Exhibit 99.2
Conference Call Notes
First Quarter 2003
Thank you operator, and good morning everyone. I want to thank you for joining
us this morning to review our results for the first quarter of fiscal 2003.
Steve Hare, our executive vice president and chief financial officer, is with me
today. After our remarks, Steve and I will be available to answer any questions
that you may have.
First, let me deal with the customary Safe Harbor statements. We call your
attention to the Forward-Looking Information disclaimer that is provided on our
web site and in our previously issued press release. This disclaimer lists a
variety of risk factors and uncertainties that could cause actual results to
differ materially from management's forecasts and expectations expressed here
today. We emphasize that all forward-looking statements made during the course
of this call are made subject to this cautionary statement and that the
information provided in this conference call is provided only as of the date of
the call.
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Having dealt with these formalities, let me begin with an overview of the topics
Steve and I will cover.
First, I will briefly review our performance for the quarter just
completed;
Second, I want to discuss some of the successes and positive indications in
the STM market in general and for our STM services business in particular;
Third, I will discuss some significant and positive developments in our
Specialty Packaging business;
Fourth, Steve will provide a more detailed financial review of our first
fiscal quarter; and
Finally, we'll talk about our outlook for the balance of the year.
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We are generally pleased with our fiscal first quarter performance. We overcame
very difficult conditions in the magazine market to deliver year over year
improvement in operating income, pre-tax profit, and EPS. Moreover, all
significant margins - value added, gross profit, EBITDA, and net operating
profit - expanded nicely year over year. This broad-based improvement was driven
by strong performances in our STM services and specialty packaging divisions
where we saw both top line growth and significant margin expansion. This more
than offset continued weakness is special interest magazines.
We are continuing to see better momentum in our STM and Specialty Packaging
divisions, and I want to talk about them in a bit more detail.
Let's begin with the STM market itself. There was an interesting article
recently in the Financial Times about this market. The article was about the
sales by Bertelsmann and Wolters Kluwer of their respective
academic journal businesses - both of which drew high levels of interest and are
expected to be purchased by financial buyers. The article made the point that,
with the impact of the economy and the media downturn on more economically
sensitive publication sectors, investors are seeing STM publishing assets as a
much safer and more attractive investment. Revenues are rising in this sector,
and the strong cash generation potential of these journal businesses provides
the stability investors are seeking. In short, in an otherwise tough publishing
market, the STM space is increasingly perceived as the place to be.
From our perspective, and as we have predicted, this market has remained a very
attractive niche throughout this prolonged economic downturn. Pages have held up
nicely, customer failures have been minimal or non-existent, and pricing has
remained fairly steady. We are fortunate to be the world leader and have
approximately 50% of our revenue coming from this attractive sector.
In this attractive market, we have both a world leadership position and a highly
differentiated product/service offering. Our STM division is the farthest along
in developing and exploiting this differentiation - leveraging our scale, our
global content processing workflow, and our proprietary Cadmus KnowledgeWorks
System to offer and deliver more and more highly valued services to our
publishing customers. These competitive advantages are what have driven the top
line growth and margin expansion I referenced earlier.
Let me talk for just a minute about each one of these advantages we have. First,
our scale. Cadmus is by far the largest provider of content processing and other
production services to STM publishers. Particularly as these publishers look to
manage their risk and to improve their own efficiencies, our scale is a
significant advantage. Our customers know we are committed to this market and
that we have multiple and redundant facilities and capabilities. In today's
environment, that sort of stability matters - and further differentiates Cadmus.
Second, our global content processing capabilities. Two years ago, we opened a
dedicated content-processing facility in Bombay, India. Since its opening, we
have installed proprietary and state of the art workflows and systems to
automate content processing. In the past 12 months, we have processed over
300,000 fully composed pages with only 77 associates. Particularly because our
offshore competitors rely on MUCH more manual, much more labor intensive, and
much slower workflows, this is an important differentiator and one that we are
only beginning to exploit. In the near future, we will be adding copyediting and
issue management capabilities to this operation - permitting us to offer a new
direct service model that we think will be very attractive to European
publishers for whom we currently do very little work. We think the growth
potential with this new model is significant.
Finally, our Cadmus KnowledgeWorks System. This suite of products is gaining
increased market interest and we are continuing to develop enhancements to the
system. This system has been a huge enabler of "outsourcing" sales. An example
of this success was highlighted in our 2002 annual report where we discussed our
work with the American Academy of Pediatrics. Pediatrics has outsourced all of
their content processing to Cadmus, and their Director, Deal Chandler, said "We
joined hands with Cadmus because we needed a strong and reliable partner that
could process our content while we focused on the more strategic issues of
managing, acquiring and marketing our content. Cadmus KnowledgeWorks helps us
streamline and expedite our publishing process."
That fundamental value proposition - that working with Cadmus can create
competitive advantage to our publishing customers - has begun to pay off in
terms of new business opportunities. Increasingly, publishers who continue to
try to "do it themselves" are recognizing that STM content processing is Cadmus'
core competency and we do it better than anyone else in the world. They
recognize that by outsourcing to Cadmus, they can publish faster and obtain
other meaningful advantages over their publishing competition. Our backlog of
outsourcing opportunities is growing rapidly and represents significant near
term growth opportunities for Cadmus.
As a result of these and other strategies, we have seen better growth and
stronger new business activity levels in our STM services division. As a result
of this growth, and with the opportunities we see before us, we are
re-allocating assets and resources to make sure we have the capacity to satisfy
this increased demand. In today's printing environment, this is a nice problem
to have.
Our other division that is gaining momentum is Specialty Packaging. As you have
seen from our fiscal 2002 numbers, this division made a nice turnaround last
year. They have carried this momentum into fiscal 2003. For the quarter, they
showed solid top line growth and much better margins. Perhaps more importantly,
however, we have recently been awarded several new and very large pieces of
business and have a strong pipeline of additional opportunities that are close.
These new business wins, all of which are pure packaging work and the bulk of
which is in the health care market, will add more than $10MM in new volume in
fiscal 2003. The size of these wins, and the fact that they are "frequency" work
- - that is, monthly and repeat volume, will allow us to generate efficiencies and
to drive much better profitability from this unit. The new business will
positively impact Q2 and should permit us to continue our positive trends in
revenue growth and profitability throughout fiscal 2003.
We believe these efforts, and other similar efforts in our other markets, are
fundamentally changing our business - from the leading publication printer to a
leading content processor that also has strong printing and distribution
capabilities. This shift is further differentiating us from our competition and
has driven the sort of top line growth and margin expansion that we saw from
these divisions in this first quarter.
At the same time, we do have other divisions less differentiated and operating
in markets much less stable than the STM market. Our specialty publications
division, for example, is operating in a very tough market and is a little
behind the other divisions in terms of differentiation. As a result, they have
continued to see soft demand and pricing pressures. This hurt us in the 1st
quarter, offsetting in part the gains we achieved in the STM and specialty
packaging divisions. We still do not see improvement in this market and we will
have to look more aggressively at ways in which to reduce cost and rationalize
capacity. Particularly since we have the need for additional assets to support
the growth we are seeing in our other divisions, this more aggressive approach
in this market is required.
With that general overview of progress and trends from a strategic and
operational perspective, I will now turn the call over to Steve Hare for a more
detailed review of the financial performance of our first quarter.
Steve,
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Financial review of our first fiscal quarter
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Thank you Bruce and good morning. We have released our first quarter earnings
report this morning and plan to file a Form 8-K shortly which contains the
release and our remarks made on this call. Today, I would like to highlight our
financial results and discuss some trends in the business.
Consolidated Results - First Quarter Ended September 30,2002
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(millions) CY PY
-- --
Sales $105.4 $111.2 Down 5%
Sales - excluding the impact of changes in paper prices and the pass-through
costs of postage and freight were down 3%.
On a segment basis, we reported sales of the following for the first quarter:
(millions) CY PY
-- --
Publisher Services $93.2 $99.6 down 6%, or 4% ex paper price changes
(STM, Magazines, and the impact of postage and freight
Books & Directories)
Specialty Packaging $12.3 $11.7 up 5% or 8% ex paper price changes
and the impact of postage and freight
The ability to generate sales growth remains the biggest challenge that our
industry and Cadmus face today. Despite the first quarter decline in total
sales, we see some momentum especially in our STM content services and packaging
units. Across the Publisher Services segment, revenue declined primarily due to
the continued softness in advertising which has reduced page counts for many of
our magazine print titles, as well as competitive pricing pressures in this
market. We believe that industry overcapacity and reduced demand in a weak
economy will continue to constrain the pace of improvement of our overall
performance in this market. The current soft demand for traditional print
services continues to drive us to focus on development of new products and
differentiated services.
Despite tough market conditions, Cadmus achieved improved financial performance
this quarter compared to last year's first quarter. These comparisons are
adjusted for the adoption of the accounting principle on goodwill which I will
discuss later:
o Gross margin improved to 18.9% versus 16.9%
o Operating income margins improved to 6.8% versus 6.3%
o EBITDA margins improved to 11.4% versus 10.8%
o Pre-tax income increased by 43% to $3.2 million;
o SG&A increased by $1 million in the quarter, as we increased reserves
for bad debt and medical expense and also added sales and other
resources to pursue and support some of the content and larger
outsource opportunities Bruce mentioned;
o Earnings per share from continuing operations increased 10% to $0.22 per
share despite a higher effective tax rate this year;
o Total debt was reduced by $4.8 million during the quarter to a total of
$181.5 million, including $28.7 million of securitization-attributed debt.
Cash flow from operations was used to achieve our debt reduction target.
o Interest expense, including securitization costs, continued to trend lower
with $4.0 million of expense compared to $4.8 million in last year's first
quarter, a decline of 17%.
Again, we are pleased with those results in light of the difficult market
conditions each of our businesses faced.
One last point. Effective July 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets, which requires companies to discontinue
amortizing goodwill and to perform annual impairment tests of goodwill and other
intangible assets. Goodwill balances attributable to each of the Company's
reporting units were tested for impairment using discounted cash flow estimates
for each reporting unit. Based on these impairment tests, the Company recorded
an impairment charge of $56.3 million, completely related to Specialty
Publications, our special interest magazine unit within the Publisher Services
segment. This charge is reflected as a cumulative effect of a change in
accounting principle in the accompanying Condensed Consolidated Statements of
Income. Including this accounting change, the net loss for the quarter was $54.3
million, or $6.02 per share. We have already discussed the adoption of this new
accounting principle with our banks and rating agencies and we do not anticipate
any impact on financial flexibility. Restatement of prior year results is not
permitted so we have presented comparable prior year income statement amounts
excluding amortization expense in the Selected Highlights table.
Bruce, that is my report. I'll now turn the call back to you to discuss the
outlook for the balance of the year.
Thanks, Steve
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Before we close, let me just talk a bit about our outlook for fiscal 2003.
As I've discussed today, we are gaining momentum in both the STM and specialty
packaging businesses, our 2 most highly differentiated units. We have won new
business in each division and have a solid pipeline in both. In those two
divisions, we are optimistic about the future prospects for continued growth and
profit improvement. Unfortunately, we have not seen any improvement in demand on
pricing and volume levels in our special interest magazine business, as the
industry-wide page count reduction continues in response to the prolonged
downturn in advertising spending. As I indicated, we will continue to reduce
costs to meet the reduced demand.
Once again, we have not anticipated much help from the marketplace in our
assumption for the balance of the fiscal year in terms of either increased
demand or a lessening of competitive pricing pressures. As several of our
competitors have noted in their warnings or releases, we expect another tough
year in terms of market conditions. However, we believe that the positive
momentum in STM and specialty packaging, as well as our lower interest expense
from much lower debt levels, will permit us to achieve year over year
improvements in each quarter and for the full year. In short, we are not
lowering our forecast and believe that our business plan remains achievable.
And, as always, we intend to continue to reduce our debt levels, while also
investing prudently in our differentiation strategies.
In summary, it is still a tough market out there, but we are pleased with the
progress we are making. We have reduced our debt, we have made progress with our
content-oriented differentiation strategy, we have begun to see some top line
growth and better new business activity levels, and we have plans in place to
continue to reduce cost and rationalize capacity in areas where market
conditions have left us with excess capacity. There's much to do still . . . but
progress nonetheless.
Operator, 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 your
questions. As we have indicated, our focus is, and will remain, to grow the
business, to capitalize on the momentum we have generated in several of our
businesses, to expand our content management services, to further leverage our
cost efficient capabilities in India, and to align our assets and resources to
meet demand.
Again, thank you for your participation and questions.