I'm sure you are too, with your options, that the stock is sitting here at $7 or even sub $7. I just want to reiterate that I think you should consider taking the story to the Street at this point.

I appreciate that, and I think that's wise advice.

Thanks anyway, and really good job on managing this business and good luck.

John Lewis, Osmium Partners.

You guys are making excellent progress. To start off, do you have any, as you like to call them, Bob, big bets for 2008? Can you discuss any new big bets you might have made?

First, our three big initiatives -- if the last four years have been kind of the idea, which you probably heard these until you're sick of them. But the idea was to exit the noncore businesses, to reset our cost structure, to generate lots of liquidity so that we could get rid of senior debt and preferred, et cetera, and also fund the new initiatives and, fourth, to reposition ourselves strategically, meaning emphasis on organizational business, within organizational business, expansion internationally, within both international and domestic, a lot more focus on the business results, execution-oriented stuff in addition to our historical -- and leadership, in addition to our historical individual effectiveness -- all those things have been the efforts of the past.

So going forward, the three big initiatives we're terming -- not for cuteness, but just because it happens to be three R's. The first is in relevance, and this is a strategic repositioning point which says that we want to move -- and I think we've already taken the steps to do so -- want to move from just what I would call inputs on our -- focusing on inputs such as individual effectiveness, or building the capabilities for effectiveness, to really helping our clients focus on outcomes. So we have a new offering that we're testing right now, around customer loyalty using the net promoter score. We have seven clients who are in our initial pilot phase; those are going well. We have expectations that during the course of this year that we can establish the foundation for a new practice around customer loyalty, which we think can be a significant one.

In that same area of relevance is to move from the classroom to any room or no room, and we have invested heavily in the past year, spent almost $4 million in the development of what we call Seven Habits Interactive, which is a combined -- our partner is Ninth House, who is viewed as the industry leader in really high-quality, Hollywood-quality film work involved with e-learning, rather than just the page-turner stuff that most of us have seen. That product is now out. One version was done for the Department of Defense. Another version, the corporate version which just came out a month or so ago, and that has now -- we're now just in the beginning of sales of this.

We expect this to be something where many, many companies who have distributed work forces who have not been able to easily access the FranklinCovey content, because of the classroom nature of it, will be able to do this. This converts what is a three-day Seven Habits course with a completely different approach to being a three-hour Seven Habits course, and from being somewhere around $1,800 if you bought it live from one of our trainers to being $300. We think it will give us an ability both to distribute to organizations with large distributed work forces, as well as lots of front-line employees who otherwise -- you're never going to take call center employees off the line for three days. This is something they can take at their leisure over three hours, non-consecutive.

So that's, we think, a big push over the next several years. But we think this year could be -- if we're successful in making some of these sales, in the third and fourth quarters we could see perhaps some large transactions in that regard.

So in the relevance area, kind of that's -- the reach -- we're trying to dramatically expand the number of outlets and people through which we distribute our offerings. We've got our fixed costs down a lot; but the big leverage, of course, comes on revenue, which, although we're driving on the organizational side and in the wholesale side and the CSBU side, we think we can do a lot more.

So the first and most important of those initiatives on reach are the continued focus on doubling our sales force over the next five years domestically and internationally, for expanding our licensee network, for making some particularly important bets in India and China that would establish the foundation for even more rapid growth in those areas. In some of our international countries where we have direct offices, we're adding also third-party sales agents that are representing us. In Japan, over half of our revenue in training comes, actually, from these kinds of partners.

We also have some opportunities, we think, this year. There's an early trend but, we think, one that will be important to the industry over time, of companies like Accenture getting big outsourcing contracts for HR, et cetera. For us to be their partner in some of these initiatives around training, where they view us as their partner on these initiatives, and that helps them to win these deals -- that's a big initiative for this year as well.

Then finally -- sorry for the long answer to the short question. But the third one is returns. That has two elements to it. One, of course, is to continue to improve our business model. We've had steady improvement. We'd like to have a breakthrough this year. We've invested for years in the new client partners, new offerings.

We've spent $20 million plus in the last few years on new offerings, and we expect the rate of investment -- not the level of investment to decrease, necessarily, but the rate of increase of investment to slow and to start to see a lot more flow-through, which we're seeing at the front lines, but to see more of that get to the bottom line. So we'd expect -- we hope for a bigger breakthrough this year in terms of our business model.

Then the other one would be to continue to focus anywhere where we have investments in businesses or assets that could -- where we could -- that would be better in somebody else's hands, to try to free up as much capital as we can to reapply to finding ways to create shareholder value. I hope that's --

That's very helpful. Just a follow-up on -- it looks like what you're doing strategically, in terms of generating higher return on capital, given some of the slides you show -- can you talk about what type of returns on capital that you guys are targeting, given some of the big bets you're making on the CSBU side? It looks like you're taking out some of the denominator in that equation.

We are. Yes, and I think for us, one of our biggest challenges is actually finding good investments, in a way, isn't it, in a funny way, because who knows exactly what our weighted-average cost of capital is. But let's say it's between 10% and 12%. We are able, I think, to look at hurdle rates that are much higher than that through investment, just because we can.

You look at the investment in a new client partner, and we make an investment in the first year of somewhere between $20,000 and $40,000, which we get 100% -- if the person works out, we get all of that investment bank in the second year, and after that -- and that's our most important investment. Our offering -- we put out $3 million or $4 million, but we expect all of that money to come back within a relatively short period of time.

So one of our biggest challenges, on one hand, is finding good investments, and that's not particularly good news. At the same time, since we think one of the investments would be our common stock, if we can't find other ways to invest it in the business right now, the idea of freeing up as much cash as we possibly can at a time when we feel like we're hitting an inflection point, potentially, on the operating results and the share price isn't reflecting it, that's a basic strategy of trying to find everything we can.

So our hurdle rate is -- we look at it against the possibility of applying common shares or dividending or doing something like that, versus just opportunities in the business and trying to force ourselves not to get stuck on saying, well, hey, we are getting a pretty decent return on capital by investing in plant and equipment, unless that can really drive top-line growth, and instead saying, hey, we wish we had lots more things to do in the business that could generate 20%. But if not, perhaps our own shares and so forth offer that opportunity.

That's, I guess, another complicated equation. But when you look at the buyback, let's say you were to do a Dutch tender and take out a significant amount of shares in the, I don't know, mid-$7 range or something like that. If you look at to cash flow per share you would be able to generate, that you could get the share price back up to where you bring those 3.5 million shares out of the count, and then you have a business that could be doing several dollars a share a year in cash flow and truly unlock a tremendous amount of value. What are your thoughts on that?

I think I couldn't say it better than what you just said, honestly. We're trying to work on both sides of the equation, which is having our operating income to sales -- our target is to get to 13% over the next two years, and at the same time to dramatically reduce the number of shares outstanding, if we can. If we can do those two things, the idea of having EBITDA and cash flow per share that's in the $2 and $3 is something that we think could be a realistic target.

That's very helpful. We think you are a very shrewd allocator of capital, given your track record and how you successfully have turned the business. But looking back over time, I guess over a 10-year period, the Company has expended approximately $115 million buying back equity, I think, at an average cost of around $15, which is almost the current market cap. Given, I think you said, now your after-tax cost on debt is around 4% on that $28 million line, it just seems like an incredible arbitrage opportunity to tap that line and turnaround and buy back, as the previous caller mentioned, a business that is yielding approximately a 20% EBITDA with the potential to make it a 40% or a 50% EBITDA yield, if the stars align.

I think we see it the same way.

Tom Koch, Turnaround Capital.

I have a rather mundane question relative to this pretty optimistic conversation. I'm just wondering, in the last year in the first quarter, you guys had a pretty significant bump in SG&A expenses. Obviously, there's a seasonal aspect to that. But I'm talking about on a quarter of 2005 versus the December quarter in 2006, and I think you guys had said at the time there were some SOX costs from Q4 2005 that rolled into Q1 2006 and some other things. I know you are not giving guidance, but can you give us a flavor, a feel for how much your SG&A costs are going to continue to rise?

I guess there are two parts -- are you actually also wanting to know kind of what that was last year? Is that helpful, or just the last part of your question?

What I'm saying is it was almost $38 million for the first quarter of the -- quarter ending November 26, 2005, and it bumped up to almost $41 million for the quarter ended December 2, 2006. That compares to the quarter we just ended, which was 36 something. So I'm just trying to get a handle on -- and you guys have talked about trying to maintain SG&A costs. Obviously, there are seasonal increases. You've had increases you have been spending to grow your business. But I'm just trying to get a feel for what kind of inflationary pressures you're seeing there.

Steve, please jump in, or if you want to start out, that's fine. Two things -- one, what we talked about in the first two quarters last year was that in the year prior, we had had some benefits that offset SG&A that we didn't expect to repeat. As a consequence, the level of SG&A or the reported growth in SG&A, while accurate, didn't quite tell the whole story. For example, the heavy focus we had had in 2005 on reducing our days sales outstanding reduced our receivables balances. With that, the research for receivables came back in -- over $0.5 million came back in, one.

Number two, in 2005, we had approximately a $1 million manufacturing benefit that was recognized from having our standard costs -- our actual costs being lower than standard, which was recognized in the first quarter, which ran through and basically became an offset to SG&A.

So we had those kind of things, which did not repeat last year and which -- while there's always some of that, it was just an extraordinary level. In the first two quarters of 2005, we had more than $4 million of those kind of nonrepeating benefits that offset SG&A. So for the first two quarters of this last year, we saw what appeared to be -- well, what were reported increases in SG&A, but actually were not related very much to the underlying business, and it didn't happen in the third and fourth quarter.

So what is really happening, in terms of -- I can tell you this maybe even just very helpfully, I hope. The cost increases we're going to have this year are basically these. We have about -- of our roughly 2,000 employees, almost 1,600 of them are on some form of incentive pay, where their pay increases with results. Those people generally do not get much, if any, bump in the base salary. Almost all of the increases are coming on what we call the performance pay side of the equation.

So our client partners, our salespeople, our consultants, our store managers and those kind of people in general have almost no base increase. So any increases that they get in those 1,600 or so people really are coming from increases in something good for us. They are about the 400 or so people who do not have some form of performance pay tend not to be the highest-paid people in the Company, and on average they get about a 3% pay increase.

So we will have, for the whole year, somewhere close to maybe $550,000 of payroll increase that is due to just inflation, so to speak, cost-of-living changes or we call it merit increases. Then you always have some adjustments in market rate for certain jobs. We are seeing technology jobs tighten up some, and so you've had some bumps. But I'd say the total of that kind of stuff is probably less than $1 million for the year, something like that.

So the increases in SG&A -- and the other big investment is in our innovations area, and because we have invested so heavily over the years, we actually have a team that's pretty much the size we think we need. So we don't see big increases there, either. So the SG&A will be primarily increases related this year, we hope, will be commissions and related to higher sales. So we don't see anything that should really increase our SG&A much beyond just the normal stuff this year, and we will have some -- we had, actually, some SG&A in our Mexico and Brazil operations, of course, reported last year that won't be reported this year. So that will offset that, to some extent.

So long answer to a short question. But I think generally our SG&A, we think, is stable except for commissions. We hope that that's not stable at all. We hope that grows at double digits this year on the commissions side and OSBU. Must everybody else will have SG&A increases only if they generate increased revenue or profits.

Was that responsive at all, or maybe I missed the point?

No, that's very helpful. As a result of this Brazil-Mexico sale, you're going to lose $6.5 million of annual revenues; you're going to lose $100,000 of operating profit. But what are you picking up now in licensing fees that should drop to the bottom line?

Minimum royalties on that revenue are 15%, so we will pick up at least $900,000 -- we will have about $900,000 -- will pick up $750,000 to $800,000 on those operations year to year, if they perform the same as they did last year.

Actually, we think both of them can grow. We feel great about our partners there, and there's a good opportunity in both countries. So perhaps it will be better. But they have a minimum royalty obligation that would, year over year, change the profitability, something of that order.

Again, I echo everybody else's comments that you guys have done a great job over the last year of really articulating the story. Every call, it gets clearer and clear. So we thank you.

Thanks very much. We appreciate your support.

John Lewis, Osmium Partners.

When you said that you could be potentially in the market in the second half of the year, you meant on your calendar year; is that right?

Our fiscal year, I meant.

So that's like January, February?

Yes, February -- kind of from the second half of our fiscal year, so March on.

So that seems like a pretty solid transaction on Mexico/Brazil, in terms of bottom-line profitability. Are there other opportunities that you're looking at in terms of international operations to go the route of Mexico/Brazil?

We thought about it. I'm sure there would be opportunities if we -- for example, the way we made the decision is trying to think of the relative attractiveness of the country, both from a -- obviously, the business opportunity as well as the business environment, as to whether it's a place that you want to have your own direct operations. We just felt like Brazil and Mexico, given the partners we found, the best idea, although there are big opportunities, they are places where we haven't been successful in the past of running good operations, and ones that we could count on their making sure we had the numbers and everything else, frankly. So those we are out of.

Australia would be one that would come to mind, because it's a smaller country. But it's operations are so good that every analysis we do, we think that there's more opportunity to stay as a direct office than not. Japan is now our actual single largest office. It generates over $20 million in revenue.

I guess the real point is that, if we are currently getting more than 15% of their revenues to our bottom line, then converting to licensee wouldn't help us much; it would hurt us. In fact, in the direct offices that remain, we either did or, where we missed slightly, we expect this year that they will all generate north of 15%, and therefore there's no motivation to do it, although there might be the opportunity to do it.

Currently, no other questions.

Great. Well, we'll just conclude, then. I know we've gone over time; I apologize for that. But we appreciate so much everybody's support.

Again, we're committed to trying to to work on both sides this year, on both the operations and try to do something on the denominator as well. So we're close to finishing our first quarter here in the next few weeks, and so we will, obviously, be reporting out in January. But we feel like the first quarter will be a solid -- directionally continuing the trend. So thanks very much.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much and have a great afternoon.