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EXHIBIT 99.2
conference call Script - Q1 FY 2001
Tuesday, October 31, 2000
Introduction - Bruce Thomas
Good morning everyone. This is Bruce Thomas, Cadmus' President and Chief
Executive Officer. I want to thank each of you for joining me this morning to
discuss our results for the first quarter of fiscal 2001. Dave Bosher, our
senior vice president and chief financial officer, joins me on the call this
morning. Following our comments and review, we will be glad to answer any
questions you may have.
Before we get into the review, let me deal with the customary Safe Harbor
statements. Please note that certain of our comments here represent "forward
looking statements" and are subject to certain risks and uncertainties that
could cause actual results to differ materially. Those risks and uncertainties
are set forth in our press release and included in a Form 8-K, which will be
filed shortly with the SEC and to which you should refer for additional details.
In highlighting our Q1 performance, we should start with this - we met our plan,
we met outside projections, and we generated results that affirm a positive
internal trend. As we have been stressing, we believe our business offers the
potential for consistent, predictable earnings growth and cash flow generation.
We are determined to deliver consistent and predictable performance, thereby
rebuilding credibility with our investors.
With that said, I want to focus my comments on (1) a review of the progress
reflected in the first quarter results, (2) a summary of some of the tactical
actions we are taking to fulfill our corporate mission, and (3) a look at what
lies ahead for us for the remainder of fiscal 2001.
Our first quarter results extended the momentum we saw in the fourth quarter of
fiscal 2000. Our Publications Services business, consisting of our STM journal
services, specialty magazines and book and directory businesses, recorded solid
growth in the first quarter, with journals and special interest magazines
growing 5 and 6 percent, respectively. These gains offset continued softness
from our specialty packaging operations. This first quarter shows the potential
of our more market-focused approach and also the company-wide emphasis on new
business development. For too long, Cadmus has been too internally focused . . .
on restructuring, on integration, and on other non-customer issues. That has
changed. We now have businesses directly lined up with our customer base, with
clear instructions to get externally focused, closer to our customers, and to
sell.
We are also pleased with the improvement in profitability. Operating income, as
a percent of sales, rose to 8.4% of sales from 6.8% last year. I should stress
that these margin gains came despite the softness in our packaging business and
against an environment of price competition that we expect to persist. Although
these margins rank at the top or our peer group, we believe we can maintain and
improve operating margins going forward. We are using our market expertise and
focus to develop a growing list of proprietary products. Not only do these
products differentiate Cadmus, permitting better top-line growth; they also
provide a mechanism to obtain premium pricing that permits continued margin
expansion. Through a combination of these differentiation strategies and more
effective leveraging of our new scale through aggressive procurement
initiatives, we believe we can continue to show further margin expansion.
As noted in our press release, we did experience noticeable softness for the
second consecutive quarter in our specialty packaging operations. This softness
was industry-wide, as corroborated by results from other industry participants.
However, as the first quarter unfolded, we began to gain momentum in new
business development and have won new business in the last 45 days that
represents significant annualized growth. During that period we have landed new
contracts from major new customers across a wide spectrum of industries,
including apparel, telecom, home furnishings, transportation, home improvement,
and pharmaceuticals. Our volume and sales backlogs in this business are up
substantially, due both to this new business as well as increased volume from
existing customers. We expect this business to rebound nicely in Q2 and to be
remain strong for the balance of the year.
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Finally, we continued to generate positive cash flow in the first quarter that
allowed us to fund necessary capital expenditures while still reducing debt by
$9.9 million. Dave will comment on the financial aspects of the quarter, but
needless to say we are optimistic about being able to continue to invest in new
technologies while strengthening our financial position further.
I'd like to discuss now our progress on some of our new products and
initiatives. First, we have successfully rolled out Rapid Review, our web-based
online peer review system for STM publishers. This product, the first module of
our integrated electronic publishing system, has received positive reviews in
the trade press and from our customers. During this quarter, we also established
a content management facility in India that will extend globally our pre-media
production system for the STM market. The sale of Dynamic Diagrams at the close
of the first quarter was also part of our plan to accelerate development of our
integrated electronic publishing system, which we are calling the "Cadmus
Knowledge System." Other components of this system will include an online author
interface, a digital and content management system, and an enhanced editing tool
- all of which are under development.
Finally, we completed the development of several proprietary products for our
specialty packaging business. Those products are all discussed in detail in our
annual report. They include Launchpad - a proprietary process and suite of
products for direct mail marketers of multi-media and software; Kangaroo Karton
-- again a proprietary process and product for the pharmaceutical market; and E-
Sert -- a product that permits the efficient integration of print and
interactive media marketing messages primarily in perfect-bound magazines. All
of these products are developed. We anticipate that they will generate new
revenues throughout the balance of fiscal 2001.
Finally, I would like to talk in more general terms about what you can expect
from Cadmus for the balance of fiscal 2001. We now have four strong market-
focused businesses, with sales, service, and making systems designed to serve
those markets. Cadmus' competitive advantage is this combination of truly
market-focused, close to the customer businesses and the scale provided from
having a half billion dollars in revenues from businesses which share strong
production and procurement synergies. To further exploit this advantage, our
emphasis will be in three areas. First, we will continue to use our market
expertise to develop and bring to market proprietary products and services to
drive better top line growth and continued margin expansion. Second, as capacity
utilization in our plants is increasing, we should realize efficiency gains and
procurement synergies to help offset the continued pricing pressures we are
experiencing in certain of our markets. Third, we will continue to use our
strong cash flows to reduce debt and lower our overall interest costs.
At this point, I'll turn the call over to Dave for a more in-depth analysis of
the quarter's financial results.
Financial Review -Dave Bosher
Thanks, Bruce. Without replaying the data from this morning's earnings release
verbatim, let me highlight some additional data and provide some comparisons
that will assist you in better understanding our results for the first quarter
of fiscal 2001.
Consolidated net sales, adjusted for divested and closed operations, rose 2% in
the first quarter to $115.7 million from $113.3 million last year. Publication
Services segment sales, which include our STM journal services, special interest
magazines, and book and directory businesses rose 6% in the first quarter. STM
journal services and special interest magazines registered revenue gains of 5%
and 6%, respectively, due to the combination of growth from existing
relationships, new customers and higher paper prices. The unit growth in the
STM journals services product line came on the heels of a 5% increase in fourth
quarter of FY 2000. The gains this quarter reflect the renewed momentum in
these businesses. In addition, book and directory sales rose 2% in the quarter.
We recorded a 15% decline in specialty packaging sales this quarter due to the
continued industry-wide softness and reductions in promotional spending by some
of our high-tech clients. These sales shortfalls, however, were concentrated in
the months of July and August, with our September sales showing considerable
improvement. Recent new business wins over the last 45 days have increased our
second quarter backlogs considerably and are giving us good visibility for
expectations of a much stronger second quarter from specialty packaging.
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Operating income rose 15% for the first quarter to $9.8 million from $8.5
million last year, adjusted for restructuring charges. Our consolidated
operating margin rose to 8.4% of sales in the quarter from 6.8% last year.
Margins improved in our STM journal services, special interest magazines, and
book and directory businesses. However, these gains were offset by margin
pressure resulting from the revenue declines from our specialty packaging
business.
EBITDA in the first quarter rose 6% to $16.4 million and EBITDA, as a percent of
sales, improved to 14.2% compared to 12.5% last year. Interest expense for the
quarter, including securitization costs, declined slightly to $6.0 million
compared to $6.2 million last year, as the significantly lower debt levels this
year and the benefit from the implementation of our receivables securitization
program offset the impact of much higher year-over-year short-term interest
rates.
Finally, let's take a look at some key balance sheet and cash flow items. We
reduced debt by an additional $9.9 million in the first quarter, bringing our
total debt, adjusted for the receivables securitization program, to $236.1
million compared to $246.0 million at June 30. First quarter cash flow totaled
$5.4 million dollars and included $3.7 million in proceeds from the sale of
Dynamic Diagrams. Capital expenditures in the first quarter totaled $3.2 million
and we remain on-track with our CAPEX plan of $21-22 million for fiscal 2001.
Increased working capital requirements and a $3.6 million cash contribution to
our pension plan in the first quarter combined to reduce cash flow by $8.0
million. So, looking forward, second quarter free cash flow should again be
minimal due to the payment of semi-annual interest on our senior subordinated
notes, but we believe we are on-track to generate cash flow in fiscal 2001
sufficient to repay another $20-25 million in total debt this fiscal year.
Fiscal 2001 Outlook
We are focused on offsetting competitive price pressures in the Publications
Services segment with better top-line growth, new proprietary products, more
operating efficiencies, additional procurement savings, and continued control of
costs. We are encouraged by recent wins in all of our businesses, especially
from our specialty packaging business. We are busier than we have been in some
time in all of our businesses and in all of our plants. Our ability to handle
these increased volume levels efficiently and profitably will be a critical
success factor for the balance of the year. In addition, the prospect of higher
short-term interest rates also poses a risk for us in the remainder of FY 2001.
But, an expected $20 to $25 million debt reduction this year will help to reduce
this exposure.
When we reported fiscal 2000 final results, we indicated that FY 2001 would be a
period of financial progress. Since our base of sell-side coverage has narrowed
along with other smaller-cap companies, it has become more difficult to point to
any meaningful consensus. However, we remain optimistic that results in the
second quarter will reflect a positive year-over-year comparison to the $.34 per
share we earned in the second quarter of fiscal 2000, when adjusted for the
operating losses we incurred last year from the closed marketing operations. We
also expect that same year-over-year improvement trend to continue into the
second half of fiscal 2001.
I would like now to turn the call back over to Bruce.
Bruce Thomas
Thanks, Dave. We believe that we are positioned to enjoy further financial
improvement in Q2 and throughout fiscal 2001. Continued growth in our STM
journal services and special interest magazine businesses and prospects for
renewed growth from our specialty packaging business should help to offset
competitive pricing pressures and will serve as necessary catalysts for further
earnings growth in fiscal 2001.
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While we are encouraged with the trends or renewed top-line earnings growth, we
continue to drive further improvement, both financially and operationally. Our
focus is, and will remain, to grow the business, improve our financial returns,
and re-establishing Cadmus' credibility with our equity investors. We believe
our business is on the right track, and we look forward to reporting to you on
our progress during the remainder of fiscal 2001.
-------- Operator, we are now ready for questions.
Closing - Bruce Thomas
Thank you, operator. Our thanks to each of you again for your participation this
morning and your continued interest in Cadmus. We look forward to working
closely with you in the new fiscal year.
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