By Trevor Shackelford February 17, 2005 -- Cenveo (NYSE: CVO) projected an air of confidence in their fourth quarter earnings call amid disappointing profitability results and the January 7th news of the resignation of their President and CEO Paul Reilly. Cenveo reported total sales for the quarter were up 13.6% to $482 million from $424 million in the same period of 2003. Despite this strong revenue growth, the company reported a net loss of $3.6 million or $0.08 per share in Q4 compared to a net income of $2.5 million in the same period for 2003 or $0.05 per share. Cenveo’s net loss in 2004 was $19.7 million ($0.41 per share) on revenues of $1.74 billion compared to a net income of $5.2 million ($0.05 per share) on $1.67 billion in sales in 2003. Topics of this summary: Quarter Overview Segment Performance 2005 Guidance Raine’s Radar Q & A Quarter Overview EBITDA for the fourth quarter of 2004 was $34.3 million compared to EBITDA of $34.2 million achieved for the same period last year. For the year ended December 31, 2004, EBITDA was $128.6 million compared to $126.2 million for the same period last year, a 1.9% improvement. These results were in line with the revised December guidance. Net cash provided by operating activities in the quarter ended December 31, 2004 was $10 million compared to $26 million provided during the comparable period of 2003. Net cash provided by operating activities fell to $24 million in 2004, down from $59 million during 2003. President and CEO Paul Reilly, who announced on January 7th, 2005 that he would be resigning, led the earnings call along with CFO Michel Salbaing. Fourth quarter revenues increased over 13.6% from the same period last year however this translated to almost no change to EBITDA. The company blames this primarily on an inability to pass on increased paper costs to customers as well as a shift towards office superstores and away from wholesale providers (such as their office and label group). During the Q4, $4.5 million was paid to terminate an unfavorable lease in NYC, complete the integration of the Q3 acquisitions (Valco Graphics in Seattle and Wallard Press in San Francisco) and write down the value of old equipment, which is planned to be removed from service in the first quarter of 2005. Segment Performance Commercial The commercial segment increased sales by 13.5% in the Q4 to $42.4 million; $11.4 million from acquired sales. This represents organic growth of 10% (commercial print led the revenue increases with a 15.1% increase). EBITDA decreased $1.6 million to $26.2 million, or 7% of sales from 8.5% of sales from Q4 last year. The company stated that product mix shifted to high speed web produced products, both in envelope and commercial print, which typically has lower profitability than their customized envelopes and high impact sheet-fed print business. Rapid increase in paper profits were also a factor in the declining profitability. They were unable to pass on these increases to customers. Several large high impact print jobs were cancelled in the Q4, also hurting performance. According to the company, some of these will return, while others will not. Resale Revenues in this segment increased to $110.7 million from $97.5 million in the same quarter last year. According to Cenveo, this 13.5% increase was due to strong organic growth in the sales of labels and documents products as well as substantial market share gains in office products. Growth in the sales of business documents was better than 3%, which is the best performance in “many years.” Office products and labels saw double digit growth. These growth numbers mark the third straight quarter of growth in the resale segment. EBITDA for the resale segment was $12.3 million in the Q4 compared to $14.8 million in the same period last year. Paper pricing was again a factor, this time due more to contractual agreements which impose a delay before paper price increases can be factored. As of today, all 2004 paper prices are now being passed on to customers. The 2005 paper price increases will be passed on as soon as contractually possible. EBITDA margin was 11% for the quarter, and 12.7% for year. Cenveo stated that the demand of their office products shifted away from their wholesale dealers toward office superstores and other retailers. This required a heavy focus on these superstores which hurt profitability in the last half of 2004 but allowed them to maintain their strong market share. This downward pressure on profitability is expected to continue affecting Cenveo in the first half of 2005, with profitability increasing in the second half of 2005. Guidance Cenveo expects free cash flows of $35 million in 2005 and full year. The decline in profitability of the resale segment is expected to continue through the first half of 2005. Reilly also stated that he anticipates paper and energy prices to continue to increase, and is doubtful about Cenveo’s ability to fully pass those increases on. The tremendous growth in Q4 top line revenues will not be sustainable, dropping to 4-5% quarter over quarter in 2005. EBITDA is expected to grow in 2005, but the percentage growth will probably be in the low single digit range. Cenveo anticipates profitability in the first quarter to continue to decrease, flatten out in the second quarter, and post modest gains in the second half of 2005 (compared to the same periods in 2004). Reilly anticipates this growth to stem from increases in the profitability of the resale segment as well as sales management refocusing their efforts on their local customers, which are seen as more profitable than the business coming from large scale customers. Raine’s Radar: Although CEO Paul Reilly says his resigning has nothing to do with his confidence in the company or the company’s strategy, one has to wonder if a greater than 60% decline in stock price over the last five years didn’t affect his or the Cenveo’s Board decision. Cenveo has been public about their acquisition binge which doesn’t seem to be bearing “bottom line” fruit in the short term. In addition to their integration issues, they are dealing with some fundamental cost control challenges (i.e. paper and energy costs, equipment retirements, etc.) and customer defections in commercial print. We would expect that Cenveo will put the brakes on buying any more small commercial printing companies until a new CEO assumes the position and revisits the overall company strategy aligned for future growth on earnings and share price. Q & A Legal charges hurt EBITDA in 2004. New sales management process is putting focus on improving local regional performance which had slipped as focus before was primarily put on large scale customers. Lower profit margins in 2004 came from a defensive market share retention position, rather than a loss of high margin work, although they did experience a shift to web. The average unit price is increasing, but not enough to cover increasing material costs. Cenveo expects a 1-2% increase in overall market share in 2005 compared to the 4-5% increase in 2004. Cenveo sees no major shift in demand from print to other mediums citing that demand is sitting right at the 10 year average For print, Cenveo projects a 0.8% decrease in demand for every 10% increase in price. Cenveo sees the likelihood of another postage increase reduced from last quarter. Cenveo has no plans to remove capacity, although there are plans to remove old equipment. FCF will likely be applied to debt reduction – no current M&A plans. 2005 costs for departure of Paul Reilly is $2.8 million No further information provided on search for CEO. No plans to sell any segments of the business (including those which were previously up for sale, but did not sell)