Headquartered in Englewood, CO, Mail-Well (NYSE: MWL) specializes in three printing industry segments: commercial printing, envelopes and printed office products. These three divisions achieved sales of $1.9 billion in 2001. Mail-Well has more than 80 printing facilities and numerous sales offices throughout North America. Reviewing the Quarter and the Year February 10th, Mail-Well announced results for the fourth quarter and for the year ended December 31st, 2002. Fourth quarter sales of $432 million with net income of $5.3 million (excluding restructuring charges). For the year ended 2002, sales were $1.7 billion with net income of $2 million. With restructuring charges included, Mail-Well’s net income for the year ended 2002 was a loss of $202.1 million. Paul Reilly, Chairman, President and CEO, started the conference call by stating that six quarters of down profitability have been followed by two quarters of positive profitability indicating “a starting point of a turnaround” for Mail-Well. The restructuring plan that was embarked on 2 years ago has now begun reaping results. Fourth quarter EBITDA of $39 million was 9% above Quarter 3 2002 and 11% higher than same quarter 2001. In both the Envelope and Printed Office Product segments, EBITDA exceeded 13% of sales. Commercial Print Group: Fourth quarter print sales improvement is better than any of Mail-Well’s publicly traded competitors. Michel Salbaing, Senior VP and CFO, stated “this shows Mail-Well has definitely turned the corner and that margins have been restored to Q1 & Q2 levels in 2001.” Overcapacity has definitely impacted prices but they are totally focused on generating profitable revenues. Envelope Group: Strongest financials in the industry. EMA’s (Envelope Manufacturing Association) research expected a 4% drop in prices yet Mail-Well has outperformed these expectations. Mail-Well’s market share has gone up to over 29% from 25% in 2002. Investors should expect Mail-Well’s 2003 sales to be similar to 2002 results. If paper prices go up then so will revenues, as Mail-Well expects to pass the increase to customers. Print Office Products is seen as Mail-Well’s growth unit and one that balances revenues and profitability for the entire company Restructuring Program Mr. Salbaing provided the Disposition Program details. In the Third Quarter 2002 conference call, Mail-Well stated that the Digital Graphics group (which ended up at $777 million revenues for the fourth quarter) would be sold or taken off the market. At this point they have taken it off the market and have only written off the Minneapolis division. There are still assets on the balance sheet given some recent interest in portions of this group. In 2002, the Envelope Division has closed 10 plants with a YTD $36 million restructuring cost and balanced by savings of $20 million, which was “higher than planned savings, because customer retention has been almost 100%” as stated by the CFO. The Commercial Print Division is closing their New York facility and consolidating the web printing operations into their LA, St. Louis, and Baltimore facilities. There have been some rightsizing activities in their Indianapolis and Seattle operations. Mail-Well shut down their printed office products facility in Clearwater, FL. Total costs incurred for these restructurings were $7 million. Headcount reductions accounted for $15 million savings and the company realized a one-year payback for the restructuring program. In total, Mail-Well has reduced its headcount by 1600 employees or 14%. Today Mail-Well has approximately 10,200 employees with 85 printing facilities. All the restructuring programs are essentially complete at this time with only minor expenses expected for first quarter 2003. Good Will and Cash Phase One Analysis of Goodwill (SFAS 142) is complete and the conclusions are that the goodwill impairment equates to $112 million, which accounts for about half of the goodwill in the Print Group. No goodwill impairment in the Envelopes or Printed Office products is anticipated at this time. Capital Structure: Mail-Well expects very little cash to be spent on restructuring in 2003. They are in full compliance with bank covenants. Total debt for 2002 was $764 million. They have no debt maturities of any significance until June 2005, and even though they believe the level of debt is still too high, this does not prevent them from investing in their business in 2003. Outlook 2003 For 2003, Mail-Well is focused on sustained market share gains and broadening relationships with key customers. Mail-Well is targeting the Fortune 25 multinational corporations with a full suite of print and print management services previously offered by all of their segments. Mail-Well wants to be the preferred supplier for print, documents, envelopes and labels. “This strategy will bring to Mail-Well, at a minimum, $40 million in new revenue across all segments,” says CEO Paul Reilly “Approximately $12 million was included in the 2002 number with $9 million in the Fourth Quarter 2002…mostly in commercial print.” Mail-Well believes that they are better positioned than their competitors to provide customers with the offering, geographical footprint, and the direct mail capabilities to increase response rates. Sales improvement has been achieved by using a total company selling approach that also resulted in a positive a culture change, which Mail-Well calls “mobilization”. Daily activities are focused in seven high impact areas around Communication, Training, and Involvement. 2003 expectations: Although Mail-Well revenues have stabilized, markets are depressed which means customers are cautious. Costs are rising, e.g. health care benefits, therefore Mail-Well estimated an EBITDA ranging from $100 million to140 million for 2003. In 2002, Mail-Well generated $49 million in free cash flow and in 2003 expects to generate $40 million, with the majority of it coming from the third and fourth quarters in 2003. The Analysts Ask 1. Analysts and Mail-Well expect similar market conditions as in 1991 and the Gulf War, especially as it relates to direct mailers and advertisers. Paul Reilly commented that the direct mail mantra is: “Do not mail into a crisis.” 2. Increases in commercial print were a result of the full effect of the restructuring and some increase in sales with Fortune 25 companies and had nothing to do with price increases. Mail-Well is expecting increased revenues in 2003 for commercial print and to have 40-50% of that improvement drop to the bottom line. 3. Mail-Well does not expect to expand from the Fortune 25 target customers to a larger group, before the middle of 2003. 4. Sustainability of Fourth Quarter 2002 cost reductions and profitability was questioned. Michel Salbiang, CFO, pointed out that little-to-no bonuses or incentive compensation were paid; yet the funds accrued throughout the year. 5. Paul Reilly, CEO, does not see the Moore/Wallace merger will change anything the in market and will not impact Mail-Well competitively. “This is not a big event at all,” he said. And adds, “This will not change the dynamics and may be positive for Mail-Well in the long run.” 6. Trends toward 2005 are for the substitution of electronic bill presentment. Mr. Reilly commented that they do not expect it to happen as quickly as first forecasted. Adoption rates are lower than first announced; therefore Mail-Well does not expect any impact on envelope revenues in 2003. Only 15% of their envelope group is involved in the bill payment business and they had originally forecast that 4% would go away. Bottom line: it’s not happening at this time.