Exhibit 99.2
Conference Call Notes
Third Quarter 2002
Thank you, Brent, and good morning everyone. I want to thank you for joining us
this morning to review our results for the third quarter of fiscal 2002. Steve
Hare, our executive vice president and chief financial officer, is with me
today. After my introductory remarks, Steve will review the financial results in
more detail. Following that, both Steve and I will be available to answer any
questions that you may have at the conclusion of our remarks.
Before we get into the review, let me deal with the customary Safe Harbor
statements. We do call your attention to the Forward-Looking Information
disclaimer that is provided on our web site. This disclaimer lists a variety of
risk factors and uncertainties that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
that are expressed here today. This disclaimer also cautions listeners against
placing undue reliance on such forward-looking statements made during the course
of this conference call. We do emphasize that all forward-looking statements
made during the course of this call are made subject to the cautionary statement
on our web site and that the information provided in this conference call is
provided only as of the date of the call.
Having covered these formalities let me begin with an overview of the topics
Steve and I will cover:
1. Some highlights from our performance this quarter
2. I want to give a more detailed update on our scholarly publishing
divisions and the progress we're making there
3. We'll give you a financial review of our third fiscal quarter, and
4. Outlook for the remainder of the fiscal year
So, let's begin with highlights.
As we said at the beginning of the year, our goals were to (i) deliver
sequential improvement in our financial performance, (ii) continue to reduce our
debt and overall leverage, (iii) extend our leadership position in the
attractive STM niche, and (iv) to improve results in our more economically
sensitive packaging and special interest magazine divisions.
We are gratified that, despite difficult market conditions, we have made
meaningful progress in each of these four important areas. Just a few additional
details.
o First, let me just stress -- market conditions during the quarter were - and
remain difficult. I'd love to declare that the recovery has begun and we're
seeing it in our results. Unfortunately, we did not - and frankly do not yet -
see it.
o Nevertheless, we were able to deliver sequentially improved performance
- and much improved performance year over year. Significantly, and Steve will
discuss this in more detail, operating margins, gross margins, and EBITDA
margins all improved year over year.
o We are also pleased that we had another strong quarter of cash flow and
were able to reduce total debt by another $9.6 million this quarter, and a
very strong $33.5 million in debt reduction for the full year. Again, this
cash flow came primarily from strong cash flow from operations - as DSOs
remain in very good shape and we continue to manage our working capital and
capital spending very well. Just a quick advertisement here - since July 1,
2000, Cadmus has paid down $58.6 million in debt. We're obviously very proud
of that!
o I'll come back to our STM business in a minute. Let me first talk about
packaging and our magazine divisions now. Last time, I said we were
beginning to see a reversal of fortune in these two divisions, where we
have seen significant volume and pricing pressures. In Q3 that prediction
proved to be half right.
o For the quarter, and I think significantly in contrast to our
packaging and commercial print competitors, we saw solid
revenue growth and margin expansion in our Packaging division.
They posted their best performance in 18 months. And they
continue to benefit from the cost and capacity actions we took
last year, the sales talent that we have added, and an overall
improved product mix. This division will continue to be
challenged by a still recovering economy, but clearly we think
it is back on the right track.
o Somewhat by contrast, we still have work to do to get our
magazine division's financial performance back where we need
and want it to be. We continue to see soft demand and pages
remain down. We continue to rationalize both cost and capacity
- but frankly we need for pricing to stabilize and for pages
to increase before we really are going to have this division
back to historical levels of performance.
Now I want to talk a bit more about our STM business - where we are pleased
about the progress we're making. Just to refresh your recollection, we saw this
year as being a pretty tough one for us in this division - as we had to deal
with a major customer consolidation and a bit of a volume softness, particularly
in the area of supplements and commercial reprints. We also were determined to
bring to market several new products and capabilities that we thought would
meaningfully extend our leadership position.
Despite these challenges, we feel we've done very well.
o We have significantly extended our "outsource" business model to
our scholarly publishing customer base. With these customers, we
effectively serve as an outsource production department - we provide
all content processing, editorial, and issue management services in
addition to traditional print, bind, and mail sevices. This year, we
have extended our outsource capabilities -- electronic peer review,
electronic proofing, a new offshore workflow, and a legacy data
conversion service. In addition, and perhaps most importantly, we have
augmented our resources in the important commercial reprint and
editorial services areas. More and more as our customers are struggling
to keep up with content processing technology and to retain scarce
editorial resources, this well established outsource approach seems to
be gaining favor.
o At the same point in time, and on a related note we are
getting close to having in place our new content processing
system, which we are calling the Cadmus Knowledge System. This
system will substantially automate the process of reviewing
and preparing STM information for print and electronic
distribution. This System will enable substantial time savings
and cost efficiencies and enhance even further the
attractiveness of our outsource model.
To expand on this important point, one of the biggest problems
facing scholarly publishers is the time to publication. STM
publishing is ALL about speed. This system, when combined with
our new offshore workflows, will allow us to significantly
reduce content-processing turnaround times - this critical
factor to STM publishers. We think this reduction in
turnaround times could be as much as 30% faster. As I said in
our earlier press release, this kind of reduction has the
potential to create the same kind of competitive advantage
that permitted us to consolidate this niche on very attractive
terms in the mid-90s. So, obviously, we're excited about the
progress we're making here as well.
o Last point. What does this mean in dollars and cents? The
other important element of the progress we have made in these
two key strategic areas is that we have been able to INCREASE
the revenue we are generating per scholarly page - again,
despite pricing pressures - at the same time that we are
significantly REDUCING cost per page. This per page margin
expansion is the financial footprint for our strategy in this
all-important STM niche and indicates our cost reduction
initiatives are coming through.
So, in conclusion, we're pretty happy with the quarter - where we made good
progress financially and strategically despite very challenging market
conditions. As we have become more focused in our business, we are getting more
effective in both operating our core business and in implementing our strategy.
We believe we're on the right track, that we will continue to show sequential
improvement, and that we are well positioned when the economy begins to rebound.
With that, I will now turn the call over to Steve Hare for a more detailed
review of the financial performance of our third quarter and to review the
outlook for our business.
Steve,
Financial review of our third fiscal quarter
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Thank you Bruce and good morning. We have released our fiscal third quarter
earnings report this morning and plan to file our Form10-Q in mid-May. Today, I
would like to highlight our financial results from the quarter and discuss a few
of our key financial management initiatives.
Consolidated Results - Third Quarter Ended March 31,2002
(millions) CY PY
-- --
Sales - Reported $112.7 $132.5
Sales - Recurring $112.7 $122.7 Down 8%
On a sequential basis, sales in the third quarter declined by 1.5%.
Recurring sales are a better comparison for trends in the business and they
exclude closed and divested operations that were reported in last year's sales.
In addition, all results that will be discussed today are from continuing
operations, and exclude last year's restructuring and other charges.
As Bruce has already indicated, top line growth is the biggest single challenge
that our industry and Cadmus face today. In our Publication markets, revenue
declined during this third quarter versus last year's quarter. Throughout the
industry, customer consolidation, overcapacity and reduced demand in a weak
economy are all factors that have produced considerable volume and pricing
pressures. In addition, lower paper prices, which are a pass-through to our
customers, have also reduced our total sales.
Nevertheless, Cadmus achieved improved financial performance in many key areas:
o Gross margin improved to 18.3% versus 16.9% in last year's third quarter.
o Operating income increased by 3% over last year's third quarter to $7.4
million.
o Operating margins improved to 6.5% versus 5.4% a year ago.
o EBITDA margins improved to 12.3% versus 10.3% a year ago.
Earnings per share from continuing operations improved to $0.17 versus $0.07
last year (excluding restructuring and other charges) and sequentially from
$0.15 in the second quarter. The company did record a $0.13 net loss per share
from discontinued operations related to the sale of Cadmus Creative Marketing, a
catalog design and photography business which we sold, in January of 2002.
Because of this divestiture, historical results have been restated to
consistently report this operation as discontinued.
Let me point out the impact of our income tax rate. We increased our tax rate
for the quarter to 53.1% to bring the year-to-date effective rate to 49.5% which
is the rate we anticipate for the full year. This catch-up adjustment reduced
our third quarter EPS by approximately $0.01 per share.
Cash EPS, which excludes amortization of goodwill expense, improved to $0.30 per
share versus $0.20 last year. As a reminder, we will adopt SFAS #142 effective
July 1, 2002 and so we will continue to record amortization expense until the
beginning of our next fiscal year.
We believe that our management focus on cost reduction during this difficult
economic stretch has fostered some of the operational improvement in
profitability despite revenue pressures. Operating with a leveraged capital
structure requires a very disciplined management approach that our company has
gradually adopted. For example, improvement in working capital management
techniques has led to lower levels of inventory and accounts receivable and
added to our overall efforts to generate positive cash flow and to reduce debt.
Total debt was reduced by $9.6 million during the quarter. Cash flow from
operations and the proceeds of some asset sales were used to achieve our debt
reduction target. For the fiscal year to date, debt reduction now stands at
$33.5 million.
Interest expense, including securitization costs, continued to trend lower with
$4.0 million of expense compared to $5.4 million in last year's third quarter.
Consolidated Results - Nine Months Ending March 31, 2002
Recurring sales of $338.3 million were down by 6% over the first nine months of
this fiscal year. Lower magazine sales, along with decreased paper prices, were
the primary causes. Year to date EPS from continuing operations were $0.38
versus $0.63 last year again excluding restructuring and other charges recorded.
Excluding amortization of goodwill, Cash EPS was $0.78 for the first nine months
of this year.
Key Financial Initiatives
As Bruce indicated, signs of economic recovery are still pretty faint in our
markets as we head into the final quarter of our fiscal year. As a result, our
management focus will continue on cost reduction opportunities, strategic
procurement initiatives, working capital reduction, and directing our capital
investments to areas of future revenue growth. Despite tightening the belt
around capital spending this year, we are pleased to see installation of two new
printing presses for Cadmus during the fourth quarter - one at Port City to
improve productivity for our Books & Directories customers and one at Charlotte
to provide 8-color capability and expand our product offerings for Packaging
customers.
Outlook
As we look ahead, we will continue to drive hard in order to achieve our stated
goal of delivering sequential earnings improvement during this fiscal year. We
do not anticipate much help from the marketplace during the fourth quarter in
terms of either increased demand or a lessening of competitive pricing
pressures.
Our goal is to continue to deleverage our balance sheet although the pace of
debt reduction will slow in the fourth quarter as a result of our scheduled $6
million semi-annual payment of bond interest. However we will continue to sell
excess assets such as the airport facility in Richmond; however, we do not have
a serious offer in hand at this time.
In summary, our biggest challenge is to achieve top line growth in this market
environment. Our strategic and cost reduction initiatives continue to reduce the
negative impact of lower volume and prices on our business. At the same time, we
are making the necessary investments in our print plants and in the Cadmus
Knowledge System to position us for the future.
Bruce, that's my update and thoughts on the quarter. I will turn it over to you
for a wrap-up. Bruce.
Thank you, Steve
Conclusion
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Just to summarize a bit,
1) We have delivered sequential improvement in earnings throughout this fiscal
year and remain optimistic that we can continue that trend for the
remainder of the fiscal year.
2) Our businesses continue to generate strong cash flow and we expect to
continue to meaningfully reduce debt.
3) We have strengthened even further our leadership position in scholarly
publishing, bringing to market additional products such as Rapid Review,
which was covered in more detail in our April 17 press release. These
technological advancements, combined with exciting advances in our global
workflows, have improved our profitability while extending our competitive
advantage in STM content processing.
4) Finally, we have seen marked improvement in the packaging division and we
believe we now have our special interest magazine division positioned for
profitable growth as the economy recovers.
Last point. I am delighted to point out that we have nearly 90% of our revenue
coming from our core publications market, which is proving to be among the more
stable and more attractive in the graphic communications industry. We expect to
continue to reduce our debt levels and to benefit from our strategy and profit
improvement actions. As a result, we think we will continue to show improved
profitability, we believe we will continue to gain share during these
challenging market conditions and to be better positioned when the economic
recovery occurs.
Brent, we are now ready for questions
After questions - conclusion
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I'd like to thank all of you for joining us for today's call and for all your
questions. As we have indicated, our focus is, and will remain, to grow the
business, to gain share, to improve our financial results and to strengthen even
further the fundamentals of the company. We believe our business is on the right
track and look forward to reporting to you on our continued progress next
quarter. Again, thank you for your participation and questions.