Exhibit 99.1
MAIL-WELL CORPORATION
FIRST QUARTER 2003 EARNINGS
LEADER, MICHEL SALBAING
ID# 9834487
05/05/03
DATE OF TRANSCRIPTION: MAY 6, 2003
MAIL-WELL CORPORATION
ID# 9834487 PAGE 2
Operator: Good afternoon. My name is Cory [PHONETIC], and I
will be your conference facilitator. At this time
I would like to welcome everyone to the Mail-Well
first quarter 2003 earnings conference call. All
lines have been placed on mute to prevent any
background noise. After the speaker's remarks
there will be a question and answer period. If
you would like to ask a question during this
time, simply press star, then the number one on
your telephone keypad. If you would like to
withdraw your question, press star, and then the
number two.
Ladies and gentlemen, it is my pleasure to turn
the conference over to Mr. Paul Reilly, Chairman,
President, and CEO of Mail-Well Corporation. Mr.
Reilly?
Ladies and gentlemen, we apologize for the delay.
At this time I would like to present again for
you, Mr. Paul Reilly, Chairman, President, and
CEO of Mail-Well Corporation. Mr. Reilly?
Paul Reilly: Thank you, Cory. They say the second time is a
charm, so we'll see if we can keep the phone on
this time. But, welcome, ladies and gentlemen,
and thank you for joining us today. This
conference will follow our normal format. I will
discuss the key drivers and trends of our
business after Michel Salbaing, our CFO, has
given you the highlights of this quarter's
results. We will then open up the conference for
Q&A.
Our remarks will cover the following: first, the
summary financial results attached to the press
release including the results of operations of
the three segments, print, envelope, and printed
office products, as well as the outlook for the
full year; two, the state of our markets and how
we are doing on gaining market share in all three
segments; and lastly, the cautious optimism we
have concerning the growth opportunities of our
company.
Before I start I'd like to pass the call to
Michel for the required Safe Harbor comments and
his review of the financial reports attached to
the press release. Michel?
Michel Salbaing: Thank you, Paul, and again good morning, ladies
and gentlemen. During the course of this
conference today we will be making certain
forward-looking statements that are subject to
various
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uncertainties and risks that could affect our
outcome. These uncertainties and risks are set
out in more detail in the invitation you received
for this call as well as in our filings with the
SEC. We invite you to refer to them in
conjunction with this call. All forward-looking
statements that we make today are intended to
come within the SEC's Safe Harbor with respect to
such statements.
As you can see on the financial highlights
attached to the press release as well as in the
supplementary information to the press release,
Mail-Well's sales in the first quarter of 2003
were $427.3 million and EBITDA was 30.7 million.
As required by newly applicable Regulation G, I
refer you to page two of the press release and
page eight of the supplementary information for
the reconciliation of EBITDA to net income and
the explanation of why we use this non GAAP
financial measure.
These results are at the top end of the guidance
given during the last conference call in
February. At that time we had told you to expect
that Q1 2003 EBITDA would be better than that in
Q1 2002 by as much as 5%. The results announced
today represent a 5.5% increase on only slightly
better sales performance. This increase is
calculated, being as shown on page seven of the
supplementary information attached to the press
release, by comparing this year's first quarter
unadjusted EBITDA to last year's EBITDA adjusted
for the sale of the filing products division and
of the digital graphics assets and for $14.5
million of restructuring charge incurred in the
first quarter of 2002.
Although this is comparing unadjusted to adjusted
numbers, we believe this more accurately reflects
the improvement in the operations of Mail-Well
than saying that EBITDA has improved 86.3% over
the same period last year. This last comparison,
however, reflects how having completed both our
disposition program and our restructuring program
improves our operating results.
Net income for the quarter was $3.1 million or
$.06 per share on a fully diluted basis compared
to a loss of $133.4 million last year or $2.80
per share. Last year's results included a number
of negative items, a $7.7 million loss from the
write-off of deferred financing fees. You'll note
that this has been reclassified from an
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extraordinary item last year to an operating
income charge this year after FAS 145, which the
company adopted in Q1 of this year. A
restructuring charge of $14.5 million also
impacted last year's results in the same way a
loss of $8 million of disposal or on disposal of
discontinued operations compared to a $2.5
million gain this year and finally the $111.7
million goodwill impairment charge shown as a
change in accounting principle on adoption of FAS
142 last year.
As we told you during the last conference call,
our restructuring activities related to our 2001
plans are complete, the 2002 restructuring plans
are essentially complete, and expenses of
$685,000 were charged in Q1 of 2003. Minimal
charges are expected in Q2 of this year.
During the quarter we sold some smaller assets
left from our digital graphics operation in St.
Louis, Dallas, and New Hampshire. We applied $3.9
million of net proceeds to the bank debt. The now
completed disposition program enabled us to apply
approximately $139 million to debt reduction in
2002 and in the Q1 of 2003, therefore, over the
last five quarters.
During the quarter net cash used in operating
activities was $13.4 million compared to $7.7
million provided by operations in the same period
last year. This was primarily from an increase in
working capital. We expect this to reverse in the
coming quarters and still expect the operations
to provide approximately $75 million of cash for
the full year. In the quarter we spent $6.4
million in cap ex out of an expected $35 million
to $40 million for the full year.
We are in full compliance with all bank
covenants. The fixed charge coverage ratio for
the first quarter of 2003 was set at .90. Our
actual performance was 1.16, and there is over
$116 million of room on the net worth test.
For the second quarter of 2003, the fixed charge
ratio is set at .95 and 1.15 thereafter. Total
debt at March 31st was $777 million commensurate
with the increase in working capital in the
quarter. And at quarter end $116 million was
drawn on the bank line, and we had $102 million
of further availability. Our capital structure
with its absence of maturities until 2005
continue to afford us
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significant flexibility to run our business and
invest in its development and growth.
The debt markets seem to hold a positive view of
this as the 8 3/4% subnotes have been trading in
the 88 to 90 range and the 9 5/8% senior sub have
been trading around par. You may remember that
these same securities traded in the mid thirties
and mid sixties respectively earlier last fall.
Now an update by segments. In the first quarter
the print segment continues to improve its
performance in a very significant way. Starting
with the top line, print increased its sales to
$198 million from $191 million or a 3.8% increase
versus the first quarter of last year. Last
year's numbers had included $4 million of sales
from our New York City operations that we closed
in the fourth quarter of the year and Q1 this
year was helped by $9 million of extra sales to
American Express through our fulfillment center
in Minneapolis.
This is a better performance than any of our
publicly traded comparables that have reported to
date. Almost all have announced same store sales
dropped year over year. Through market share
gains and expanded relationships with our
customers, we continue the top line improvement
that we have seen since the end of Q2 of last
year. We have significantly improved our
operating margin, that is EBITDA to sales,
compared to the first quarter of last year.
Although we have more than doubled these margins,
we are still not satisfied with the margins
attained. These low EBITDA to sales margins when
compared to our historical levels are a
reflection of the state of the markets today
characterized by over capacity, which of course
drives prices down. We can significantly improve
on the 4.3% achieved in the first quarter of
2003, but we will need some help from the markets
to get where we want to be.
Again, the print segment is now totally focused
on increasing profitable sales. Having caught up
on the cost curve to our current sales levels, we
are applying the operational leverage that our
cost structure has brought to improving
profitability as we get extra volumes and also
proactively dealing with negative trends in the
market while still increasing profitability.
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Our envelope segment continues to be the
strongest in the industry. The EBITDA margins
were 12.8% this quarter, again showing a year
over year improvement compared to the 12.6%
achieved in Q1 of 2002 when taking out the
restructuring charges of last year.
Sales at $179 million were only 1.9% lower than
in the same quarter last year when considering
that we disposed of the filing assets that were
part of the envelope segment in the first quarter
of last year. Given the impact that the
expectation of war and then the actual war has
had on direct mail, we consider that these are
very good results. This is further illustrated by
comparison to statistics, that EMA, the Envelope
Manufacturers Association, prepared. They have
seen an 8% drop in shipped volumes just in
February and a 10.6% reduction in new orders as
mailers went into quote, unquote wait mode.
During that time our shipments were flat, a
reflection of better market positioning with our
customers when compared to our competition.
In modeling 2003 we had set expectations such
that envelope segment sales would be very similar
to those achieved in 2002. We also assumed in the
model that we could pass paper price increases on
together with other increased costs and supplies
whose costs have gone up because of increases in
petroleum costs. This is turning out not to be
the case because of intense price competition in
our market. To the extent we cannot rectify the
situation, this will have a continuing negative
impact on envelopes.
To maintain our EBITDA expectations for the
segment, we are continuing close control of all
operating costs. Productivity was much improved
in Q1 compared to the prior year. Labor as a
percentage of sales was reduced 100 basis points.
This was one of the expected outcomes of the
restructuring of our envelope segments, and it is
paying off well for us.
In the first quarter of this year, the results of
our printed office product segments once again
came in as expected. Although margins decreased
in the quarter year over year, this was expected.
We had to contend with much higher benefits costs
and $1.5 million of lower sales. This anticipated
sales decline was due primarily to lower sales of
business forms, especially continuous forms and
mailers. Sales of the label products were
comparable to the first quarter of 2002.
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I will now turn the call back to Paul Reilly.
Paul Reilly: Thank you, Michel. The quickest and best way to
summarize the first quarter is that we are
delivering on what we said we would: that's
market share gains, efficiency gains, and profits
as per guidance. To get more insight into what is
coming up next quarter and longer term, let me go
through some more details.
First, print. Print improvement is continuing. In
Q1, as expected, we achieved a better than 160%
increase in EBITDA year over year. We also expect
Q2 will show significant improvement over the
previous year. We expect Q2 EBITDA to go from
break even to a level similar to that achieved in
Q1. Operating income will go from a loss to
income while sales are expected to increase some
5% year over year. Of note, we expect this will
be achieved in a quarter traditionally very soft
for us.
Driving these improvements is our developing
relationship with the American Express Company
but also a growing number of customer wins. We
are increasing the number of customers where we
negotiate contractual relationships. We expect
that over time this will reduce our present
almost total dependence on transactional work.
We have always said that the commercial print
market is a huge market. This is why we have
strategically chosen to be in those markets. Our
35 plants and the services and capabilities they
bring to our customers allow us to address
essentially any part of the general commercial
print market. This is why we expect to grow our
sales even in a down market.
Also, working as one company as opposed to 35
independent operating units, there is no print
customer for which we cannot fulfill all of its
commercial printing needs either locally or
through the use of our national web capacity
strategically located throughout the U.S.
Now our envelopes segment. In our envelopes
segment we have seen good performance in the
first quarter. I say good performance because one
has to realize that direct mail orders
effectively stopped in February in anticipation
of the war. To repeat some of
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the Envelope Manufacturers Association statistics
(EMA), shipments have declined 8% in February and
new orders some 10% in anticipation of the war.
As noted by EMA, this also had occurred prior to
the previous Gulf war, and mailing volumes
returned after the war's end. Envelope prices
also increased sharply during that period.
Some very good news has come from the United
States postal service over the past few weeks.
Congress has passed legislation, which the
President signed into law, on funding pension
costs for the United States postal service. The
legislation ensures that there will be no postal
increases into at least 2006. This means
stability on a significant cost component of
direct mail.
The other piece of good news is that the efforts
by the United States Postal Service to further
reduce the cost of first class mailers used in
direct mail by discounting postal costs to these
large mailers. This is evidenced by discussions
between the U.S. Postal Service that have been
held with Capital One. As the EMA stated in a
recent newsletter, and I quote, the factors are
now in place for a much improved late 2003 as
rate stability and price levels return to normal,
close quote.
In printed office products, we again had a very
predictable quarter, although their markets are
as tough as ever. The small and medium size
businesses served by the value added distributors
which are printed office products customers are
also very cost conscious and are cutting their
expenses whenever they can.
The erosion in traditional document sales is
continuing while the sales of specialty documents
and labels are holding firm. Profitability is
relatively stable as a result of the
rationalization efforts of last year and good
ongoing cost controls.
Total company sales which are facilitated by
printed office products and channels is the
strategic glue that we have between our three
segments. We expect that through a series of
marketing and sales initiatives, we will be
looking at some 10 million of extra sales which
would be equivalent to a 5% organic growth rate
for printed office products. We have achieved
approximately one-third of that growth at this
time based on the commitments from customers
currently in house. Our successes in total
company
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selling have been instrumental in what we believe
is our third quarter in a row in capturing market
share throughout our company.
Mobilization. Upon completion of our
restructuring process, we now progress to
mobilization. During our call in February we
discussed this initiative to involve our 10,000
employees in the success of our company. Three
hundred managers and sales executives have
collectively designed a focus document which
identifies seven key success factors we will
concentrate on as a company. We are linking all
of our employees to measurements attached to
those key success factors.
We have also completed a company-wide employee
survey, and we are now working the steps to
address our employee concerns that they say
inhibit customer service and efficiencies. We are
now about to launch a customer survey to make
sure that we are addressing the right things that
will satisfy and retain our customers.
Mobilization provides direction, key action
areas, and measurements of success for all
employees. This process will drive a
transformation of Mail-Well that will
institutionalize a continuing improvement culture
of customer satisfaction, employee engagement,
financial and management performance.
Now I'll talk about guidance. For quarter 2 I
referred to the improvement we expect from print;
the dampening efforts of the Iraq war on direct
mail and, therefore, envelope volumes; and I have
spoken of the stability and predictability of
printed office products. This adds up to a second
quarter that we expect will be significantly
better than Q2 of last year. I won't give you a
specific range, but I can tell you that we remain
comfortable with the forecasted 2003 EBITDA in
the $130 million to $140 million range. Another
caveat I will state is that to achieve the higher
end of our 2003 guidance, we will need something
of a direct mail recovery reported by the EMA
after the first Gulf War.
So in summary, A, print continues to improve, and
we are confident that in Q2 and full year
performance will exhibit growth in the top line
and, very importantly, a much better bottom line.
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B, through it all, there are some very
encouraging signs for the envelope segment. Our
share of transactional mail is increasing, postal
rates are going to be stable into 2006, and the
United States Postal Service is taking steps to
reduce the costs of mailing for large mailers.
With the war at a quick end, it is reasonable to
expect a firm up of direct mail volumes.
C, our concentration on new business initiatives,
where our size and scope of products and services
gives us a competitive advantage, is starting to
show traction. These efforts are being supported
by mobilization where all 10,000 employees of
Mail-Well are uniting to satisfy our customers,
drive efficiencies, and deliver profits.
This concludes my remarks. I will now pass the
phone call back to Cory who will instruct you how
to ask questions. Cory?
Operator: Thank you, sir. At this time I would like to
remind everyone, in order to ask a question,
please press star, then the number one on your
telephone keypad. Again, if you would like to ask
a question or make a comment, press star, one.
We'll pause for just a moment to compile the Q&A
roster. And we'll take our first question from
Bill Hoffman of UBS Warburg.
Bill Hoffman: Yeah. Good afternoon.
Paul Reilly: Hi, Bill.
Bill Hoffman: Question on the auto business in the commercial
print side and just what kind of visibility you
have looking into the I guess more of the third
quarter than the second and then also just more
specifically the direct mail segment. You talked
about an expected or hoped for recovery in
advertising. What are you actually hearing from
advertising firms at this point in time?
Paul Reilly: Okay. Let me take the first question. Automobile
industry, it's still pretty early. We do know a
few things. We're looking at a season that may be
a little bit earlier this year. Some of the
orders are coming in earlier. We don't
necessarily see it as extra orders but, in fact,
earlier.
We also have some new products in this area which
we think point
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towards another successful car season. For one of
our companies, Armstrong White in Detroit, we
have a technology that allows us to take cad cam
drawings from the manufacturers, and we convert
them directly into printable material without the
use of photography. One of our customers alone
will be saving $300,000 just in the cost of
moving their automobiles around the country for
their photography shoots. So we're a bit bullish
on a good solid season for the car brochure.
On the direct mail, it's obviously too early to
tell, the war having just ended. But I think as I
said in the closing remarks, there is reason, I
mean reasonable belief that the markets will now
pick up. They did after the last Gulf war. There
is a mantra within the direct mail industry that
they do not mail into a crisis, and the industry
very much took that mantra to heart this year. So
we're optimistic about both of them coming in
very strong.
Bill Hoffman: My next question is on the cost side. With the
recovery in markets, we're seeing health costs go
up, which typically feeds into white papers. And
I just want to get a sense from you all what your
expectations are there on the cost side.
Paul Reilly: I didn't --
Michel Salbaing: Health costs, health and white paper.
Paul Reilly: -- you know, interesting that in the uncoated
free sheet market we did get an increase last
October. The numbers that we currently see, about
50% of those costs were able to be passed on.
That is a little bit less than usual because of
the competitive nature and the excess capacity
that's in the market.
Our view of that increase as well as further ones
is that -- we were very surprised at the last
one. We'll see how long it holds in terms of it
being passed on to us. But operational rates in
the paper markets are at very, very low levels,
well below the 93% capacity utilization where we
start to see price increases. So our forecast for
prices generally are for stable to down prices.
Bill Hoffman: Okay. And then just last question --
Paul Reilly: But I think the decrease in cost of petroleum is
going to help that as well.
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Bill Hoffman: -- right. Just last question, as you start to
generate some free cash this year, I know you've
said in the past that historically, you know, the
focus, at least from out of the block, is for
debt reduction and paying down the revolver. You
know, at what point in time do you start to think
about, you know, talking acquisition of some
components into the business going forward for
growth?
Paul Reilly: We at this moment do not see us actively pursuing
strategic acquisitions. I would say if one came
up that fit the criteria that we have publicly
stated, and I'll state them again, we would be
open. But our view is probably another six months
to a year before we would actively pursue those.
The criteria, the strategic criteria that we
would see, would be looking for, would be on the
envelope side, acquisitions that would further
improve our low cost position. On the print side
it would target the markets where we'd like to
increase our local market share. And broadly we
would be seeking acquisitions that would expand
our product and service offering and add to what
we believe is a nice traction in total company
selling, but offering more services to our total
company selling. The partnership we have with
American Express is a great, great example of how
that can work to improve market share.
Bill Hoffman: Great. Thank you.
Paul Reilly: Thank you.
Operator: Your next question is from Andy Vanhouten at
Deutsche Bank.
Andy Vanhouten: Great. Thank you. I wanted to focus for a moment
on the issue of working capital. It was a good
quarter in that, you know, EBITDA exceeded your
cash interest and capital expenditures for the
quarter. But there wasn't, you know, any free
cash flow produced because of the swing in
working capital. Is this something that was
surprising? Obviously you have seasonal builds in
working capital. Is the swing in working capital
what you thought, and how should we view that,
you know, for the upcoming quarter?
Paul Reilly: It was not a surprise from the point of view that
to those, for
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example, insiders like our banks, that was very
much in the card. Where we did a little bit less
than we thought we would do is keeping our
payables in sync with our increase in the
receivables and inventory. The increase in
receivables and inventory is seasonably normal.
You would expect that. The end of the first
quarter is a lot of activity, and April is not a
bad month. Where we did not do as good a job as
in the past is on controlling, you know, the
equilibrium of payables. We fully expect that's
going to reverse out, and we still expect that
the cash provided by operations will be in the
$75 million level over the year. And you should
have fairly good production in the third and
fourth quarters. That is normal.
Andy Vanhouten: Great. Thank you very much.
Paul Reilly: Okay. You're welcome, Andy.
Operator: Your next question is from Todd Morgan of CIBC
World Markets.
Todd Morgan: Thank you. Good afternoon.
Paul Reilly: Hi, Todd.
Todd Morgan: Hi. One just clarification if I could. You talked
about the sort of cross selling activities and I
guess 10 million of extra sales booked to date.
That sounds like some pretty good progress. I was
just trying to understand if those are revenues
that you, you know, printed and booked, or is
that just contracts for revenues that will occur
throughout some time in the future.
Paul Reilly: Let me clarify. Maybe I wasn't clear. The 10
million is the objective for this year. And to
date, booked in house, we have approximately --
we're at a run rate of a third of that. That's
where we are today.
Todd Morgan: And so that third, that three or four million is
revenues that you have billed, or those are the
revenues that you --
Paul Reilly: It's a combination of billed and booked at this
point.
Todd Morgan: -- okay. Okay. And I guess, secondly, one of the
things that you had talked about, or at least
that I heard through your presentation,
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is just the over capacity in the industry and the
pricing questions that really creates. And you
talked a little bit about sort of demand picking
up a little bit in some of the segments, but is
that -- when and is that really enough to really
make any difference on the pricing front? And
could you perhaps even talk a little bit about
how the pricing cycle needs to evolve before you
can really get back to where you want to be?
Paul Reilly: We believe the indicator or the trigger that we
need is a more robust growth market. Our business
tends to be, and most all of our businesses is
transactional, and it's the how do the people
that are making the price decisions feel. If the
business is coming in and their plants are busy,
the industry tends to be less price competitive.
Historically, we now have three years. It looks
like we're at the end, we're not 100% sure, of
decreasing markets. We've gone into a three year
period of decrease in size of markets and
decrease in prices. Never before has that ever
occurred.
With the turn, just some robustness we would see
the improvement in there. From our end, and this
is the way we deal with it, we're not counting on
the prices are going to go up. In our mind, how
efficient we are our ability of our employees to
run the machines more efficiently, stabilization
of the pricing in a market will mean a lot to
future profits.
Todd Morgan: But if we were to come back a year from now, do
you think we'd be looking at higher prices or a
similar type environment?
Paul Reilly: I'd like to think it was higher prices, but I
would -- I'd just say I'd like to think, but I'd
be very, very happy if we had stable prices.
Todd Morgan: Is there anything that we in the investing
community could focus on to try and, you know,
ascertain any turn in the pricing environment,
anything that you look at in particular that
would be helpful for us as well?
Paul Reilly: I'd go into our two markets. About 50% of our
business is driven by advertising markets. So as
we see the advertising indexes pick up, that
would be an indicator. In the direct mail market
it's difficult to see it, but postal volumes,
standard class mail, if you
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saw those going up, that would be indicated that
the direct mail markets are strengthening. But
they would both be forward indicators.
Todd Morgan: Okay. Well, good. Thank you very much for your
help.
Paul Reilly: You're quite welcome.
Operator: The next question is from Craig Hoagland of
Anderson Hoagland & Company.
Craig Hoagland: Hi, guys.
Paul Reilly: Hey, Craig.
Craig Hoagland: Could you tell us a little bit about the
difference between the total company selling
program and the national accounts program of a
couple of years ago?
Paul Reilly: The biggest difference between total company
selling and national accounts is a national
account was usually within a segment and
differentiation by multiple locations. So in our
print group we would go to markets saying, we can
provide all you would need throughout the country
to our 35 locations.
Total company selling is another step above that,
and it's adding to our geographical footprint
differentiation by selling multiple product
lines. So we would be going to customers and
selling printing, envelopes, forms, and
documents. And we are getting a -- we're actually
receiving today more traction in that area than
we did with national accounts.
We're very, very pleased at the interest we're
getting from customers. And it could be -- I
mean, one of the drivers we see is that companies
-- our customers are looking to reduce their
costs, reduce the number of vendors. And
Mail-Well is uniquely satisfied to provide
printing, envelopes, documents, and labels
because we're basically manufacturing all four of
those product lines and it's been going quite
well for us.
Craig Hoagland: Okay. And does the forms business kind of the
linchpin of that? Is that the foot in the door --
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Paul Reilly: No. Actually, the idea of printed office products
is that's a company that sells to resellers. And
our channel advantages go two ways. First of all,
they know how to sell the resellers. So in terms
of them providing documents and labels, they know
how to provide that to printing companies and
envelope companies. They do that very well.
On the other side, through their network of value
added distributors, 20,000 is the size of the
customer base, we are now bringing envelopes and
printing to those channels as well. So the
combination of total company selling is going in
both directions.
Craig Hoagland: -- okay. Turning to the second quarter, if memory
serves, that's a fairly low visibility quarter in
that you don't have annual reports or car
brochures. I was just wondering if that's correct
and kind of what your level of confidence is or
what drives your confidence that that quarter
will be so much better than last?
Paul Reilly: Craig, I'm going to repeat your question because
you're coming in very low on our machine. I want
to make sure that everybody heard your question.
Craig Hoagland: Okay.
Paul Reilly: Essentially you're saying that 2Q -- the question
is, Q2 is normally the one where you have less
visibility. How are you still confident that
you're going to do so well? You're absolutely
right that there is, within all of our
businesses, Q2 tends to be the weakest quarter.
Our confidence comes from the level of sales
activity that we now see, you know, which we're
only seeing a few weeks, but we get all of our
confidence from our cost structure. Our cost
structure is so much better, particularly on the
print side going into Q2, and that's why we're so
confident about a significant improvement in Q2.
Craig Hoagland: Okay. And that's my last question is are the
structural changes in cost basically in place
today, or is there anything more to come?
Paul Reilly: There's always more to come, but the improvements
we have are where we said we would be when we
announced our program 18 months ago, and we're
going to see those -- those benefits are going to
come through loud and clear in Q2.
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Craig Hoagland: Okay. So we will see another step down in Q2
versus Q1.
Paul Reilly: When you compare it -- no, actually, I'm talking
year to year you'll see the big difference.
Craig Hoagland: Year to year. Okay.
Paul Reilly: This is always more -- we're always driving more.
You can see that we even had some restructuring
costs. We did some more restructuring in the
print group in Q2, in Q1 I'm sorry, and we'll see
those benefits in Q2. So there will be some
improvements Q2 versus Q1.
Craig Hoagland: Okay. Appreciate the work, gentlemen.
Paul Reilly: Thank you, Craig.
Operator: The next question is from Jeff Kobylarz at
Salomon Smith Brothers Asset Management.
Jeff Kobylarz: Question about the envelope business. Can you say
what the general industry price change was in the
first quarter, price per thousand?
Paul Reilly: I have a number in my head but not in front of
me, it's approximately a 4% decrease.
Jeff Kobylarz: Okay. And I may have missed this. Did you say
that there was some type of demand after the
first quarter slowdown in envelopes that you're
now seeing?
Paul Reilly: No. We're going back to the first Gulf War in the
early nineties and looking at that trend. And up
to now it's been very consistent. We saw the
business slowdown in anticipation. During the war
it slowed down even more. And then within a month
or so afterwards we started to see it pick up.
And in that particular case we saw volume pickup
and pricing pickup.
Jeff Kobylarz: Can you summarize just what happened in '91 after
that Gulf War ended in the next 12 months in the
envelope business?
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Paul Reilly: We don't have those numbers in front of us, but
it was a fairly dramatic increase. A significant
improvement over the mail to direct mail being
done during the war and before the war.
Jeff Kobylarz: Right. All right. And when you say the second
quarter will be up versus prior year, will the
envelope business be up also?
Paul Reilly: Relatively flat.
Jeff Kobylarz: Okay. Flat versus last year or --
Paul Reilly: Versus quarter to quarter. Traditionally you do
see on the low volumes fall a little bit, and we
expect that same pattern regardless this time as
well.
Jeff Kobylarz: -- got you. All right. Thank you.
Paul Reilly: You're quite welcome.
Operator: Your next question is from Salomon Akyol with
Stifel Nicholas.
Salomon Akyol: Thank you. Couple of quick questions. First of
all, I think, as I recall from Q4, you said that
insurance and health care costs were on the rise
and the outlook was kind of cloudy. Have you
gotten better clarification on that?
Paul Reilly: Well, we are -- in terms of where we think our
costs are going, they were -- in the medical
alone we think they're going up $10 million, of
which $7.5 to $8 million of that will be born by
the company. And our company drew about roughly a
25% split between employee contributions and
company contributions. In that particular area
you're looking at about $7.5 million. And we're
tracking towards that, maybe slightly favorable,
but nothing that would say that the $7.5 million
isn't the right accruals to be making.
Salomon Akyol: Okay.
Paul Reilly: It's roughly 2 million a quarter is what we're
eating every quarter on that alone.
Salomon Akyol: Got you. And then the second question goes back
to print margins.
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Can you tell me again I guess what your goal is
in terms of where you want to go there and how
did it get generated? You know, you're less than
1% now, and we're going up, but how are we
getting there specifically?
Paul Reilly: You're looking at operating income.
Salomon Akyol: Yeah.
Paul Reilly: So, you know, we're looking at an EBITDA of 9 to
10, so, you know, 6 to 8, in that range, would be
where an operating income. How do we get there?
There's no one thing that gets us there. We still
have some troubled plants which are turning
around, but there's room for dramatic
improvement, so there's still the top down
restructuring, making sure that the plants are
sized to the specific current sales level.
We have market share gains, particularly through
total company selling. We think that will add
dramatically over the next several years. And the
rest is going to come from our mobilization
program, and it's doing 100 things 1% better with
providing the tools for our employees to run the
machines more quickly, to do things smartly, to
reduce inventories, that's how we will get there.
You know, many, many -- you know, not necessarily
in the printing industry because the printing
industry hasn't been a real adopter of quality
and Six Sigma technology. But when those things
are brought to our industry, we think there will
be dramatic improvements in the future. We expect
that to be the case.
Salomon Akyol: Okay. Got you. And just clarification if I've
kind of heard and interpreted correctly, going
into Q2 you'd expect to be up from Q1 even on
lower volumes or flat volumes?
Paul Reilly: No. I think we said we're up approximately the
same level in terms of profit. We'll be slightly
lower sales.
Salomon Akyol: Okay. Thank you so much.
Paul Reilly: More as our cost structure gets more mature and
we get those benefits. And that will be a
significant improvement over the comparable
period last year.
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Salomon Akyol: Got you. Thanks.
Paul Reilly: Okay.
Operator: I would like to give everyone an additional
moment at this time to ask a question by pressing
star and the number one on your telephone keypad.
There are no further questions at this time.
Gentlemen, are there any closing remarks?
Paul Reilly: Cory, this is Paul Reilly again. Thank you all.
We do want to again state that we are delivering
on the promises we made to you: market share
increases, more efficiency, delivering the
profits, and we're doing that in a market much
more severe than we anticipated than when we gave
you those numbers. So as this market turns, and
it will, there are no -- there doesn't seem to be
any clouds out there. We should be in a positive
economic environment from this point on, and
we'll see that going very well for the future of
the company.
Thank you all. We appreciate your support. That
will be it.
Operator: Ladies and gentlemen, this concludes today's
Mail-Well first quarter 2003 earnings conference
call. You may now disconnect.
[END OF CALL]