By Jan Stoddard of Raine Consulting January 28, 2003 -- Editor's Note: Cadmus Communications Corporation (NASDAQ/NM: CDMS), headquartered in Richmond VA, with operations in five states and 3400 employees, provides content management, production and distribution services for scientific, technical, and medical publishers. Cadmus is the 5th largest periodical printer in the U.S. The newly consolidated Publisher Services Group, representing 90% of the company’s revenues, consists of the Company's scientific, technical and medical ("STM") services, special interest magazines and professional books and directories businesses. The Specialty Packaging segment, representing 11% of company revenues, focuses on specialized packaging needs and products. On January 23, Cadmus Communications reported net sales of $113.7 million, an operating loss of $0.6 million, and a net loss of $3.2 million, or $0.35 per share, for the second quarter of its fiscal year 2003. Excluding the impact of restructuring and other charges, the Company reported income of $2.7 million, or $0.30 per share compared to $0.28 last year and $0.22 in the first quarter. Conference Call Highlights: Conducting the conference call to discuss earnings and to offer forward-looking statements were President and CEO, Bruce V. Thomas, and Stephen Hare, Executive Vice President and CFO. Thomas emphasized that the marketing focus on STM services has been working, as demonstrated by sequential year-over-year improvement (8% revenue increase) with all divisions, including magazines, showing sequential growth. Cadmus initiated a multi-year plan beginning with a 2001 refocusing strategy, then expanding in 2002 with the development of in-depth market expertise and proprietary products. In 2003, Cadmus plans to leverage market expertise and its proprietary products to redefine customer-vendor relationships. Cadmus has positioned itself as a supplier that can provide a total strategic outsourcing solution - an end-to-end print and content management organization. This convergence of capabilities and customer strategies is making large contracts possible. Creation of the Publishing Services Group will institutionalize outsourcing and allow management of multi-market business (journal, magazine and book) needed by the same customer. The Publisher Services Group will focus on multi-market sales efforts, implement large outsourcing opportunities, and improve procurement and logistics programs. Thomas states, "We are gaining momentum, not worrying where volume is coming from, but how to handle volume we just might see." New management appointments will support the new market strategies. Also announced on January 23, Stephen E. Hare will become president of the Publisher Services Group and will continue to drive initiatives to improve growth and profitability. Paul K. Suijk has joined the Company as Senior Vice President and CFO. Cadmus will leverage his experience in international business development and multinational operations to expand its worldwide presence and further leverage the company’s global content processing capabilities. Question and Answer Session: Following the prepared statements, the call was opened to questions from various analysts and financial representatives. Here is a summary of those points: 1. One of the 2003 financial initiatives is to manage pension liabilities by increasing monies into pension contribution without tying up liquidity. There will be an increase over last year’s $2.5- $2.6 million although the full amount has yet to be determined. Cadmus is also looking at alternatives of more funding, or a more optimal mix. 2. The restructuring process, including closure of facilities and movement of equipment and customer work to other locations, was done very quickly. Although a cost/benefit analysis had anticipated possible business loss due to relocation, Cadmus has retained all titles. Of the restructuring costs, $2 million was used for cash severances with another $2 million in cost still anticipated. (Current debt is $180 million total including capitalization.) 3. Initially, a breakeven quarter was expected before restructuring costs, but in light of significant growth in the Specialty Packaging group, Cadmus made a debt repayment of $1.1 million. Receivables and inventory were up in 2nd quarter/1st half due to sales growth. The restructuring reduced overall capacity in systems, but the company still has significant capacity when needed in Richmond, VA. 4. The formation of the Publishing Group was a way to both reduce costs and combine marketing efforts. Retaining a combined market focus is key. There will be SGA synergies, as costs associated with a divisional structure will be eliminated. Most importantly, this group is an investment in growth opportunities. Many existing customers are multi-market publishers delivering across all three product segments - books, journals, magazines - and are looking for a single source and single point of contact. These customers want true strategic outsourcing opportunities where the supplier assumes activities currently done in-house. These customers have had to reduce their internal staff but have to deliver on a larger scale, thus setting up the perfect scenario for the Cadmus end-to-end solution. 5. These strategic outsourcing opportunities take some time to land (months to several years) and cannot be handled by a single sales rep. Cadmus has “tweaked” its traditional sales/customer service structure to reposition customer service more effectively as business managers. And, by providing more meaningful incentives to drive and land these accounts, Cadmus has also refocused the sales staff. 6. They are seeing a shift in determinative factors in the buyer's mind. Five years ago, decisions were based just on print; 1-2 years ago they were based on content processing and content management. Today, supplier determination is based on the ability to also handle administrative aspects from preparation of content to printing to distribution on a worldwide basis. The publishing industry does not want to make technology investments and is challenged by having fewer resources (e.g., copy editing, content management). Each of these potential outsourcing relationships is significant in nature - $1million dollar plus deals. 7. Pricing is very competitive in specialty publishing and they have not seen a bottoming out. Although there have been some instances of increased page counts, overall it will be awhile before improvement. 8. Cadmus will continue to offer services that have a higher perceived value, which enables them to sell other than on a commoditized, low-cost basis. Providing more valuable services than the competition has allowed them to resist some of the pricing pressures. Thomas declined to provide detailed information specific to the magazine-only group. 9. The top line growth in the Specialty Packaging group is expected to continue due to new pharmacy business revenues. The shift to the health care sector has also smoothed out some of the seasonality in sales. Cadmus expects another good quarter as it continues to shift to the health care sector and specialty packaging.