By Ann Levine August 9, 2004 -- Cenveo (NYSE: CVO) recently announced a second quarter loss of $2.1 million or $0.04 a share as compared to loss of $2.3 million or $0.05 a share for the same period last year. Sales during the second quarter were $409.4 million up from $407.8 million during the second quarter of 2003. EBITDA posted a 6.4% increase at $29.1 million for the second quarter of 2004 over EBITA of $27.3 million for the same period last year. Topics of this summary: Quarter Overview Segment Performance Guidance Q & A Quarter Overview During today’s earnings call Cenveo officials stated that second quarter results were in line with expectations and showed the 8th consecutive quarter of year over year improvement as measured by EBITDA. Gross margins increased 100 basis points to 20.4% during the quarter, due to cautious pricing, an improvement in levels of contract work and is also an indication the company is recovering the cost of paper. During the quarter, the company incurred $1 million in restructuring charges due to the closing of the Bensalem, PA plant and the integration costs with the Cenveo Philadelphia print plant. Cenveo has also invested in a higher level of inventory during the quarter to ensure customer satisfaction with new contracts. The company expects inventory levels to return to normal within the next few quarters. In new developments, Cenveo has launched e-commerce portals with American Express providing customers an easier way to utilize Cenveo products. The company will soon offer the same e-commerce opportunity within the hotel/leisure and facility management channels. During the call, Cenveo’s President and CEO outlined the company’s acquisition strategy to include three types; Type I includes firms that provide local market share growth, Type II, firms that expand Cenveo’s product line and Type III, firms that provide an outsourcing opportunity for client companies. The recent Valco acquisition falls into Type I category. Cenveo is actively seeking Type II and III acquisitions. Segment Performance Commercial – In the Commercial segment sales increased to $307.6 million during the quarter as compared to sales of $306.6 million for the same period last year. Volumes showed a 4% increase. The highlight of the quarter was this segments $20.2 million in EBITDA and an increase in GM’s 130 basis points to 19.3%. The expectation is for positive results for the remainder of 2004. There are over 60 long-term contractual relationships contributing $300 million annually. The long-term contracts allow Cenveo to pass on paper prices. Sales and marketing costs in this segment will be increased by 10%. Resale – Sales in this segment were $101.8 million for the quarter, compared to $101.2 million for the second quarter of 2003. Volumes showed an increase of 5%. EBITDA was $14.7 million. Cenveo recently confirmed two large contracts in the Retail segment impacting second quarter results. Guidance Cenveo affirmed its earlier guidance of EBITDA of $135-142 million for 2004. The company also expects the third quarter to show a YOY improvement of 7% driven by an increase in sales. Q & A Although new market share was only 1.4% in over performance, Cenveo objectives are for additional gain in the future. Guidance for capital expenditures include $25-$30 million in 2004 with nothing in the company’s foreseeable future that changes the figure. The past quarter was unusual overall in that May was stronger than April and the two new office product contracts began shipping in late May and early June. The latter half of the quarter was stronger than the first half. 2003 showed a 5% decrease in prices and YOY pricing pressure is a 4% decrease. The trend is showing a decrease, however, pricing pressures are still a drag on profits. Margins have increased due to realized efficiencies throughout the income statement. Cenveo has spent approximately $9.5 million on acquisitions this year due to the acquisition of Valco. Inventory is up $12 million, $10 million of which is planned due to the new contracts with office product providers. Cenveo increased inventory to ensure the customers will not see any change in service levels as a result of the contracts and the transition from a previous vendor to Cenveo. As the retailers switch suppliers, old stock must be removed and new stock resupplied. The increase is considered transitional and most of the increase in inventory will disappear by the end of the year. There was no earnings impact as a result of the increase in inventory. Challenges from the Type III acquisitions Cenveo hopes to secure, include a long sales cycle, an initial decision to outsource a function, and a demonstration from Cenveo that the outsourcing arrangement saves the client money. Expected use for free cash flow will be to pay down debt. After debt is paid down, the company plans to purchase EBITDA to increase leverage. Although the company’s stock price is currently at low levels, techniques to increase stock prices are currently limited. Officials today did not believe the use of free cash flow to buy down equity and increase leverage would be a good use of capital given the balance sheet. CEO Reilly indicated optimism about company performance in 2005. Cenveo’s business is driven by advertising spending and business confidence. On an anecdotal basis, Reilly indicated confidence among business leaders has been higher than in previous years. Even though 2004 is an election year, models indicate only a ½% growth in the market due to a combination of spending on the election and the Olympics. Regarding reducing costs on the SG & A side of the business, some opportunities have been realized by reducing the company from 150 separate businesses to today’s integrated 86. Opportunities still exist but are limited by the number of hours in a day.