Exhibit 99-2
Conference Call Notes
Fourth Quarter 2001
Thank you Burton, and good morning everyone. I want to thank you for joining us
this morning to discuss our results for the fourth quarter of fiscal 2001. Bruce
Willis, our vice president and interim chief financial officer, joins me on the
call today. After my introductory comments, both Bruce and I will be available
to answer any questions that you have.
We're going to do things a little differently this time. Rather than reading
prepared remarks, I am simply going to make some less formal comments on our
4/th/ quarter and underlying trends in our business and in our markets. We hope
that this less formal approach - more of a discussion than a speech - will
permit us to have more of a dialogue on today's call.
So, here we go.
. Topics To Be Discussed:
. I want to touch on several subjects this morning:
. A review of fiscal 2001 - from both a strategic and financial
perspective;
. A review of the quarter we just completed;
. A more specific discussion of some of the things we accomplished that we
believe have strengthened the business as we move into fiscal 2002;
. A discussion of the outlook for fiscal 2002; and
. An update on where we are in our CFO search
. Fiscal 2001 -- Repositioning of the Business:
. In fiscal 2001, we re-committed ourselves to Cadmus' core business - the
production and distribution of information primarily for scholarly and
commercial publishers;
. We recognized that our core markets had strong underlying fundamentals
and that in these markets our competitive position is strong and our
market share substantial;
. We recognized that our competitive advantage in our largest division,
our STM journal services business, relates more to the management of STM
content than it does to the printing, binding, and mailing of printed
journals. In other words, we are a lot less vulnerable to a decline in
journal print volume than we . . . and probably you . . . have been
thinking;
. With this "content-centric" perspective, we did three things this
year:
1. We aligned our business with the markets we serve - permitting us
to sell more effectively and also creating an environment where we can
consistently generate market-specific and proprietary products and
services;
2. We emphasized in our resource allocation and in the way we go to
market that we are now, and will be more in the future, a specialized
content management company that also can distribute that content in
print. I'll talk more about this later; and
3. We consolidated several facilities, reducing our overall cost
structure and capacity and also our dependence on more volatile and
more price competitive commercial print volume.
. Fiscal 2001 -- Financial Performance:
. Fiscal 2001 did not turn out, in terms of our financial performance,
the way that we had planned;
. We certainly did not expect the sort of dramatic downturn that we
experienced in first the technology sector and then in the overall
U.S. economy. Those downturns seriously affected the financial
performance of our magazine and packaging businesses versus our
original plan;
. And, we invested much more aggressively in our content management
capabilities than we had originally planned - as we saw both the need
and the opportunity to exploit the strong fundamentals and trends
particularly in our industry-leading STM journals division. Again,
I'll talk more about that later;
. On the other hand, we sustained strong cash flow and achieved our plan
in terms of debt reduction - reducing total debt by $25 million for
the year;
. And, we also sustained strong revenue growth in both our STM journals
and books and directories division - registering year over year
revenue growth in each quarter;
. Very gratifying to us was the growth and performance of the "pure"
content management portion of our business - where we invested so
heavily in fiscal 2001 and will again in 2002. For the year, driven by
increasingly strong page growth - 4% in Q1, 8% in Q2 and Q3, and 13%
in Q4 - this business showed strong revenue growth and expanded market
share
. IN SHORT, the portions of our business that we said were non-cyclical
proved to be so and the portions of our business that we knew to be
more economically sensitive proved not to be immune.
. Content Management - A Definition:
. Before we go any further, I want to make sure that we all understand
what we mean when we talk about "content management";
. Lots of our competitors talk about "content management" - but what
they are talking about is really just "pre-press on steroids" -just
archiving and providing for the re-purposing or re-use of ads or other
content completely supplied by their customer ;
. That is not what we're talking about. What we're talking about is a
completely integrated, shared process of content creation between Cadmus
and its customers. A process where, after the article is selected for
publication by the customer's editorial board - Cadmus does pretty much
everything else.
. We use our Rapid Review product to facilitate the all-important peer
review process;
. We have teams of editors, many with PhD's, that provide style and
other copy editing services, often working directly with the author;
. We work directly with the author to accept and to resolve issues
associated with digital art - tables, photos, and graphs;
. We use resources in the U.S. and India to either key in non-digital
content or convert digital files into SGML, XML, or Postscript files
for web and print distribution;
. We use our "S-Proof" product to facilitate the process of author
approval of final text and image content;
. We handle - on behalf of the customer and directly with authors - the
ordering of author and other reprints;
. We facilitate the delivery of new and legacy content to the customer's
web site or other on-line distribution service; and
. We print and distribute the content in journal form.
. For some of our most content management-intensive customers, we derive as
much as 90% of our total value added dollars from the provision of these
content management services. In other words, we are only minimally
dependent upon or at risk with respect to print volume. And, demand for
these services is driven by pages, not copies - and pages are growing
rapidly.
. None of our peers can make a similar claim with respect to more than a
nominal portion of their business. For Cadmus, it is true for nearly one-
third of our total business - a percentage we will look to grow in fiscal
2002 as we pursue this more "content centric" strategy.
. Q4 - A Quick Review:
. We have lots of numbers in the press release - both in the text and the
tables - so I am not going to review them in detail here.
. Just a couple of things to highlight:
. We did achieve consensus expectations for the 4th quarter -
reporting $.11 per share for the quarter and $.78 for the fiscal
year - before restructuring and other charges;
. We had another very strong quarter in terms of cash flow and
reduced debt by another $6.8 million for the quarter and $25 million
for the year - a result we are very pleased with, given the softness
in EBIT;
. Pages grew a strong 13% in the quarter. As a result, we saw
another strong quarter of revenue growth from our two less cyclical
businesses - journals and books and directories. For the quarter,
journals was up 5% and books and directories was up 7.3%;
. We saw increased softness in the quarter in our special interest
magazine business, with revenues down over 6% for the quarter -AFTER
adjusting for the now discontinued Graphic
Solutions division, which we have consolidated with our Byrd
Press facility in Richmond. During this calendar year, we have
seen a continuing decline in ad pages, even in these special
interest titles, and as a result we are seeing the same page
shrinkage and revenue declines that our peers in this business
have experienced and already reported on;
. In our specialty packaging business, we hope we are turning a
corner. As we saw in Q3, our "core" packaging business showed
modest growth, adjusting for the technology-focused fulfillment
business in Atlanta that we recently closed and consolidated with
our Charlotte facility. This core business growth reflects the
progress made in the pharmaceutical market - where we continue to
make progress - and in other less volatile segments;
. Finally, we continued to invest aggressively in driving our
content management strategy - launching several new products and
services and continuing to expand our capacity offshore - more on
this later. This investment will continue in fiscal 2002.
. In short, we achieved our expectations, met our cash flow and debt
reduction targets, and did what we needed to do to continue
positioning the business to be successful in what we expect to be a
near term environment of slow economic growth and "soft demand".
. Accomplishments in FY2001 and "To Dos" For FY2002:
. We have already talked about the progress we made repositioning the
business in fiscal 2001. I want, also, to highlight some of the specific
operational achievements in fiscal 2001 - from which we will benefit in
fiscal 2002 and beyond. These are just a few:
. Successfully opened a content management facility in India. This
significantly expanded our capacity and positioned us as the only major
provider of "turn-key" content management services with a completely global
workflow. We are now at approximately 300,000 pages annually at this
facility and have added capabilities to handle legacy data conversion on a
very high quality, very large-scale basis. This has been a "home run."
. We brought several new content-management products and services to market -
specifically:
. S-Proof, a web based author proofing system;
. Version 1.5 of Rapid Review - our electronic peer review system . . . and
we have a very powerful Version 2.0 coming out in the fall;
. An "on-demand" SGML/XML capability, that permits us to facilitate web
distribution of content well in advance of the printed journal itself; and
. The ability to support Powerpoint in STM article submission. This sounds
like a small thing but it has been the number 1 author gripe for years and
now Cadmus, and only Cadmus, can do it.
. We used the consolidation of our two Richmond magazine facilities to create
an 8-unit printing capability in our Byrd Press plant. We are looking to
add another 8-unit in 2002 - permitting us to have two of the most
versatile and well-equipped special interest magazine printing plants on
the East Coast.
. And, we made great progress repositioning our specialty packaging business.
We received cGMP
certification, landed two major pharmaceutical accounts, and added a number
of other very attractive non-technology customers. In addition, just this
week will be the first commercial application of e-SERT a proprietary
product that has generated a lot of interest from advertisers and from
publishers seeking to drive better ad sales.
. I should note that all of these accomplishments and innovations are
highlighted weekly on our web site. Go to http://www.cadmus.com and click
on the e.dition site.
. For fiscal 2002, we will be building on these accomplishments and will
further differentiate Cadmus from mere "ink on paper" providers.
Specifically, we will:
. Continue to expand our offshore facilities - adding both more capacity and
more capabilities offshore;
. Continue to expand our content management product/service offering - with
Version 2.0 of Rapid Review and also the beta version of our "integrated
electronic publishing system" - a system that facilitates within a single
system the entire process of multi-channel scholarly content management and
distribution;
. Continue our work to reconfigure our Easton and Byrd Press facilities to
give them improved capacity and efficiencies and to serve their pre-press
needs from centralized media centers with state of the art digital pre-
press capabilities;
. Add capacity to our books and directories division, acquiring for them a
"zero make ready" press that will permit them to bring not only much needed
capacity on line but also permit them to continue to exploit their high
service/low cost business model;
. Continue to reposition and grow our specialty packaging business - building
share of wallet with the new pharmaceutical and other customers we added
this year and continuing our aggressive new business development
activities; and
. As always, generate cash flow, control CAPEX, and pay down debt.
. Fiscal 2002 - The Financial Outlook:
. We are not assuming any economic rebound until calendar 2002 at the
earliest and we have not yet seen any indications that the worst is
over in terms of overall market conditions and advertising spending in
particular;
. Therefore, we are expecting fiscal 2002 to be much like 2001 in terms
of overall demand - continued strength in our journal and books and
directories divisions and continued softness in our special interest
magazine and specialty packaging businesses;
. We will get the benefit of both lower debt levels and lower prevailing
interest rates, and that we believe will be a benefit we obtain over
the entire fiscal year;
. We will get efficiency gains and lower costs from the plant
consolidations we completed this year - but we are being cautious
about the year over year impact of these until we see a real turn
in the lower ad/lower pages/shorter run length phenomenon we have seen
over the past 6 months;
. And, we believe that we will see a return to top line growth and
profitability from our specialty packaging business - although we see
soft demand in this market continuing for some time to come;
. Finally, we will continue to invest aggressively in our content
management platform - as we feel that with such investment we can
continue to gain share and enter other vertical markets in fiscal
2002.
. In summary, we - like so many others - have less visibility than we
would like to have as we enter a new fiscal year. We do believe,
however, that:
. Our fiscal first quarter - historically our weakest - will be
roughly in line with the 4th quarter we just completed;
. From there, we expect to see sequential and meaningful
improvement quarter over quarter and, as a result meaningful
improvement year over year;
. And, again, we do expect to pay down another approximately $20
million in debt.
. We should note also that if we elect to adopt newly enacted
SFAS 142, we expect the annual positive impact on our EPS to be
approximately $.50 per share. Our remarks about year over year and
sequential improvement were BEFORE considering the positive impact
of this change.
. Our CFO Search:
. A couple of comments on our search for a new CFO;
. We have identified a candidate, he has accepted our offer, he will be
notifying his current employer this week and we plan to make an
announcement shortly thereafter. He will be joining us in mid-
September;
. During this interim period, Bruce Willis has done an outstanding job
under difficult conditions - year-end, business planning process, etc.
He has my complete confidence, the complete confidence of my senior
management team, and the complete confidence of the Board.
. I think that is all I wanted to cover with these remarks. With that- I will
stop -- and Bruce and I would be happy to answer any questions that you may
have. Operator?