Exhibit 99.2
Prepared Remarks from Conference Call
Introduction
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Good morning. This is Steve Gillispie, chairman and chief executive officer. I
want to thank you for joining us this morning to review our results for the
first quarter of fiscal 1998. Joining me today are Bruce Thomas, senior vice
president and chief financial officer, and Dave Bosher, vice president and
treasurer. We will begin this call with the customary summary by Dave Bosher,
after which Bruce, Dave and I will be pleased to answer any questions that you
may have.
Dave...
Thanks, Steve. Good morning everyone.
First Quarter Results
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We are pleased to report this morning that Cadmus earned record first quarter
net income of $2.0 million, or $.25 per share. This represented an increase of
20% over net income of $1.7 million, or $.21 per share, earned in the same
period last year. Last year's first quarter EPS included a $0.3 million or $.02
per share gain resulting from the restructuring of our publishing business. So,
"operating" net income was $.25 per share versus $.19 for the first quarter of
last year.
Sales in the first quarter declined marginally, from $93.9 to $92.4 million.
This decline was solely the result of the sale of our consumer publishing
business and the closing of several operations in connection with our
restructuring actions in fiscal 1997. Adjusting for these divestitures and
closings, sales actually rose 5%. Taking it further, if you adjusted for
discontinued businesses and lower paper prices, sales advanced nearly 8%.
Gross margins declined to 22.2% from 22.6% last year. However, SG&A expenses
improved to 16.1% of sales in this year's first quarter, down from 16.9% last
year. As a result, operating income rose 6% to $5.7 million and our operating
margin improved to 6.2% of sales, up from 5.7% last year. Interest expense
declined to $1.9 million this quarter from just over $2.0 million last year due
to lower debt levels resulting from our strong cash flow performance over the
last year.
We experienced good top-line growth and margin improvement in several of our key
businesses. In addition, first quarter results were positively influenced by the
impact of restructuring actions that began in the fourth quarter of fiscal 1997.
So, in short, the base business improved year over-year and we achieved the
restructuring savings we anticipated.
I'd like now to spend just a few minutes describing the operating performance in
several of our key businesses.
Our Professional Communications sector had another great quarter. As you know,
this group is comprised of our research journal services and magazine product
lines. While this group's total sales rose just 1%, those results are a bit
misleading. Journal sales actually rose 5%, while magazine sales declined 14%,
as we continued to right-size the magazine product line. Lower paper sales also
depressed reported sales. In fact, adjusting for the estimated impact of lower
paper prices, journal sales actually rose 8%.
Operating margins in this group continued to improve, rising over 150 basis
points in the first quarter as compared to last year. This increase was
attributable to restructuring savings, product mix improvements, and cost and
efficiency gains at each of our manufacturing facilities. In addition, the
successful downsizing and refocusing of our magazine product line continued to
improve margins in this product line.
In our Marketing Communications sector, first quarter operating results also
showed improvement over last year. We enjoyed excellent internal growth in
financial communications, in direct marketing, in custom publishing, and in our
catalog business. At the same time, we had somewhat disappointing results in our
point-of-purchase and packaging and promotional businesses.
I will now discuss each of these operations in more detail. For the quarter,
financial communications sales increased 46% due to continued growth in mutual
fund services and full service banking relationships, combined with robust
capital markets activity. Our direct marketing operations continued their
improvement trend with an increase in agency fees of over 38%. This increase is
related to significant new-account development over the last few quarters. And,
a significant profit turn-around was accomplished in our custom publishing
operation, a result of good top-line growth and restructuring benefits. Finally,
catalog design and photography agency fees grew 21% in the quarter, driven by
increased billings to existing clients. At the same time, our packaging and
promotional group experienced a 2% decline in sales due to lower media
duplication revenues and to the expected disruption related to its relocation to
our new 180,000 square-foot facility in Charlotte. While that move went as well
as we could have expected, we did experience a short-term disruption in
operations and a profit margin squeeze. Finally, our point-of-purchase business
continued to post disappointing results, despite a significantly lower cost
structure resulting from the restructuring. Revenues here declined 28% due to
business lost in the first half of last year and to lower sales to fast-food
clients.
Now let's take a look at cash flow and our capital position at September 30.
Free cash flow was a ($1.1) million in the first quarter. The deficit was
attributable to cash outlays against the restructuring program, which totaled
approximately $1.8 million. Working capital demands rose slightly due to a
seasonal increase in inventory levels, while CAPEX totaled approximately $4.1
million. We ended the first quarter with total debt of $97.0 million, which
represented a slight increase of $0.9 million from June 30.
Our debt-to-capital ratio improved marginally to 48.9% at September 30, compared
to 49.0% at June 30, 1997.
Restructuring Update
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Before I go to our fiscal 1998 outlook, let me give you a brief update on our
restructuring. I mentioned earlier that in the first quarter we obtained the
restructuring savings that we had anticipated. We are increasingly confident of
our ability to realize annual cost savings of at least $.50 per share. We
continued to make good progress in the quarter toward executing the remaining
restructuring actions. All actions scheduled for completion by September 30 were
completed. The remaining actions, primarily reductions in work force, are all on
schedule.
Fiscal 1998 Outlook
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Finally, let me update you on our view of FY98. Due to the positive operating
trends at several of our key businesses and the successful execution of our
restructuring actions to-date, we are increasingly optimistic that Cadmus will
continue to achieve improved financial performance throughout the remainder of
fiscal 1998. We remain comfortable with earnings estimates of up to $1.40 per
share. Nearer term, we believe that published estimates for our second quarter
in the range of $.33 to $.35 per share are reasonable.
Conclusion
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Before I conclude my remarks, please note that certain of my comments represent
"forward looking statements" and are subject to certain risks and uncertainties.
Those risks and uncertainties are set forth in our press release and included in
a Form 8-K which will be filed today with the SEC to which you should refer for
additional details.
I thank you again for joining us for this morning's call and for your continued
interest and support in Cadmus. I would now like to open up the session for any
questions you may have for Steve, Bruce or me.