Franklin Covey Co (FC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2008 FranklinCovey Company earnings conference call. I will be your moderator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today, Mr. [Derek Hech] Corporate Controller. Please proceed.

Good morning, everyone. On behalf of the Company, I would like to welcome everybody out to our first quarter fiscal 2008 webcast this morning and before we begin the festivities, we would just like to remind everybody that this presentation will contain 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, higher productive sales professionals, general economic conditions, competition in the Company's targeted marketplace, market acceptance of new products and services and marketing strategies, increases or decreases in the Company's market share, growth or contraction of overall market -- of the overall market for products offered 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-K and 8-K reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence. There can be no assurance that the Company's actual future performance will meet our expectations. These forward-looking statements are based on management's expectations as of the date here of and are subject to the outcome of various factors including those listed above. Any one of which may cause future results to differ materially from our current expectations. With that said, I'd like to turn the time over to Steve Young, our Chief Financial Officer, to begin our discussion of the financial results.

Thank you, Derek. That was wonderful.

You're welcome.

Good morning, everyone, again and thank you for joining us. I hope that you have had a chance to review our earnings release and our quarterly report. If you have not had a chance yet, I would encourage you to read both of those documents. They contain significant amounts of important information that we won't have time to cover in our webcast today.

Those of you who have had a chance to review our earnings release or financial statements, like many people probably start at the top and see what's going on with revenue, then jump to the bottom and then look in the middle. Following that convention, you would notice that our revenue -- our sales, net sales, declined approximately $1.9 million, compared to last year. And you would wonder why that is, perhaps. Then you would look down at the bottom and you would see that net income available to common shareholders increased $1.6 million would say well, that's good, considering that revenues sales decreased and earnings increased. And then you would look in the middle and you would say sure enough, operating income or income from operations also increased $1.5 million. You would see that margins improved a little bit and that our SG&A decreased by $2.1 million. So I'll cover a few of the highlights related to this information and then Bill and Sarah and Bob will add detail as it relates to the business units and to the business.

First of all, when we look at our net sales number, please remember that of the $1.9 million decrease, $1.3 million of that is a result of our sale of the Brazil and Mexico operation and the transition of those operations into licensee arrangements for those countries. That's $1.3 million of that difference. Then, as you would see in the detail and expect, there are several areas, operating areas of the Company that have results better or significantly better than last year and some have results that are not as high as last year, and Bill and Sarah will primarily walk through those differences. You'd see that our gross profit percentage increased 100 basis points and realize that that's primarily a result of mix, even though the business units are also holding their margin as the training, consulting portion of the business improves, we would expect our margin to continue to improve a little bit.

As we look at our SG&A number and see that it decreased by $2.1 million compared to the prior year, we would also mention the Brazil and Mexico transaction as not only one that impacts sales, but also SG&A. So $1.2 million of that decrease is a result of that transition of Mexico and Brazil to licensee operations. I'm sure Bill will talk about it more, but overall, that transition, even though sales decreased, our operating income improved about $0.4 million as a result of the transition of those two offices. So compared to the prior quarter, sales down, SG&A down, but earnings up as a result of that transaction.

We would also be happy to report that in our first quarter, our audit and related fees were quite -- about $0.5 million better than last year. We would also point out that our analysis of our revenues and our operating income as it impacts our long-term incentive plan and share based compensation, that as we looked at the performance over the service period, we were -- it was necessary for us to make an adjustment to our long-term incentive pay accruals and that reduced our SG&A compared to last year by approximately $800,000. So the sum of those three things is greater than $2.1 million, reflecting we also had some increases in bonus and related accruals and investments in growth that we've talked about for several quarters that were a little -- that were a little bit higher than last year.

As a result of all of that, our income from operations was $1.5 million higher than last year. Our net interest expense up a little bit compared to last year, as a result of our redeeming the remainder of the preferred and entering into a line of credit to do that. Our tax expense you see is a little bit over a 50%, as a percentage of income before income taxes. As we go into the future, when we get to a point that our management stock loan program is paid off and we're able to use our foreign tax credits, then that percentage, or effective rate will decrease down to what some might expect as a more normal effective rate, 40, 41, 42%, depending on what our timing different --or what our differences are at that time. So then we would point out also that as you would notice, that our preferred stock dividend was 0, compared to $900,000 last year, and that's a difference that -- or a 0 dividend that will continue. So at the end of the day or at the bottom of the page, our net income available again is $1.6 million, higher than the prior year.

If we look at the balance sheet, we would see a balance sheet that's essentially as we would expect. I'd like to talk just a little bit about cash and just note that the increase in the receivables, the receivable balance, is primarily a result of increase in the areas of our Company that generate receivables, the training, consulting side of the business, increases there, so it's volume related, slight increase in days sales outstanding, but primarily volume related.

Just a second on cash and our line of credit. You will notice that our cash balance is approximately $8.8 million, and our line of credit balance approximately $14.7 million at the end of the quarter. And many of you will remember our comment for a couple of quarters that about at this time or the end of January, we would be essentially out of the line of credit.

Let's go back and remember that at the time we made that comment, it was not necessarily an attempt to predict our cash as it was to say we have an opportunity here to redeem the remainder of our preferred shares.

In order to do that, we're going to enter into a line of credit arrangements but we want you to know that we don't view those line of credit arrangements as long term and we're going to be out of those in a fairly short amount of time. So I'm pleased to report that as of today, our cash balance, if we were to close our books today, is higher than our credit line balance today. We were into the credit facility $14.7 million at the end of the quarter and our balance as of yesterday was $3.8 million. And our cash balance is higher than $3.8 million.

So if we're to give ourselves a little bit of leeway out what essentially out means, I would say if our cash balance is greater than our line of credit balance, then we might be essentially out of the line and forced to be fully out of the line, we'll simply depend upon over the next few weeks how aggressively we want to bring cash in from our international operations, what our operations are for this next period of time, and so I believe that we're essentially out of the line and we're pleased that today we have a $3.8 million balance, understanding that our cash needs go up and down weekly in a cycle. So we're pleased about that. Really, nothing that I would talk about on the balance sheet, other than that pretty standard, straight forward numbers that you would expect.

So let me just say a little bit about our Q2 and then talk a little bit about more later, but if you remember in Q2, we have the sale of our printing facility that created more than $1 million worth of operating income and we won't have a similar sale this quarter. So our operating income will be decreased by that amount. Additionally, we would now estimate that our second quarter operations will be less than our first quarter operation or than our second quarter last year by an amount that could or would exceed our first quarter increase. So we might be in a position or estimate to be in a position similar to what we were last year, in that our first half of the year would be -- have an operating income financial result less than last year, but expect to have an improved result by the end of the year.

So I guess the short summary would be that in our business, there are some areas of the business that are significantly better than last or financial result higher than last year, compared to the first quarter, some areas of the business that the financial result was lower than that of the first quarter, but overall we continue to see improvement in our financial results. So with that, we'd be pleased to turn the time over to Bill Bennett, our President of the OSBU.

Thank you Steve, and thank you everyone on the call for joining us this morning. First of all, pleased to announce that we concluded Q1 with both top and bottom line growth and I would make note, this is the sixth successive quarter of both top and bottom line growth and marks 12 of last 14 quarters top line growth and 15 of the last 17 quarters, bottom line growth. As you can see from the tree, the OSBU Q1 performance tree we grew 2% on the top, 18% on the bottom. As already has been discussed a couple times, that 2% is somewhat misleading in that we have the Brazil and Mexico conversion in there and dropped $1.3 million in revenue because we moved to a royalty model. So that offset the top line somewhat in OSBU.

I think the most relevant way for us to break this out is to take a look at what we would call our core revenue channels versus the other one. We'll begin with the core revenue channels. As you can see in the chart they represent 83% of our total revenue and as a group, core revenue grew 16% on the top and 38% on the bottom. Taking it out one more tree branch to the right, you can see that our domestic direct offices were up 19% year-over-year on the top, 46% on the bottom. The drivers behind what were that our -- as you know, our two major channels on delivery, on site days delivered and facilitator delivery were both up. On the on site basis, we delivered 8% more days than prior year but we also delivered them with a 12% higher revenue per day which gave us a combined strong impact of about 23%. Facilitator business was up and all of the regions in the U.S., all seven of them grew year-over-year.

From an international standpoint, in our direct offices, as you can see, 9% on the top, 13% on the bottom. That's notable because Japan, who has not missed a year-over-year growth quarter in 17 quarters, did so in Q1. That wasn't concerning to us because we have a perennial customer who typically books with us in Q1, actually moved forward to Q4 the prior year so they weren't able to compensate for that. But that appears to be a one-time impact and Japan looks to be in very good shape. On a licensee basis, again, as you can see, 24% on the top, 61% on the bottom. To date, we have about 31 -- well, exactly 31 licensees around the world that are representing 133 countries. We had good growth overall but would mention that we had triple digit growth in India, Malaysia, the Benelux region, Scandinavia, Spain, and Greece. And normally we would report Brazil and Mexico in with the licensees because that's their new status. We've separated them out here because this is the year of their conversion but of course on the bottom line, both Brazil and Mexico had, as Steve already pointed out a little over 400,000 year-over-year in bottom line improvement so that would normally be added to that licensee category. So overall core revenue channels we feel are in great shape.

The other 17% of revenue is all lumped together on this slide and what you see is other revenue channels. Collectively the group was off 36% on the top, 51% on the bottom. The -- three of the four there are the ones that we're focusing on, SBG Publics and promotional revenue. Because as we already discussed, Brazil and Mexico is in conversion.

Talking first about Sales Performance Group, this is our team that sells our sales training programs, helping clients succeed. This group has been up and down over the years. The problem being that they have a few small accounts but a disproportionate number of very large accounts. When all those large accounts have a good year, we have a fantastic year. When one of them has an off year it tends to create a significant bump, as is the case in Q1. And you can see that 47% hit on the top, 69% hit on the bottom. That's especially exacerbated by the fact that Q1 '07 showed significant growth over Q1 '06. So we had a hard comp we were up against and had one of the large accounts that was off in Q1. We have plans to address this issue in the Sales Performance Group.

Public Programs, which is the team of people that deliver training programs for the general public at locations such as hotels and conference centers, was off 23% on the top, 76% on the bottom. That was driven by a reduced number of programs that were delivered this year. That's a decision that's typically made about six months out in advance of program delivery. As well as some slightly decreased attendance. Those things are driven by the fact that we have some maturing one-day programs out there that were in need of refreshment. We made a positive move in that we've introduced our new leadership offering into the public setting which is great and it's getting great reviews. However, whenever you introduce a brand-new program, you have a disproportionate expense increase in mailing costs to try to establish awareness and get the attendance volume up, which is why we took an additional hit on the bottom. But that looks -- that program is doing very well so we anticipate that making very positive contribution as we go forward.

Finally, on the promotional revenue area, this is a cluster of revenue groups that's characterized by our books and audio business, as well as our speaker business which is primarily dominated by Stephen R. Covey speaking engagements. It's a little bit of revenue in the big picture and even less EBITDA. The primary purpose of these functions, while obviously we want them to be profitable, their main function is to create market awareness for the Company. The quarter was difficult for this group because we were comping against two big books performance last year, in 8th Habit and 6 Most Important Decisions which was Sean Covey's second teen book, consequently creating a poor year-over-year performance there. I would mention though, that despite that, Steven R. Covey is as active as ever, and in fact, delivered 85 times on the road last year, which was an increase over prior year.

So overall, that's the story behind the other revenue channels. We're not worried about Brazil and Mexico which still does have an impact on that 17% revenue grouping and the others we have plans in place to address. Real quickly, going to the next page, you can just see that our running 12 month momentum index continues to show an upward trend as well as growth over prior year, which was growth over the year prior to that. And this is effectively a book-to-bill ratio. This is calculated by the total value of our deals booked as opposed to the revenue that we're able to recognize.

Finally, or next page, I should say, as I think you're aware from prior calls, one of our key strategies for our multi-year growth plan is increasing the size of our sales force worldwide. Since the beginning of fiscal '05, we've been adding sales people, both domestically and internationally as well as sales agents in some countries and we've consistently tracked the number of those as well as the ramp rate of those new additions to make sure they're staying on the target that we've laid for ourselves. What this chart is showing to you on the left side is that this year, to date, while we are slightly off our ramp, we are well ahead of last year on a basis with these new salespeople and on a lifetime basis, we are comfortably ahead of the ramp plans that we have in place for those sales folks.

Now, finally, on the next page, we refer to our alumni client partners as those client partners that were in place prior the fiscal '05 implementation of salespersons growth strategy and so we have an additional strategy to try to make sure that that alumni sales group continues to grow. We have one target for the sales force as a whole of these alumni and then we have another one for the middle 60% to try to drive that group up. We're happy to report that we are well ahead of prior year and well ahead of the baseline goals that we set for ourselves in this group. So, that's a summary for OSBU. With that, I will turn it over to Sarah Merz.

Thanks, Bill. Good morning, everybody, and thank you for the opportunity to give an update on the consumer business unit. If you look at the same tree structure on page 11 or slide 11, you'll see that in the CSBU in the first quarter of '08, we experienced a 7% revenue decline and a 5% EBITDA decline. As Bill has done, I'll divide the economics into the different parts of the business that we track. The top row being our proprietary channels of retail stores, e-commerce, call center and in international the e-commerce and call center business. Secondly, the third party channels or the wholesale commercial business as we call it. And then finally the operating groups.

If you go to that middle column of the tree, you'll see that the vast majority of our revenues, as recorded, are coming from our proprietary channels. About 86% of the revenue with another 12% of the revenue coming from the wholesale and commercial and the remaining 2% coming from operations, which is primarily our FranklinCovey printing operation. I'd just like to point out, though, that the wholesale business has a significant portion which is royalty based. And so those percentages tend to minimize a little bit of the retail footprint that is coming from wholesale, since that revenue drops straight to the bottom line as EBITDA.

So if we start with the top layer there, which is the revenue and EBITDA performance coming from our proprietary channels, you'll see that we recorded a 6% decline in revenue and an 11% decline in EBITDA. We've given an additional layer of detail on the right-hand side. So let me just walk through that, because you'll see how those piece parts aggregated to those numbers.

Starting with the retail stores, we saw about a 7% revenue decline and a 33% EBITDA decline. There are two pieces in the retail store business. First of all, we closed some stores last year so you have non repeating sales from closed stores which are obviously 100% variance year-over-year, since those stores are no longer open today. Then you look at the stores that are open this year that were open last year, and our comp store sales did see some softness, but obviously not to the level of the 7% because that's the blended rate. The largest impact on the retail performance were declines in store traffic. And we offset those fairly considerably by our continued efforts on outbound selling, which we're very happy to see is growing year-over-year, but it did not fully offset that traffic softness, so we did record comp store -- some comp store decline in the overall revenue decline of 7%.

The second piece is consumer direct which you'll recall is the blend of call center and e-commerce. We saw the same softness in traffic only time it comes through as phone calls and clicks on our website. But same kind of softness in traffic in the first quarter. Some of that traffic decline was anticipated because we chose to move some of our catalog spending out of the first quarter and into the second quarter, bringing it closer to the busy season and we made a strategic decision that we would get a better return on our investment by shifting that catalog spending to Q2.

The third piece of it is international and like in the OSBU, we are seeing continued growth in international, with a 12% increase in the revenue line and a 28% increase on the EBITDA line. So that expansion effort continues at a nice pace. So you aggregate those three elements together which brings us to our consumer, total consumer proprietary channel numbers.

If you go to the next row, which is our commercial and wholesale business, we saw an 8% decline in revenue and a 14% decline in EBITDA. The vast majority of that decline we have identified as being associated with a transition of our distribution partners. We work with four different organizations on distribution. The largest of whom is Mead Westvaco. We have transitioned the office super store business to a new partner, R.R. Donnelly, and as part of that transition, Mead is not replenishing its inventories at its typical pattern as that cutoff date is March 1. So we are working to make that transition happen but we anticipated some of this would be associated with inventory drawdowns and we are working through that right now. We are adding a fifth distributor and we will be announcing that shortly, who will help us address the computer superstore and department store classes of trade. So that is our wholesale business.

The third component is our SG&A and operational side of the business and you can see there that our spending was decreased over prior year quarter and so we saw an EBITDA pick-up of 15%. That comes really from two pieces. We experienced operating efficiencies in our printing operations and I believe we shared with you last quarter that we reconfigured our printing operations, so we saw efficiencies just in output as well as in raw material input and it also reflects the shift in catalog spending, which I mentioned earlier, shifting some investment out of the first quarter, into the second quarter. So those three components aggregate together to the total CSBU revenue and EBITDA changes that we recorded.

As we have noted on the next page, we are still working intensely on the growth opportunities. They continue to be both domestic and international wholesale, as well as the international licensee network that Bill referenced and new product activity. I won't talk about this very much, except to note that we do continue to add distributors on the wholesale side. We are working closely with our retail partners, the office superstores and the mass marketers, the mass retailers there and continue to test new products, new offerings, and we are pleased at what we're seeing. One of our new partners does happen to have an international infrastructure on the wholesale side, which will allow us to pick up the pace on our international wholesale initiatives because they'll be able to facilitate that with their existing operations and their offices in other countries.

One area to note on new products, because you might have seen some press coverage on it, is our PlanPlus online business continues to grow. We had a great CES press event and series of meetings on that and we are experiencing double-digit growth on that month over month and are very excited at the opportunities for that new product offering. So with that quick overview of first quarter performance, I'm going to turn the time over to Bob Whitman, our CEO. Bob?

Sorry. Can you hear me now?

Yes.

Yes.

Excuse me. Thanks, Sarah and Bill and Steve. It was a good -- really good summary. Just a couple of points, maybe I'd note, relative things that were said and maybe give an overview and then open it to questions. One, Steve mentioned that there was a reversal for the [L-Tip] award, reduction of the probability that we would receive that in the Q. It notes the basis for that. It's probably worth noting that while we are on track to hit our profit goals that are associated with that, the change in business model, the dimensions of the L-Tip award require both revenue growth, certain targets for revenue growth and for profit. While we expect to hit the profit target, the change in our business model where we've gone in the consumer side to more royalty based, higher percentage of our business being royalty based which takes money off the top line, and putting more on the bottom line, but in terms of the percentage for the royalty, that's as well as the conversion of Brazil and Mexico, licensees and the closure of stores. So it's primarily that dimension.

Second, it was good that Steve kind of gave an overview of the second, third, and fourth quarter. As he mentioned, the third and fourth quarters looked very strong. The second quarter, because of the dominance of the consumer business unit in the second quarter, more than 100% of the decline in the second quarter is expected to come from the operations of the CSBU alone and then you add to that then this non repeat of the building sales which suggests that OSBU and other things, we expect to continue to have strong performance in the second quarter. The CSBU has been somewhat soft in sales through the high season, has been picking up over the course of now the first of the year is here and people are recognizing, hey it's new year, and they need their planners. But we also expect CSBU's operations to improve in the third and fourth quarter, of course much less of the revenue occurs there and the impact of outbound selling efforts of our wholesale operations are therefore much more observable then.

Just to note, Bill's presentation, that talks about the -- kind of the core channel growth, is where of course we're focusing. Don't want to excuse, as Bill didn't, these smaller channels like public programs and SPG and he's been addressing those. I think we really to have the consistency that we want every single quarter, it's exciting on one hand to see the big engines really hitting well and almost everywhere, you know, our domestic, international and licensee operations are doing well. But these other operations can have a big impact and so Bill's been spending a lot of time with his team to address and fix these two or three things that affected our first quarter.

We expect the second quarter that they will have a little bit of impact but significantly less and by the third and fourth quarters, that they'll be neutral year-over-year to slightly growing with the idea that they would all be growth operations in the future, that would require some restructuring which is under way. But I just think it's worth mentioning that those smaller engines, even only 17% of the revenue, reduced EBITDA in the first quarter, operating income in the first quarter from the OSBU by a significant amount versus what would have been, given the enormous revenue and profit growth that OSBU achieved.

Overall, just say maybe this last comment, and then open it to questions, is that the three key elements obviously to shareholder value creation are, one, continue to grow top line, top and bottom line and the biggest engines behind that right now are our organizational sales, or our Organizational Solutions Business Unit and the biggest bets there have been the hiring and ramp up of client partners and the productivity of our existing client partners. The biggest deterrent on that side has been kind of the softness in our core channels in CSBU over the last year or so, particularly, and while the growth initiatives that are undergoing-- that we're going through on the wholesale and PlanPlus online site, and international site, we think, even if those were to never stabilize, we think that the growth in these other areas would offset those declines.

We really think we have an opportunity and have some plans to further restructure our consumer operations so that the reliance of the overall business on retail, and some of these other things, is further reduced. And so in that area, we think that we can -- we believe going forward that in both second quarter, third, and fourth, that the main engines keep moving forward in coming years and in fact, the flow-through from investments that we made years ago in new client partners is now hitting that part of the curve where the biggest increases now occur in the first year of a new client partner that's more or less a break even proposition. The second year you get all your money back and it's profitable. But because of the fixed cost component, every year has more and more flow through.

The second element is, of course, the multiple that's applied to our earnings. That's a function of a lot of things. You all will have your own formulas. But certainly one of the issues is the growth rate and we believe we have opportunities for accelerating that growth rate, particularly on the OSBU side and also in CSBU as it relates to these wholesale and international initiatives as well as PlanPlus.

A second dimension is the business model and we've done a lot to improve the business model over the last years. But we have -- we believe there are further opportunities while our primary focus hasn't been cost reduction over the last few years, it has been revenue growth, and it will continue to be. We nevertheless believe we have some opportunities to go in and adjust the current business model, even at current revenue levels, particularly in our IT costs and some of these other related areas where we now have the size and business particularly on the CSBU side that allows us to think about that. Certainly the predictability of the earnings stream will affect the multiple. And therefore, the need to fix some of these smaller operations that have been problematic in a given quarter, overall they've been fine but quarter-to-quarter they're not predictable. And while our main engines have been, we've had disruptions and we are committed to fixing those.

And then finally, I think the relative -- the more and more that our business is on the higher margin, higher growth organizational side, where growth emphasis has been, the better the multiple is likely to be and so we continue to focus on the growth on OSBU and structure our business model in CSBU. So that the the down side risk is minimized and that we have good profitability but not focusing as much on worrying about the top line revenue dollars. Finally, third element of value creation would be in our mind shrinking the outstanding share base. As Steve mentioned, we have now put ourselves in a position where we can pay off our line with remaining cash. We have been -- some cash left in our credit line available and we'll be looking for ways to utilize that. We think one of the opportunities that we've all talked about in the past would be to find ways of shrinking that share base over the -- in the coming quarters. At that point I would like to just turn the time over to you all for questions. And I guess I'll turn it back to our moderator.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Lewis with Osmium Partners. Please proceed.

Thanks, good morning, guys. Just a couple quick questions. I guess first off for Bill, you talked about some pretty significant growth rates I think you said in India, Scandinavia, Spain, Greece. Can you talk about what kind of growth rate or where you are on China and other -- maybe some other countries that have critical mass that are growing?

Yes, thank you, John. That's a good question. China we grew but frankly, it's modest compared to what should be happening with China. The licensee partner we've had had in China has kind of had some up and down performance. We met with them in September to discuss this and we've laid out kind of an attack plan this year of what we think we need to do to try to spur that on. Right now, China's only down around 12% growth, so we are not by any stretch of the imagination maximizing that opportunity in China. This licensee partner there is connected to a -- it's a large organization, so it should have the right type of resources to make it happen. Both myself and [Stefan Mardekes], the head of international, are traveling to China soon to spend quite a few days with them and go over their business plans and take a look at their objectives. But I think that the bottom line for us is that unless we see the kind of growth at least that we're seeing in India, we'll have to make a change in that strategy there.

Thanks. And then another question for you, Bill. In terms of -- you saw a fairly significant improvement in your operating margins on the OSBU international side. I think they jumped, even when you adjust for Brazil and Mexico, I think you saw the operating margin jump from 20.5 to 27.5. Can you just give a little color about what's driving those operating margins?

Sure. One thing is that we've made a change in a number of the direct office general managers over the last few years and I don't want to jinx our self, but we made some pretty good calls on these people. U.K. is a large office. Carries a lot of the revenue. And Kemlon Smith, the leader we put in place over there, has just really wrestled that business model to the ground and built it back up and made a substantial difference. So we've got improvements showing in the U.K., in the gross margin, in the cost management and obviously in the revenue growth. We're kind of hitting at all levels there and that's made a significant contribution.

Australia, small though it may be, as an office, we've also done very well with the new general manager we put in place down there and he has accomplished the same thing. And I just would mention on the top line, the gross margin changes have come primarily from the fact that both of these gentlemen have wrestled down the discounting practices and just kept our pricing in place the way it needs to and we've done that, despite the sales forces' fears with virtually no impact to the client set. So it's just as we hoped it would be there. So I think in all the offices, Japan has always been an extremely well-run office so that doesn't -- it doesn't hurt us and Canada has been on a slow improvement track as well. I think in all places we've had improvement that's compounded to represent some pretty good change.

That's great. Thanks, Bill. I guess just another question was for Sarah. In terms of PlanPlus, you said you're seeing -- I imagine off a very small base, double-digit month over month growth. What kind of expectations do you have for PlanPlus and can it be a meaningful revenue driver for you?

John, thanks for the question. It is off of a fairly small base, but we have seen double-digit growth each month now for about the last six months and so we do have very high hopes for continued growth there and it can be a very significant contributor. The nice thing about the PlanPlus online model is it's a subscription model. So when you sign an organization up, they are paying you every single month and it's almost pure EBITDA. So I think our growth is going to be a function of how fast we can scale resources to keep feeding the growth. We have a great partner who has a sales team and they continue to add salespeople and we pass them our leads from all of our channels when they convert them, we get the majority of the revenue and the EBITDA associated with that.

We think it's also a very nice foundation for further applications. We've built the engine and now we're looking at other applications, for instance, versions of this which would be delivered over mobile phones and we are very shortly probably going to be talking about a new partnership with somebody to deliver this over mobile phones. There are other applications that extend into other parts of the business, including the organizational solutions business, that could use this engine for delivery of content. So we do think it will become a significant portion. It is in the whole scheme of things relatively a small portion today on the revenue side, but it's getting to be fairly meaningful on the EBITDA side.

Thank you very much for that, Sarah. I'll hop back in and I'll be back in a minute for more questions.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Tom Koch with Turnaround Capital. Please proceed.

Hey, Bob and Steve.

Hey, Tom.

Had a question which is given the, some of the volatility in your revenues and I guess operating income, quarter-to-quarter, can you give a little bit more clarity on -- you said you expect the second quarter to be down I guess versus last year on an operating income basis, but then the rest of the year to be up. I'm just trying to understand I guess what gives you the confidence to be able to sit here and talk about the second end of the year and I guess ties into the second part is when you talk about trying to restructure some of the -- both sides of the house of the businesses to try to dampen some of the volatility, how do you do that and what do you mean by that?

On the first question, Tom and Steve, Steve go ahead if you would rather go first.

More than happy, Bob.

Okay. You fix what I say. The insight in the second half of the year, the back half of the year, comes primarily of course in the OSBU where we give advanced bookings that give us some transparency. A lot of transparency three to four months out and some transparency six to seven months out and where we also know about events and things that we're going to be having in the back half of the year, including 30 of what we call these greatness summits that we have that have replaced our historical symposiums and which are profit making activities and have significant revenue associated with them, along with big contracts that we know about that kick in in the back half of the year.

So that's the primary thing on the OSBU side that gives us some transparency, together with the fact that we also in some of these operations that affected first quarter badly, that Bill's talked about, like public programs being down, that's something that the decision was made six months on mailing strategy, et cetera, as well as the launch of the new program. But we know what our mailing schedule is and what our response rates are of so we have good visibility there. The fact that SPG is a big account business, we've already gotten some of those big accounts in place. On the things that did well, they look like they'll continue to do well in the coming quarters. On the things that weren't so good in the first quarter, they'll be less bad in the second quarter and neutral to positive and so on the OSBU side, that gives us some visibility on that.

The CSBU side is primarily a statement that if you're off in CSBU, if things are soft, the portion of the year where it hurts you the most is in the first two quarters, where the sales of course the highest, so that the impact of the softness hits you the most on the bottom line. Part of it is just a statement about the fact that even if CSBU operations were to continue with the same level of softness, the impact in the back half of the year on a revenue and EBITDA basis would be a lot less. The other side of it is that the growth side of that business, the wholesale business tends to -- the sales actually occur in what would be the offseason, because you're selling to third parties who buy that and we already have orders being placed or worked on that give us some confidence in the back half of the year. Is that response to that question?

Yes.

The second half of that question, Tom, was what? Sorry. What can we do to smooth out earnings? Tom, was that the question?

Yes. I mean SGU, for example, you can look at what you're comping against from previous quarters -- from quarters of the previous year if it was a big quarter. I know that's lumpy, that's up and down, but yes, you talked about trying to restructure some of these and I'm just wondering what that really means?

Well, I think what it means, at least what I meant by it Tom, was the exact right answer for all the things we ought to be doing. The different question. But one is that we closed a lot of retail stores. The primary restriction on that has been the runoff of hey, we would have closed more faster but for the cost of getting out of the leases and we now have a number of leases that are coming up for renewal and the opportunity to buy out some others. So that's one element that can reduce -- like reducing the reliance on retail sales and with 10,000 wholesale units now, wholesale outlets which we distribute product obviously this had an impact. Well, the target was not to cannibalize our own sales, nevertheless they're given 10,000 other places, there's at least some of our customers were choosing to go there. So the need for the number of stores we knew would be less. We targeted a smaller number earlier on. So getting there is one element of that restructure.

Another one though that is I think just -- in our IT infrastructure, the IT infrastructure was built in the '90s, the late '90s at a time when the business, the consumer side of the business was much much larger and whether it was a vision that that was the predominant part of the business. That has shifted. We've got systems that are way bigger and more complex than the operation requires and as we continue to shift toward wholesale there the need for these big systems is less and less. So we are in agreements and we have -- and the nature and the structure of our systems is to support something that's just a heck of a lot bigger than we need and there are a lot of costs associated with that excess capacity. So I think that's one that could have, while it's not so much the volatility that's just a one time change in the whole business model that could be significant.

In terms of volatility of the other things, this SPG business really has two components. One is the big deal business. The other is really smaller sales, as Bill said, which is smaller accounts. We think that by moving the second part of that business to getting much broader access to our broad salesforces around the world including our licenses to sell that product which has been restricted in the past, so that product line can grow and that by putting then additional focus on our big account business instead of trying to run both simultaneously that you should be able to make the big account business be one that actually is more predictable because big accounts aren't necessarily less predictable, it's just that it is if you only have a few of them, it makes it that way. So really going after this and making that side more predictable, our public programs business is quite predictable. We just need to be looking at it six to nine months out. So some of those things I think can make it more predictable, along with conversion to a licensee status which we've done in Mexico and Brazil where we'd have that opportunity.

Okay. Thanks. One other thing, I'd just be a little bit remiss not to ask, with everything that -- all the talk of a slowdown in the economies, what are you seeing from your customers? I mean, the consumer side kind of speaks for itself, but on the OSBU side what are you seeing from your customers as far as their continued demands for your product?

We -- and Bill, you -- would you like to respond first, Bill? Go ahead.

Sure. I don't -- at this point in time, on the, our side of the business I wouldn't say we're really feeling it. I mean there's a selective case here and there with certain customers. In fact, the large client in SPG, Sales Performance Group, that didn't buy attributed that to their business performance because of economy. But for the most part we haven't really experienced it. Now, we nonetheless are preparing, anticipating it. We've had a great, exciting release with 7 Habits Interactive, which is the online version of 7 Habits we did in conjunction with Ninth House and have that just starting up. We've got our first early wins there. So we're trying to anticipate it.. But to answer your question directly, haven't really felt it get yet, while my intention is to anticipate it and plan accordingly.

Tom, I'd mention that, just to underscore that, our bookings pace -- the number of days that we've booked in, for future delivery in December was our highest in history. But nevertheless, there's concern obviously. As Bill said, this 7 Habits Interactive product gives you a much lower price point that doesn't require the travel and other things that are often cut back and that tangentially affect training, focus, we hope will push us in some respect as the folks on this new customer loyalty offering and are more execution oriented things, where people are finding them to be part of their core business processes, even some of the big, for example, in the Department of Defense where they curtailed because of the war cost, this may be an early example, because of the war cost they have curtailed a lot of their normal training which hurt us on one side but they canceled some of the traditional training but are actually more than making up for the loss of that business with new execution and stuff that helps them drive it home.

The third is, I expect we would see some slowdown and that some -- we're going to affected somehow. While that's not the reason for this additional cost restructure about which I spoke, we think there's another 8 million to $10 million of costs on top of the $125 million that's come out, that in some of these areas like IT and other things that we should be able to get another $10 million of costs out to help, which would help us cushion if there is some softness.

Great. Thanks a lot.

Thanks.

Your next question comes from the line of John Lewis. Please proceed.

Hi, Bob. Just a follow-up question for you. I guess if you go back and take a look at your capital structure over the last few years, I think you paid down I guess it was around 90 some odd million from the preferreds. I think you paid over -- I guess when that deal was done, you were in a rather distressed position and I guess that was, the preferred was about 10% and that interest wasn't tax deductible.

Now I think you have access to capital and your after tax cost is 4%. Just looking at -- I guess just one other quick thing. When you look at the operating leases, I guess around $32.5 million I know you guys also sublet some of that space, so I think your cost on that $32 million, is it about slightly under 2%, if you take-?

After tax.

Is that about right?

After tax, Steve, I would think that would be about right. Yes, we need to trade -- as you said, we were paying -- on that portion of the preferred that was retired from the sale leaseback, although it's not characterized exactly, but that's effectively what it was, sale leaseback of the building, we traded 10%, as you say, after tax for a cost that was roughly 9% pretax, if we had the whole burden, but because we then leased out a little over half the rest of the facility, that dropped down for us, that pretax cost went to 4.5% and the after tax cost went down to somewhere close to 2.5.

I guess my question and/or point would be that when you borrowed money, when you were distressed, you were paying I guess effectively almost 2.5 times what your after tax is today. So in essence, the interest you were paying on those preferreds under today's scenario could support almost 2.5 times the debt load. Is that a fair way to look at it in terms of--?

It is.

Just -- we were just -- just for the record, I know you probably don't want to say anything on it today, but in our mind, it just seems we ran a bunch of numbers and it just makes -- I mean, overwhelming sense to buy back a huge block of stock, given the current scenario. So I know you guys are in your planning phase, but we're first thinking $25 million sounded aggressive but we think maybe even 35 million to $40 million, given -- I mean, if you borrowed $40 million at 4% that's -- or at 6%, and your after tax cost is 4%, I mean, that's $1.6 million to buy back potentially a very large block of stock at a very low multiple of cash flow.

We agree with that analysis.

Okay. Okay. Well, thanks, I look forward to seeing you next week at the -- you and your team next week at the annual meeting.

Thanks, John.

There are no further questions at this time.

Okay. Thank you very much. We'd like to thank everyone for being part of this today. I'd like to personally thank our great team who's done such a great job of getting things turned around and moving forward and thanks to you, Steve and Bill and Sarah for all you do. Thanks.

Thank you.

Thank you for your participation in today's presentation. This concludes your conference. You may now disconnect. And have a good day.