By Jan Stoddard April 29, 2003 -- Cadmus Communications Corporation (NASDAQ/NM: CDMS) Richmond, VA. announced net sales of $113.4 million for the third quarter of its fiscal year 2003, an increase of 1% from $112.7 million in last year's third quarter. Operating income was $7.5 million (6.6% of net sales). Both income from continuing operations and net income were $2.2 million, or $0.24 per share for the third quarter of fiscal 2003, compared with operating income of $7.4 million (6.5% of net sales), income from continuing operations of $1.5 million, and net income of $0.3 million, or $0.04 per share, in the third quarter of fiscal 2002. Cadmus Communications, headquartered in Richmond VA, with operations spanning five states and 3000 employees, is a $450 million leader in servicing the content management, production and distribution needs for scientific, technical, and medical publishers. Cadmus is the 5th largest periodical printer in the U.S. Publisher Services Group sales overall were $98.0 million, flat with $98.2 million last year, as growth in STM (Scientific, Technical, and Medical) services from existing accounts and from new business wins offset continued softness in advertising and pricing pressures in the special interest magazine market. Specialty Packaging segment sales were $15.5 million, an increase of 7% from $14.5 million, as this division continued to generate new business wins; primarily in the healthcare market. Mr. Bruce V. Thomas, President and Chief Executive Officer, opened the web cast announcing Q3 results, reviewing progress and a subsequent question-and-answer session. Call Topics: * Chairman Comments * Financial Summary * Closing Comments * Q&A Chairman Comments: Mr. Thomas began by pointing to recent announcements by competitors of revised earnings and revenues for this most recent financial quarter. These companies are stressing the extremely difficult market and economic conditions, especially in the more commoditized section of the commercial print market. Mr. Thomas stated that the problems are not from reaching efficiencies in manufacturing operations, but due to customers assigning less and less value to traditional print services. It is these services (i.e. from traditional print), which is being commoditized. Given the market conditions, Mr. Thomas noted that he was pleased with the organic growth reached by Cadmus in the last quarter, especially without any additional revenue benefits from acquisitions. Over the past three years, Cadmus has worked hard to incorporate a business strategy based on differentiation. There are numerous examples of why Cadmus is no longer just a print-and-bind company. The achievements of the past quarter are a direct result of this strategy and the chief reason why Cadmus can continue to grow its market share. The differentiation strategy includes three components: 1. Developing expertise acknowledged by buyers. (A Cadmus associate has recently been elected as association officer for The Society for Scholarly Publishers, a trade association for market publishers.) 2. Develop distinct technology differentiation such as Cadmus Knowledge Product Works. 3. Deliver complete outsourced solutions. Cadmus' most differentiated divisions include the content-oriented STM services and specialty packaging divisions. Mr. Thomas cited examples of differentiation strategy success including: * For a College-based association, Cadmus manages all reprints by including soliciting reprint content, order fulfillment, payment collections and reimbursement (less commission) back to the association. Additionally, Cadmus is their sole source supplier for content management and print distribution. * For another association, Cadmus manages member requests for copies of previously published materials. This program includes direct member fulfillment, inventory management, turnkey and storage. Cadmus also provides content management and print for this association for other products. * Specialty packaging - men's & women's materials move off-shore to reduce lead times and costs of packaging materials - Cadmus Global Packaging Solutions - network of in-country providers including proprietary inventory management solution. Mr. Thomas noted that that there are early signs of differentiation in our specialty magazine business as well. Financial Summary Mr. Paul Suijk, Chief Financial Officer, reviewed financial highlights for Q3 including: * Net sales increased 1% compared to last year's third quarter as continued growth in STM services offset continued softness in the special interest magazine market; * Operating income, adjusted as described below, increased to $8.6 million compared to $8.5 million last year and $8.3 million in the second quarter; * Operating margins were 7.6% of net sales, flat with last year, but increased from 7.3% in the second quarter; * EBITDA margin declined to 11.7% from 12.3% last year but increased compared to 11.5% in the second quarter; * Total debt (including securitization) decreased by $9.0 million during the quarter, due to cash flow from operations, progress on new working capital initiatives and the sale of an idle facility. Mr. Suijk pointed to the following reasons for these improved results: 1. Better mix: growth in services other than print 2. Offshore workflows allow us to be more competitive. 3. Specialty packaging offers an improvement in product mix and an increase in volume. Closing Comments Mr. Thomas closed by stating that the future outlook is for comparative results. The STM & Specialty Packaging Groups are seen as clear differentiators with sustainable growth. Cadmus is focused on delivering a strong fourth quarter 2003 and year-over-year improvements. Q & A Session: 1. When asked about why there was a higher SG&A expenses, Mr. Thomas cited increased bad debt reserves due to being cautious with customers and an additional write-off on fixed assets. 2. When questioned why the stock price has not responded to the favorable results, Mr. Thomas replied that this quarter is important especially when examining competitor's results. They have been able to dramatically de-leverage the company (debt reduction) and combined with its differentiation strategy, the company is much better positioned. This should translate into higher share value. 3. The Specialty Interest magazine business (30% of Cadmus total business) remains soft. However, Mr. Thomas noted that they are beginning to see some signs of advertising rebound and early signs of page growth; although this was not realized in third quarter 2003. (This increase would reverse a consistent trend of a 15% decline in page counts and revenue over last 18 months.) If increases continue, it would be a real positive, as since Cadmus is down two magazines already much more efficiently than in past. The contribution from additional pages would be significant.