EX-99.1 2 exh99p1.txt Exhibit 99.1 CORPORATE PARTICIPANTS PRESENTATION PAUL REILLY Cenveo - Chairman, President, CEO ------------------------------------------------------------ OPERATOR MICHEL SALBAING Cenveo - SVP Finance, CFO Good day, ladies and gentlemen, and welcome to the Cenveo second quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we CONFERENCE CALL PARTICIPANTS will conduct a question-and-answer session and instructions will follow at that time. If anyone should require ANDY VAN HOUTEN (PH) assistance during the conference, please press star, then Deutsche Banc - Analyst 0 on your touch-tone telephone. As a reminder this conference is being recorded. Jeff Kobylarz (PH) Solomon Brothers Asset Management - Analyst I would now like to introduce your host for today's conference, Mr. Paul Reilly, Chairman, President, and Chief TODD MORGAN (PH) Executive Officer. Mr. Reilly, you may begin your CIBC - Analyst conference. Stuart Hosansky (PH) ------------------------------------------------------------ Vanguard - Analyst PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO Steve Gidumal (PH) Thank you, Adriane. Good morning, ladies and gentlemen, and Vertus Capital - Analyst thank you for joining us today. Here today, Michel Salbaing, our CFO will be joining us. During today's conference call, we will cover the following salient points. One, Q2 was in line with previously provided guidance and matched the average of published analyst reports. This is the 8th quarter in a row where our operations have shown year-over-year improvement as measured by EBITDA. More importantly, during these eight quarters we have produced the results we said we would. Two, we continue to make progress in our two key metrics. We've increased return on capital employed, or ROCE, and we increased market share. Third, our one-stop shopping value proposition continues to be effective. We are getting more long-term contract work. Today approximately 20% of our volume is under such contracts. Four, we remain on target to achieve our full-year guidance. Point to note, our markets are getting stronger. This is good. With stronger markets our results will more easily demonstrate the positive impact of our actions to increase sales and reduce costs. I'd now like to pass the call over to Michel Salbaing for the required Safe Harbor comments, and his review of the financial report attached to the press release. Michel? ------------------------------------------------------------ MICHEL SALBAING - CENVEO - SVP FINANCE, CFO Thank you Paul. And again good day, ladies and gentlemen. During the course of this conference today, we will be making certain forward-looking statements that are subject to various uncertainties and risks that could affect their outcome. These uncertainties and risks are set out in more detail in the invitation you received to this call, as well as in our filings with relationship with two large office supply companies. We the SEC. We invite you to refer to them in conjunction with invested, temporarily, in higher levels of inventory to this call. All forward-looking statements we make today are ensure customer satisfaction during the transition. We intended to come within the SEC's Safe Harbor with respect expect these inventory levels to come back to normal over to such statements. the next two quarters. Total debt at June 30th was $773 million, down $4 million from the level reported at the end As shown in the financial highlights attached to the press of the previous quarter. We fully expect to have our debt release, as well as in the supplementary information to the down to the $745 million-range by year-end. This is in line press release, Cenveo's sales in the second quarter of 2004 with previous guidance of $35 million of free cash flow were $409.4 million and EBITDA was $29.1 million. Sales were generation from operations for 2004. It also takes into up year-over-year. These are same-store sales, as there were account the impact of acquisitions. neither acquisitions nor dispositions to affect the comparative numbers. EBITDA was up 6.4% year-over-year. And Our interest costs have decreased from last year as a result EBITDA as a percentage of sales was up year-over-year by 40 of the new debt issue in the first quarter and the favorable basis points to reach 7.1%. The last time second quarter rate of 7 and 7/8%. With our present debt structure, where results were in the 7% EBITDA range was in 2001. 87% of our debt is fixed-rate debt, we are not vulnerable to interest rate hikes, nor do we have any significant In 2001, sales were 15% higher than they are today. This maturities before 2012, since we expect that there will be EBITDA percentage was achieved on lower sales as we no amounts outstanding on our revolver facility when it decreased expenses during the prior industry recession by matures in 2008. well over $100 million, of which, fixed expense reductions amounted to $60 million. These quarterly results were very Now a quick update by segment. First, the Commercial much in line with the expectations that we shared with you segment. The increase in second quarter sales in the at the end of the last quarter. Net loss for the quarter was segment, year-over-year, came from some 4% increase volumes, $2.1 million, or $0.04 cents per share, compared to a net while prices compared to Q2 of last year were reduced by loss of $2.3 million last year, or $0.05 cents per share. almost the same amount. EBITDA increased $1 million to $20.2 million, or 6.6% million of sales, from 6.3% of sales last Gross margins were up 100 basis points, or 5%, to 20.4% in year. The continued increase in EBITDA margins of the the quarter, a reflection of cautious pricing and an commercial segment is the highlight of this quarter. This improvement in levels of contract work. This is also an was achieved by increasing gross margins 130 basis points to indication that we are recovering the higher cost of paper. 19.3%. We are pricing better because we are able to flex SG&A expenses increased this quarter as compared to last labor effectively and are not concentrating on filling, year because of the investment we made in sales and quote, unquote, unused capacity. We are also successfully marketing as our markets are becoming stronger. This passing on paper price increases. includes sales generated from our one-stop shopping value proposition. We are benefiting from this investment, and All the while, we are strategically increasing our sales and will continue to do so in the coming quarters. marketing costs by over 10%. We are seeing this investment paying off as the new business opportunities we are pursuing During the quarter, we incurred $1 million in restructuring have increased significantly. We have, today, close to 60 charges, (compared to 400,000 last year), to close our long-term multimillion dollar contractual relationships, Bensalem, Pennsylvania envelope plant, and integrate it into representing approximately $300 million of annual business. our Philadelphia print plant to create, what we think, is These contractual relationships allow us to pass through the first integrated commercial print/envelope facility in paper cost increases. the country. In the second quarter, we received payment of a unsecured note issued as a portion of the consideration for Now the Resale segment. During the second quarter of 2004, a business we sold in 2000. This note had appropriately been sales of the Resale segment were up slightly to $101.8 fully reserved at the time of sale. This recovery of $2 million, from $101.2 million in the same quarter last year. million, shown in the results as $1.2 million net of tax, This is the third quarter where, sequentially, sales have compensated for a $2 million increase in workers' increased compared to the previous quarter, and the first compensation accruals driven by negative development of old quarter of year-over-year increase in sales since 2001. Here claims. Our safety incident rate in 2003 was the lowest in again, the increase in volumes of 5% have been negated by many years, and the cost of claims incurred in 2003 was the decreases in prices from Q2 of last year. This is the lowest of the last six years. Our incident rate and claim expected result from successes we have had in signing cost for 2004 are tracking consistent with 2003. Our problem multi-year contracts with two very large office product has been the negative development of claims we have had retailers. The signings will have a very positive impact on difficulty in closing. We have engaged a new advisor to volumes in Q3 and Q4. assist us with this issue. Our Specialty Label sales have continued very strong. During the quarter, cash flow from operation was Concurrently, the trend of lower sales of traditional approximately $9.7 million, despite the fact that during the business forms has continued. Overall, in the Resale quarter, inventories increased $12 million, $10 of which is segment, with good cost to support our new flexing, EBITDA was up strongly to $14.7 million, from $12.9 momentum in all market segments. Our Commercial segment has million last year. We continue to achieve healthy EBITDA improved its margins over the prior year, significantly. margins of over 14%. This means that pricing has improved, and that we are recovering the higher price of paper, and that we are Finally, Corporate. The increase in unallocated corporate controlling our costs. expenses was due to the additional workers' compensation accrual mentioned earlier. We did not allocate this Now operations for the Resale segment. Sales are up additional expense to our segments because the expense was sequentially and year-over-year for the first time in three related to claims incurred prior to 2004. years. Sales of our business labels, which grew strongly in Q1, continue to grow in Q2. Sales in this market segment In summary, our EBITDA increased in the second quarter of have grown over 10% in 2004. Sales in the office products 2004, driven by the increased gross profits, which we retailer channel, which were down sharply in Q1, were up in achieved through disciplined pricing, passing on paper price Q2. The rate of decline in sales of business forms slowed increases where they have helped, and flexing manufacturing significantly in Q2. Margins of our Resale segment are also costs where necessary. These improved margins enabled us to improving. EBITDA return on sales in 2004 is up 160 basis invest in sales and marketing to bolster our market points. EBITDA as a percent of sales was over 14%. position. Let me turn now to Cenveo as a whole. We have often stressed I will now turn the call back to Paul Reilly. that our strategic goal is to increase return on capital, ROCE, while growing market share. At the end of the quarter, ------------------------------------------------------------ we had increased our return on capital employed after-tax to PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO 5.9%, from 5.5% at the end of Q2 last year, and 4.5%, two years ago. We are targeting a year-end ROCE of 6.5%, which Thank you, Michel. The best way to summarize Q2 is by would represent a better than 8% improvement year-over-year. pointing to our key objectives as management. Achieving Obviously, we have some ways to go to reach our goal of a market share gains, increasing ROCE, or return on capital ROCE, or return on capital employed, in the 10% to 12% employed, achieving efficiency gains, achieving EBITDA after-tax range. growth per guidance. We have achieved all those, and this is the eighth quarter in a row that we have done that. What has As we have discussed with you before, we measure our market made this quarter even more satisfying, is that we are share gains in a relative fashion. We measure how our sales seeing clear signs that our industry is becoming healthier. volume growth compares to industry volume growth. Based on a This is a great sign for the quarters to come. composite index of industry stats, our sales, in volume terms, grew 1.4% better than the market this quarter. In Let me emphasize some operational points before I talk more addition to our one-stop shopping value proposition, we need generally about our results and the state of our markets. to ensure that our operations grow beyond what the market I'll also quickly speak about the recent acquisition we will provide. To do this, we are using internet technology made, and clearly delineate our acquisition strategy and how more and more. Let me give you some examples. different it is from one that we had in the past. First the operations from the Commercial segment. The downward We are using e-commerce portals which we have branded as pressure on prices, which has been negating improvements in e-synergies, to make it easier for our customers to order volumes on a year-over-year basis, has diminished products and services from us. One example of this type of significantly over the past couple of quarters. We are product is the rollout at American Express of an e-catalog seeing trends that make us optimistic about the second half on a nationwide basis. Thousands of their employees will use of the year. Sales of our national commercial printing this portal to order products from Cenveo. The same approach business -- and this is where we nationally market large, is being offered to the hotel/leisure vertical channel, and high-quality print jobs -- were strong in the second we expect to achieve good results here as well. Another area quarter, and have been strong all year. where we will be offering e-commerce solutions is the facility management channel in our Resale segment. The This national segment is the market that can significantly growth in the number of new e-commerce installations has impact our Q3 results. Our car brochure business for Q3 grown by double-digits. These customized applications looks good, so we are expecting the good sales performance increase the worth of Cenveo to our customers, and increases in national printing to continue. Real sales of our the cost of switching to a competitor. commercial envelope products increased on a year-over-year basis in Q2. Again, with volume increases of 4.5% being We told you last quarter that our one-stop shopping value offset by sales price decreases. In Q2, sales of these proposition to the market required us to operate under one products have been down. We believe we will begin to see name. The rebranding of the company has progressed very well positive year-over-year comparisons for the rest of 2004. and the feedback from our customers has been very positive. Now that they see us under the one name, they better Our one-stop shopping value proposition has provided $40 appreciate the size and the scope that we have. The one million of new work during the first 6 months of 2004, and brand also reinforces, internally, it's building to our employees, the benefit of working seamlessly across We are seeing the same trends in our business. Our national our platform. market business has the strongest backlog it's had in years for Q3. Our local business is also seeing a strong increase Another way of creating shareholder value, we believe, is a -- an increase which points to a much better second half for modest acquisition program. Most of our competitors that the year. Our sales execs leading our one-stop shopping trade at higher multiples than Cenveo have acquisition value proposition are also very confident that the sales programs. Some modest, some quite aggressive. We see three they will bring to the second half will be stronger than the types of acquisitions that will clearly increase EBITDA in a $40 million of newly sold in the first half. We should also de-leveraging fashion, and, therefore, be positive for our remember that the impact of an election on print advertising shareholders. First, there's Type-1 acquisition: Acquire is usually positive. firms to grow local market share to beyond 20% local absolute market share or a 150% local relative market share. Finally, an overall favorable environment. And we are We have seen that our units, which have these market finally well-positioned to profit from it over the next few positions, generally exceed our cost of capital in quarters. I'd like to look at printing industry multiples. up-markets and sales and earnings fall less in down markets. Obviously management, and our shareholders, are disappointed Type-2 acquisitions: Acquire firms to expand product line to by seeing the Company stock near a 52-week low, as our most better serve our one-stop shopping value proposition. Type-3 important responsibility is shareholder value creation. acquisitions: Acquire internal operations that our customers Since achieving our 52-week high, we have met all guidance seek to outsource, and combine with a long-term supply in place and we have removed all significant debt principal agreement. Our agreement with American Express is an example payments to beyond 2012. Some investors have pointed out, of a Type-3 acquisition. that in that response to the Fed announcement on their intention to increase interest rates, leverage companies Our recent Valco acquisition is a Type-1 acquisition. In like Cenveo have seen their multiples contract. We addition to meeting our local market share objectives, this understand why, as interest costs are rising, high debt acquisition also met our internal financial parameters. It levels could have a negative impact on valuations in today's is a de-leveraging transaction. Its return exceeds our equity markets. However, the largely fixed-rate nature of weighted-average cost of capital of 12% after-tax. We will Cenveo's debt and its lack of maturities before 2012, have tuck in our similar Seattle location and create even further not been sufficiently taken into account in our opinion. We synergies. We will install 2 sheet-fed presses to better have very little exposure to higher interest rates. serve the growing Seattle market, and further build upon our, now, leading market position. We will consider Type-1 Contrary to our stock price increasing, our enterprise value acquisitions when they become available. We are actively multiple is at an historical low. Our enterprise value has seeking Type-2 and Type-3 acquisitions. typically been around 7.5 times last 12-months' EBITDA. We see today, the industry mean at around 7.7 times last After many quarters of openly wondering if this economy 12-months' EBITDA, which is higher than the normal in would ever produce growth for our industry again, we are response to improving industry conditions. Cenveo's multiple finally seeing everything aligning. Both the economists and today is more around 6.8 times last 12-months' EBITDA. We our customers (the people ordering our products and believe the results we have achieved in the first half of services), are in-sync. Universal McCann forecasts U.S. 2004, and the strong Q3 and Q4 prospects, should have the advertising to grow 7% in 2004 over 2003. The Blue Chip effect of bringing back Cenveo's multiples. If the multiple Economic Indicators are projecting commercial print sales to returns to a more traditional level, for instance, 7.5 times grow 3.2% to 4.1% in 2004, and 4.0 to 5.0 in 2005 [sic]. They last 12-months' EBITDA, and if that happens by year-end, project that this will be the first gain, meaning 2004, based on the then last 12-months' EBITDA, the stock imputed since 2000 -- since the year 2000. This is a quick sample of value would be $6.50. what the economists are saying. Now let's turn to our guidance. At the end of last year, and But here is what printing business leaders are saying. NAPL, again last quarter, I told you that I expected the full-year the National Association of Printing Leadership reports, 2004 EBITDA would be within the $135 million to $142 million "Sales increases have become more widespread for the range. Now with the first two quarters behind us, I can Printing Business Panel. In April roughly 56% of Panel affirm that guidance. I expect the third quarter to show members experienced an increase in sales, up from 42.6% one even stronger improvement than Q2 did, probably in the range year earlier. The percent of the Panel experiencing of 7% year-over-year improvement in profitability, as increases had been steadily rising of late, confirming that measured by EBITDA. This year-over-year improvement will be the business cycle for print has turned". On the driven, first by increases in sales in the 3% to 5% range envelope-side of the business, EMA, the Envelope coming from improving market share [sic], and also, now, Manufacturers Association, reports orders were up 5% from from clearly improving market conditions. Second, margins April to May, and 4% higher than May 2003. The selling will continue to improve. We look upon this second half of prices are still soft, as evidenced by the value per 1,000 2004 very positively, and as being a sound foundation for envelopes, which was down one-half from April to May to continued growth in 2005. $15.46. So let me conclude. Q2 was in line with our expectations. QUESTION AND ANSWER Two, in Q2 we continued to increase market share and return on capital employed. Three, we previously communicated to you that most of our improvement in 2004, over 2003, would ------------------------------------------------------------ occur in Q2 and Q3. Q2 has happened as forecasted. Sales and OPERATOR profits improvements in Q3 will be aided by a number of things: new sales contracts in the office products channel, Thank you. Ladies and gentlemen, if you have a question at for which deliveries will ramp up in that quarter, continued this time, please press the 1 key on your touch-tone success in marketing the one-stop shopping value telephone. If your question has been answered, or you wish proposition, and finally a strong car brochure season. We to remove yourself from the queue, please press the pound expect that Q4 will continue this trend. Fourth, our debt, key. although large in relation to current cash flow, is manageable without any significant maturities through 2012. The first question is from Andy Van Houten from Deutsche Its high proportion of fixed rate versus floating rate Banc. insulates us against rising interest rates. And, fifth, we affirm our 2004 guidance, a range of $135 million to $142 ------------------------------------------------------------ million of EBITDA, and is consistent with, this year, again, PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO generating significant increases in shareholder value. Hi, Andy. This concludes my remarks. I will now pass the phone back to Adriane, who will instruct you on how to present questions ------------------------------------------------------------ to management. Adriane? ANDY VAN HOUTEN - DEUTSCHE BANC - ANALYST Hi, how are you? Thank you very much for the good detailed introduction. In terms of your sense that you're taking market share from your competitors, is that something that you expect to maintain for the balance of the year, to accelerate that rate of market share gains, or are you happy with, sort of, the 1.2%, I guess, overperformance versus your competitors? ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO Good question. We would expect it to return. We think that the 1.4%, not that we think, the 1.4% is in the lower range of our objectives. It's adequate. We're certainly hoping that over the rest of this year, not only hoping, but putting in plans to make it happen, that over the rest of this year and in future years it will even be higher than that. ------------------------------------------------------------ ANDY VAN HOUTEN - DEUTSCHE BANC - ANALYST Question about capital spending. Obviously, you're seeing some good results from your incremental increase in spending on the sales and marketing line. With a potential increase in EBITDA, and again, you know, some improvement in free cash flow growth, do you feel additional flexibility about potentially increasing your capital spending over the next 12 to 18 months? Are there projects that you feel would provide you with sufficient return to do so? ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO We have given guidance that we believe the CapEx is in the $25, $30 million range per year, cash, and there's nothing in the foreseeable future that points to that changing. There is still sufficient capacity for to us grow significantly from where we are today. So, we're not changing them at all. ------------------------------------------------------------ ------------------------------------------------------------ ANDY VAN HOUTEN - DEUTSCHE BANC - ANALYST JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST Great. Thank you, very much. Okay. Are you seeing less pressure on your average selling price going into this third quarter? ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO Thank you, Andy. Second derivative is increasing. Got to look from where we ------------------------------------------------------------ started. You know, we -- 2003 we experienced a 5% decrease OPERATOR in prices. We've seen that on a year-over-year basis so far this year to be 4%, so that's showing that the trend is, in The next question is from Jeff Kobylarz with Solomon fact, decreasing. So the answer to your question is, yes. Brothers Asset Management. And that's a lot of -- to increase profit. But there's still, I mean, taking a 4% decrease in pricing is still we ------------------------------------------------------------ managed to have a fairly large drag on profits. If that 4% JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST wasn't there these, profits would be significantly different than they are now. But in spite of that, and our Hi. efficiencies and our growth, we were able to achieve the improvement in earnings. ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST Hi, Jeff, how you doing? Right. And your margin you said was up, because you were ------------------------------------------------------------ able to just, essentially, it sounds like flex labor lower. JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST Was that the biggest swing variable? Good. Great quarter. ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO But it's also the pricing, even as the trend is improving, and that helps us as well. But, our basic improvement in Thank you. margins is coming from efficiencies throughout the income statement, from how we buy, how many pounds of paper we use ------------------------------------------------------------ per job. It's up and down, including our SG&A as well. JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST ------------------------------------------------------------ Can you comment about the tone of the quarter as you went JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST through April, May, June? Did it get stronger as each month went by? Okay. And is there any pressure on labor at all, given what seems to be at times, a stronger economy? ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO It's an unusual quarter. The answer's on an overall basis. It's absolutely the case. The two new office products Have not heard of any yet. None has come to our attention. companies that we signed up, we started to ship late May, early June, so that certainly increased the sales towards ------------------------------------------------------------ the latter half. And I think the underlying business that we JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST saw in both the print side and the envelopes would have indicated that the -- we haven't seen all the industry data Okay. Lastly about acquisitions, is there is a limit to how for June, but the May number was certainly stronger than much you might spend on acquisitions the rest of this year April. But the industry data we do have for June would or next year? Or is it just situation by situation? indicate continued growth in the June quarter, and that was, you know, consistent with our growth as well. ------------------------------------------------------------ year-end, when they would go back into our normal system. PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO So, yes, it is a unique event, and is not a permanent event. The type 3 acquisition, these are very, very long sell It really is -- we're looking at it optimistically. I think cycles. Our experience-to-date, even though we have one, but by the nature of where we are, you know, we have, you know, we've obviously been looking at others, is that it's over a launched on what we call a modest acquisition, I think so year cycle. So the amount of time it takes is one hurdle. far we have spent about $9 and a half million. But the initial hurdle is the decision by our client to outsource this function. And that is usually needs to be ------------------------------------------------------------ made, in fact, it always has been made at the higher levels, JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST and there's a significant amount of social issues within that company involved with that. So that would be the number For Valco? two issue. The last issue would be the nature of our business. Our business is a customized. So we're not -- they ------------------------------------------------------------ don't -- what they would purchase one year, they don't PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO necessarily buy the next year. It changes from year to year. So we worked through a variety of systems that allows us to Yeah, with Valco. demonstrate to the company that's not outsourced, that they, in fact, have saved money. And we do that through a costing ------------------------------------------------------------ system we have put in. But there takes a time for our JEFF KOBYLARZ - SOLOMON BROTHERS ASSET MANAGEMENT - ANALYST perspective client to get comfortable with those systems. So they would be three. It's going to take about a year, but All right. Thank you. the rewards for our client who decides the outsource, and then for Cenveo, are significant. Certainly, our current ------------------------------------------------------------ announced outsourcing, our client is very happy with the PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO results, as we are. So, that's the hurdles. Hopefully that helps. Thank you. ------------------------------------------------------------ ------------------------------------------------------------ TODD MORGAN - CIBC - ANALYST OPERATOR That helps. Thanks. The next question is from Todd Morgan from CIBC. ------------------------------------------------------------ ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO TODD MORGAN - CIBC - ANALYST Thank you. Thank you. Good afternoon. Two quick questions. First of all, there's -- it looks like a little bit of an uptick in ------------------------------------------------------------ the inventory levels this quarter compared to last year and OPERATOR previous quarters. I was wondering if there was anything going on there? And I guess, secondly, could you talk a The Next question is from Stuart Hosansky from Vanguard. little bit about the, sort of, the challenges of, I guess, more of the Type-3 acquisitions, the outsourcing-type deals? ------------------------------------------------------------ I mean, I think you've done, correct me if I'm wrong, but STUART HOSANSKY - VANGUARD - ANALYST certainly one large deal so far. What are the real decision points for your customers and entering into that kind of Good afternoon. arrangement? ------------------------------------------------------------ ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO Hi, Stuart. How are you doing? Okay. Good questions. The inventory we did address in the prepared remarks. I'll go through it again. Inventory is up ------------------------------------------------------------ $12 million, $10 million of which is a planned increase to STUART HOSANSKY - VANGUARD - ANALYST do with those two new office products providers that we have signed up. So as we started to ramp up in the beginning, Okay. How are you? Actually, my questions were -- most of late May, there's a transition. They're moving out of the my questions were answered, but I do have a couple of ones. current supplier into us. And the predictability of demand One just to confirm, if you look over the next, call it, 1 during that period is not what it normally is. So the way we to 3 years, what do you expect the use of free cash flow to ensure that our customer sees no change in the service be? levels during this period of moving from the old competitor to us, we put into inventory an additional 10 million. We would anticipate that most of that will be gone by ------------------------------------------------------------ higher inventory levels than you'd normally be with these MICHEL SALBAING - CENVEO - SVP FINANCE, CFO companies? It's always going to be to pay down debt. That's our -- the ------------------------------------------------------------ generation of free cash flow is to reduce debt. MICHEL SALBAING - CENVEO - SVP FINANCE, CFO ------------------------------------------------------------ What happens is that with the relationship with a large STUART HOSANSKY - VANGUARD - ANALYST retailer is the stockings that they need to have on their shelves within their various outlets. When they switch Okay. So, and then, but once you get to the point where suppliers, what happens is that they first start by doing there's nothing left under the revolver? away with the inventories that they have from the previous supplier, and all of a sudden they replenish the stock. And ------------------------------------------------------------ it's that time where you have that extra replenishment, MICHEL SALBAING - CENVEO - SVP FINANCE, CFO where you need extra inventories to do it. And then after that you need to maintain the fill-rate, because that's the Then at that point it will be used to purchase EBITDA to whole secret of supplying the retail chains is fill-rate. decrease leverage. You cannot not deliver on time when requested to. ------------------------------------------------------------ ------------------------------------------------------------ STUART HOSANSKY - VANGUARD - ANALYST STUART HOSANSKY - VANGUARD - ANALYST Okay. All right. And you gave us information on the -- on Okay. the inventory level for the two office product companies. What I'm wondering is, can you quantify at all what the ------------------------------------------------------------ earnings impact might have been or -- for that? MICHEL SALBAING - CENVEO - SVP FINANCE, CFO ------------------------------------------------------------ It's just a question -- it's transitional, as we said in MICHEL SALBAING - CENVEO - SVP FINANCE, CFO the prepared remarks, it's really a transitional situation. The earnings -- I don't think I follow the question. The ------------------------------------------------------------ earnings impact of? STUART HOSANSKY - VANGUARD - ANALYST ------------------------------------------------------------ Okay. And the final thing is, as you've indicated, your STUART HOSANSKY - VANGUARD - ANALYST stock price appears to be low at the moment, are there any plans to either consider instituting a share buyback, or do The earnings impact of the increase in inventory, and any other type of activity with your free cash flow to whatever other additional costs you incurred to ramp up for reward shareholders try to get the stock price up? these new contracts. ------------------------------------------------------------ ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO MICHEL SALBAING - CENVEO - SVP FINANCE, CFO As we look at the options, and given the current status of There has been no earnings impact at this time. We've our balance sheet, the, sort of, you know, techniques that invested in building the inventories. We expect those are available to us are a bit limited. In the past when we contracts -- and we're not going to divulge, of course, the have been in similar positions, we have chosen to buy back value of the contracts, but we'll start hitting principally our stock. But the truth of the matter is, today to do that, the third quarter. And you will see, I would expect, there was some people, and it's not universal who would say noticeable increase in volumes of our Resale group. that that may aggravate our problem relative to the leverage. We don't think that the leverage discount is ------------------------------------------------------------ appropriate, even if it's occurring, is appropriate for STUART HOSANSKY - VANGUARD - ANALYST Cenveo because of the nature of our balance sheet. But to use the free cash flow to buy down equity, and further Okay. And then if you can help me to understand one thing, increase leverage, we do not believe that that would be a and that is that you're building up the inventory for these good use of capital given the nature of our balance sheet. two new contracts, and you're also saying that by the end of the year, the inventories should be back to normal levels, ------------------------------------------------------------ or for the prior levels. You're building up the inventory STUART HOSANSKY - VANGUARD - ANALYST because of expected needs by these companies, or because you want to position yourself better for them so there's no Okay. Thank you very much. outages? Can you talk about why you're at ------------------------------------------------------------ in the market, and the combination of election and Olympic PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO year. That's a pretty small number in this very large market, but, you know, it could be out there today. So the Thank you, Stuart. answer is that could be happening, and probably is happening. Our business is very much driven by advertising ------------------------------------------------------------ dollars and business confidence, and this would be more of a OPERATOR personal comment than one that I have an industry statistic in front of me, but as I talk to business leaders, the Again, if you have a question at this time, please press business confidence that I am hearing is the best I've heard the 1 key on your touch-tone telephone. The next question is in a long time. So as long as business confidence picks up, from Steve Gidumal from Vertus Capital. that's what will allow our business to grow. So given what we're hearing, I'm not seeing a downturn in 2005 at all. I ------------------------------------------------------------ would also add that we did recently have some very positive STEVE GIDUMAL - VERTUS CAPITAL - ANALYST reports about advertising, and I did have an industry executive point to me, that his history, or his experience Hey, Paul. Steve Gidumal. would be that the printing markets would follow about three months after that. So that would be another good sign ------------------------------------------------------------ leading towards a stronger 2005. So, Steve, at this point, PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO our markets are different than they used to be, but 2005 looks like a good year for us. Hi, Steve. How are you doing, Steve? ------------------------------------------------------------ ------------------------------------------------------------ STEVE GIDUMAL - VERTUS CAPITAL - ANALYST STEVE GIDUMAL - VERTUS CAPITAL - ANALYST Okay. And on the cost side, you think there'll be any -- is Okay. Good. How are you? there any more opportunities on the SG&A side, or you think that's -- we shouldn't be looking at that in the near term? ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO Very good. The Company which three years ago was a collection of, ------------------------------------------------------------ then, 150 companies, and today is a much more integrated 86 STEVE GIDUMAL - VERTUS CAPITAL - ANALYST companies, as we move up the integration curve, the number of opportunities we see are still very large. And today, and Very good quarter. I say this internally, I say it publicly, that our opportunities are not limited by the opportunities we see. ------------------------------------------------------------ They're limited by the numbers of hours in the day. So I PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO think for many years to come, there is still proven methods, maybe not necessarily proven in our industry, but proven in Thank you, very much. other industries that will take those techniques, use them within printing, and continue to make these companies more ------------------------------------------------------------ efficient. STEVE GIDUMAL - VERTUS CAPITAL - ANALYST ------------------------------------------------------------ Okay. So, you talked, as you have in the past, also about STEVE GIDUMAL - VERTUS CAPITAL - ANALYST how the, you know, the year's shaping up nicely because of the, in part, because of the election cycle. Can you just Great. Thanks. Glad to hear you're doing so well. Thank tell us a little bit how -- how it looks like what your you. Bye. visibility is, or how you think the cycle could turn, you know, could change or not change as we go into '05? I mean ------------------------------------------------------------ is it -- so I guess what I'm trying to get a sense of is, is OPERATOR there a bump here that's just due to the election spending, or is that just a smaller aspect of the trend line that's At this time I'm showing that there are no further going on? questions. I will now turn the conference back to Mr. Reilly for any closing remarks. ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO ------------------------------------------------------------ PAUL REILLY - CENVEO - CHAIRMAN, PRESIDENT, CEO As you may remember, the model that has been put out there for years about election is that there would be a half a Thank you, Adriane. Thank you everybody for your time percent growth today. I'll just leave you with two points. Profits are up year-over-year, and the profits are predictable year-over-year, and I think that's a very good sign, and we look forward to talking to you at Q3 conference call. Have a great day.