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Executives

Robert G. Burton - President

Robert G. Burton - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee

Scott J. Goodwin - Chief Financial Officer

Paul K. Suijk - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Charles Strauzer - CJS Securities, Inc.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Lance W. Vitanza - CRT Capital Group LLC, Research Division

James Clement - Sidoti & Company, LLC

Cenveo (CVO) Q1 2013 Earnings Call May 9, 2013 10:00 AM ET

Operator

Good morning, and welcome to Cenveo's 2013 First Quarter Results Conference Call. Today's host will be Mr. Robert G. Burton, Sr., Chairman and CEO of Cenveo. This call is scheduled to last approximately 1 hour. Mr. Burton will speak, and then the call will open up for a question-and-answer session. I will now turn the call over to Cenveo.

Robert G. Burton

Thank you. Good morning, everyone, and thank you for your patience. We're experiencing some web hosting issues here. But welcome to Cenveo 2013 First Quarter Results Conference Call. Today's call will be hosted by Robert G. Burton, Sr., the company's Chairman and Chief Executive Officer; and members of the senior management team. But before I turn the call over to Mr. Burton, I'd like to remind everyone that certain materials covered on today's call are considered forward-looking and are covered under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995.

Also, any forward-looking estimates given on today's call will exclude any effects of restructuring, impairments or any other related acquisition charges. For further details regarding these factors, please reference Pages 10 and 11 of the company's press release that was issued last night. And with that, I'd like to turn the call over to Mr. Burton.

Robert G. Burton

Thank you, Rob, and I hope we're all hooked up with everybody, because we're ready to go. And good morning, ladies and gentlemen. This is Bob Burton speaking, and I am the Senior Manager of Cenveo. I hope that you had a chance to look at the press release, because there was a lot of information in there. And a lot of the data we're going to talk to today will clarify a couple of questions that you may have on your mind.

But first of all, the highlight of the first quarter, I would have to say, was the fact that the first quarter cash flow from operations activities increased some $20 million from prior year. And that statement alone is something that's very positive and something that we've been working on for the past year. Our cash flow primarily is the goal for all of our managers for 2013 as performance-related and any other kind of measurement that we were looking for at least $75 million of free cash flow, which is our target for the year, and we have gotten off to a good start. We looked -- spent the last year talking about this year being the time that we wanted to look at different assets, if we wanted to divest those assets and how we want to really measure our company. And we have tried everything from EPS when we first started to EBITDA, and as we get closer to making some decisions of being public or private and what is important, we think cash flow is. And we determined that early on going into 2013, and that is the primary measurement that you are going to hear us talk about throughout the year, even though we will discuss EBITDA as an important issue. But this cash flow is our #1 priority, and we're off to a pretty good start for the first quarter with that issue.

The second item, when I look at our first quarter EBITDA results, we're generally in line with our budget. And you hear that statement a lot, and I'm still trying to figure out what it means when some people say it. But if you look at our results, last year, we did $47 million of EBITDA. And we knew going into the year, and I'll talk more about this later on, that we were going to have some movement of some of our major customers that we had picked up from the transactional situation that were moving to the back half of the year, and we wouldn't see those revenues in the first quarter. Keep in mind that the first quarter is the worst quarter in the entire publishing industry for everybody. I mean, if you can make a profit in the first quarter, that's a pretty good step in the right direction because most companies do not. The first quarter is a very difficult quarter for everybody after coming off the fourth quarter surge of the holiday kind of thrust. So last year, we did $47 million. We put together a budget of $40 million, and we thought the $40 million was pretty close, but there were a couple of things that happened, and that's what I'm going to talk about.

Cenveo is a transactional sales-driven business. You know that now because what we talk about, Labels and Packaging and all the businesses that we are in, are transactional. That means we go out and we sell it today and we ship it as soon as we can get it shipped and packaged and sent out, but we do it. This is not a long run magazine business kind of contract. We are in a transactional kind of business. And many of our new sales have continued to shift its focus to verticals such as managed care and travel and leisure, which are really back half weighted, and what we're seeing now is more and more of our new sales that have been moving to the back half. And I have a piece of paper here, just so you know ahead of -- that lists our top 100 and then our top 25 customers, and we track those customers. These are sales that we expect to have or repeat kind of sales, but we track those sales, and those sales move. And they move right up until the last moment. And when they move to a different quarter or a different month, then we say, "Yes, sir," and "Yes, ma'am," and "Thank you very much, and is there anything else we can do?" That's the way the business is.

And when you sort of look at what's going on with the movement of some of our businesses, I could point out $15 million, $20 million of business that's been moving at different directions every day we talk. So the transactional business definitely moved on us in the first quarter on a couple of major accounts. And the other reason that we have this so-called shortfall in EBITDA was that during the quarter, we had a fire in one of our Packaging facilities. And we don't actually talk about where these facilities are because the competition uses that against us with some of our own customers, but we did have a fire. There was a fire in one of our presses and one of our most successful and higher-margin packaging facilities. And we lost the press very early in the month of January. And what happens in -- those of you that are in these businesses, you've had fires that have happened, well, we historically don't have these kind of problems because our track record in managing our businesses and precautions and the training we have, it would be really a rare thing to happen. But during the maintenance cleanup effort with one of the presses, we did have a fire. And the press was destroyed and we lost it, and it was really our #1, what I would call, workhorse press in this plant that we have from a Packaging standpoint.

So what you don't realize, you can't add all this stuff up. You can, and you can come to a number, and you can say, "Hey, well, you lost $2 million or $3 million. And here's what..." That's not what the issue is. The issue, when you have had these kind of fires, is the inefficiencies, that you lose the work with the presses, including the people, the paper, the location and the duplication that happens. You will need to shift work from other locations to cover that business that you can't do because you don't have enough presses to do that, and you have to do that with the permission of the customers, and you have to ship material to these locations. And these other people who work on that equipment have to get used to the amount of work that's done and the timing and the different kind of jobs that they are. So you could think that you're in great shape and you felt that you really handled all your cost and everything correctly, and then you find out about 6 months or a year later that you have $100,000 or $200,000 worth of air freight bills that are coming through, that you really should have shipped regular mail, but the customer wanted the material on time and you had to get it there.

So we went through the normal inefficiencies that I've had that we'll color on major runs and small runs and all the other kind of things that we had. And fortunately, the new press is going to be ready in the start of the third quarter with all the new bells and whistles that come with these kind of presses, and that's going to be a terrific plus for that location so we can get up and get running with our customer base. And again, I want to point out that this is an exception for us to have this kind of fire in any of our locations. Fortunately, none of our people were injured, which is a blessing. And the fact that we're going to be up and running in the third quarter is just a strong comment about the management there on site and the senior management of the group in getting the press up.

But I want you to know that we lost some business time and some inefficiencies, and I don't know what number is. That could be $4 million, $5 million. I have no idea. The people, lawyers, tell me I can't talk about. I'm just telling you right now. It's money that we really can't put our arms around, but it happens when you have these kind of things, and I wanted you to know about it. And you know that when we talk about the growth of our business and where we want to invest, we talk about Labels and Packaging, and this is part of it in the Packaging. And we got hurt there in the first quarter, but we're going to be up and running in the back half. And we're okay right now, because once you get through that sort of 30-day cycle, you're in pretty good shape.

So if you look at the quarter and you look at what we talked about, we were up in cash some $20 million versus last year. That's terrific. And we're down EBITDA. You can look at it, $4 million to $6 million versus our budget or versus last year, and then you got to offset that. And I think if I looked at that, that would look like a push to me, and I feel pretty good about the fact that our people responded the way they did and the fact that we're up and running and the fact that we continue and will continue to talk about our customer base of the transactional businesses we have and how those will continue to move, and you're going to continue to hear those stories until we go so large that we can't talk about them anymore. So that's about the press. And also, you know that we have these calls, and the calls really should be to update to investors on the new news from the company. And you fully are aware that we take all our time and take almost most of the hour in talking about our business because we really feel strongly about things that we are doing that are different and new and want to keep you advised. But this is one of the meetings that will not be that case, and we'll have some opportunities for some questions because a lot of the stuff we're covering now and have covered, have repeated it, and no need to talk about it anymore. But I do have some items, I have 6 items I'd like to discuss before we get into the meat of the program.

Item one: You know that 2012 was the year we completed our refinancing of Cenveo, and we're all pleased to get that process behind us and putting the 2013 maturities behind us. Because all I've been talking to you about is for the last 7 years about paying fees to banks and everybody who helps us go out and get all this refinancing. And probably one of the shocks to most of you in the last press release we sent out, we talked about an $8 million savings on an annualized basis going forward on the refinancing that we put together. And I thought all of you would be pleased with that because that's going to go right to the bottom line and help us make some other investments and make this company a lot stronger than it has been in the past. That is item one.

Item two: We talked about -- last year, we talked about 50%, and 40% in the past. But this year, during 2013, we plan to have about 60% of our EBITDA coming from the following high-growth kind of companies and products such as Labels, Packaging, Direct Mail. By the way, Scott will talk about that some more, and so will Rob. Direct Mail is looking pretty good, and the content business and any small acquisitions, all of those are going to help us continue to increase the amount of volume that we put through that are going to come from these higher-margin kind of investments that will make us a better and more attractive kind of company.

Item three: The business plan hasn't changed. Once this is all over, we'll talk about some of the divestitures today, but we are still a company that is a Label and Packaging company with a high cash flow kind of objective.

Item four: We'll talk today about nonstrategic assets and selling those, but I just want to remind you that we started selling these nonstrategic assets in 2012, and we did that with the sale of some forms-related businesses, and we were able to generate some $50 million worth of cash. And when we took those dollars and we paid down debt and we made some other investments in our Labels and Packaging -- so we really started paying down debt and investing in this business in 2012. It's not the fact we're just starting this year. And I'd also like to remind you, one of the investors I saw on the street recently asked me why we have the 215 number, the same as we had last year, and I reminded them that we picked up $50 million of sales from assets, and those things generated $10 million, $15 million worth of profits, and we don't count those because they're gone. So you need to keep in mind, as we move down this road, that we're going to continue to sell other assets, and the EBITDA number is going to get smaller until we start buying and bringing back some of the Packaging and Label acquisitions to offset that.

And item five I have here: Last week, at our Annual Meeting, I announced that we would start to hold our future Annual Meetings in New York City, and the rationale behind that was that in Stanford, we really could get a very good turnout, 100-plus, and New York City, we get basically a similar kind of turnout, but we get more investors who invest in our product and who have invested in our product. But the trip out here is really impossible for them to stop today and get out and come to the meeting and listen to an hour presentation and then get back. So we're going to go back to the New York scene where we started. I think it's the right place to be, and we're going to have a 1-hour presentation, and we're in the process of putting together some displays. We have some on our Packaging and Label business, and we're going to expand that. So we will have a more effective kind of conversation of talking about who we are but also seeing posters and all through on the walls throughout the meeting site on where we're going to be at, and those sites are going to be in New York City. And we have a complete presentation lined up, and we'll just hook that up right into the posters and all the other stuff that we have set up.

And item six, the last item, I'd like to say thank you for all of you that voted with the proxy on the last Annual Meeting. You know that you're supposed to, as a company, get your results out to the outside world in, I think, 4 days, and we did that, and you probably didn't see it anywhere. But I did want you to know that we appreciate it.

We've got a long way to go as a company, and to do the kind of job, we should be doing, the kind of job we've done in the past, because there are some real major hurdles in some of these environments that we're getting over, but I think it's -- it'd be appropriate for us to say thank you and let you know that if I look at the vote, the CPO [ph] vote, he got about an 89%, and that's pretty good. In the past, I've got a little higher than that, but I can understand why 89% would be a very good vote.

The vote on the compensation, that is a big issue around America with all companies, and we got a 75% vote for that, and there was a 25% vote against it. And then all directors together, we ended up with about 84% or 85% kind of vote, and we very much appreciate that. And again, that's our commitment to do better and to work harder and to get some more results and, more importantly, to get this stock headed in the right direction. And I think a lot of the things we're doing today and what you'll hear about today and what we've been doing in the past couple of months are reflected upon that.

So as we have in the past, we're going to follow the same kind of format that we've had. Scott Goodwin, our CFO, is going to report on our first quarter financial results, then Rob Burton, our President, will report on some top sales. And again, I'll remind you that we do not mention these customers' names. They prefer we do not. I know a lot of companies hire staff to go out and ask permission. We just like to talk about segments, and we think it has the same effect instead of hiring people just to go out and get information. So we'll be talking about those, and we will give you an update on what we're doing with some of the non-strategic stuff and what kind of progress we have made. And then we'll open up the call for Q&A. So why don't we get started here and let Scott give his report on the financial side. Scott?

Scott J. Goodwin

Thank you, Mr. Burton, and good morning, everyone. Today, I'm going to review our first quarter 2013 financial results and provide select financial highlights from the quarter and briefly discuss the benefits of our refinancing that we completed last month.

As Mr. Burton just alluded to, the results for the first quarter were mixed. We experienced top line and operating performance declines in our Commercial Print operations due to several factors. We continued to experience price pressure on our Envelope business, and we encountered significant disruption in our Packaging operations due to a press fire early in the quarter. To mitigate these items, we initiated plans to reduce our cost structure by up to an additional $20 million and announced the consolidation of an envelope facility. Meanwhile, we experienced increased sales and operating performance in our Labels business, and our direct envelope business experienced sales growth that was overshadowed by sales declines in our office product business, mainly due to our decision to exit certain low-margin accounts that were being transitioned out of our platform during the first half of 2012. Even with these mixed results, we improved our cash flow from operations by over $20 million compared to the first quarter of 2012 and are ahead of our cash flow goals for the year.

With that brief overview, I'll move on to the results. Net sales for the first quarter were $432.3 million compared to $455.6 million in the prior year. Rob will further highlight our sales trends and initiatives shortly. Our gross profit for the quarter was impacted by lower sales volumes within our Commercial Print operations and product mix changes within our Envelope business. Our waste recoveries remained relatively consistent with the prior year; however, we currently expect pricing to improve in the back half of the year due to anticipated demand levels. We have also experienced rising input costs in several smaller raw material categories such as films and adhesives over the past several months that we have not been able to pass along to our customers as of yet. As a result, our gross margin declined from 17.7% in the prior year to 16.2% in the first quarter of 2013. We anticipate improvement in gross margins throughout the remainder of the year as we increase sales volumes and our cost actions take effect.

SG&A expenses for the first quarter remained relatively flat compared to the prior year. Restructuring, impairment and other charges for the first quarter were $4.2 million compared to $14 million in the prior year. The current year charges mainly relate to employee headcount reductions as well as charges associated with the announced envelope plant consolidation. Cash restructuring and integration for the quarter was $3.9 million compared to $3.4 million in the prior year. As mentioned on our previous call, we currently expect similar levels of cash restructuring and integration in 2013 as compared to 2012.

Interest expense for the first quarter increased $1.7 million to $29.6 million from $27.9 million in the prior year. This increase was due to higher weighted average interest rates on lower average outstanding debt and incremental noncash interest expense as a result of our 2012 refinancing activities and our unsecured term loan.

Cash paid for interest was $28.1 million for the first quarter of 2013 compared to $39.4 million for the prior year. As previously announced, we were able to take advantage of market conditions and refinance our first lien debt last month under more favorable terms. Given this refinancing, we currently do not have a debt maturity until 2017 and expect significant annual cash interest savings. We currently expect cash interest to be around $105 million for the full year of 2013 versus the previously communicated $110 million target. Adjusted EBITDA for the first quarter was down from the prior year at $36 million compared to $47 million in 2012, primarily driven by the performance of our Commercial Print and Office Product Envelope businesses.

Turning to our cash flow highlights for the quarter. We generated cash flow from operating activities of our continuing operations of $3.3 million in the first quarter of 2013 compared to a use of cash of $16.9 million in the first quarter of 2012. The improvement of over $20 million in our operating cash flows from the prior year primarily relates to nonrecurring payments made in the prior year along with the timing of cash interest payments and our working capital initiatives. Our focus on our working capital continues to generate positive results. Our DSO for the first quarter was reduced from 56 days in 2012 to 54 days in 2013. The increase in our inventory during the quarter was attributable to 2 business initiatives that are aimed at reducing our cost basis as well as growing incremental sales within 2 select business lines. We currently expect that these cost-effective inventory purchases will be worked through over the remainder of the year. We continue to work with our strong vendor base to improve our GPO. While we expect the long-term impact to be a benefit to us, we anticipate a short-term use of cash due to changes in our newly negotiated terms with our critical suppliers. We've experienced great support on this initiative, and we expect further support from the remainder of the vendor base as we look to continue to strengthen our balance sheet. Our cash paid for pension and postretirement plans was $3.4 million in the first quarter of 2013 compared to $4 million in the prior year. We currently expect our remaining contributions to be $13 million for 2013. Cash paid for income taxes was $200,000 in the first quarter of 2013 compared to $500,000 in the first quarter of 2012. For the full year 2013, we currently expect cash taxes to be approximately $1.9 million.

Cash flows from continuing investing activities for the first quarter of 2013 reflect capital expenditures of $10.3 million cash paid for the acquisition of Express Label, as well as a strategic investment in label technology, offset by the proceeds from the sales of assets of $5.9 million. The proceeds from the sales of the assets were generated primarily from a sale-leaseback transaction for one of our Commercial Print facilities. We expect net capital expenditures to be in the $20 million to $25 million range for the full year.

Cash flows from financing activities for the first quarter of 2013 primarily reflect the issuance of our unsecured term loan and related fees, which addressed our remaining 7 7/8 notes maturity that we retired in January of this year. As of the end of the first quarter, our net-debt-to-EBITDA ratio was 5.4x when considering our convertible debt as equity. We remain committed to reducing our outstanding debt balance in 2013. And to date, we have repaid $12 million of the unsecured term loan and expect to have this loan fully repaid this year.

Given that our credit facility's excess cash flow sweep allows for 50% of our excess cash flow to be used to repay debt or reinvest in our business, we will look to further improve on our capital structure by focusing not only on our first lien borrowings but also our higher interest rate and convertible debt securities once the unsecured term loan is fully repaid.

In closing, despite a slow-recovering economy and mixed results for the first quarter, we remain optimistic and expect our consolidated financial results to improve throughout the remainder of the year. With having addressed our 7 7/8 notes maturity in January, having an opportunity to refinance our first lien debt early in the second quarter and with the ability to concentrate more on our business and our strategic initiatives, we are focused on returning value to our shareholders over the longer term. And with that, I'd like to turn the call back over to Mr. Burton.

Robert G. Burton

Thank you, Scott. And you heard, it seemed like every other sentence was paying back debt and lowering debt, and that's the direction of this company. Rob?

Robert G. Burton

Thank you. I have a few subjects I'd like to discuss today: an update on the strategic review process and an update on operations, as well as some insight into our sales process. In regard to strategic options, as we mentioned previously on our last conference call and again in our press release last night, we are working with our adviser in evaluating each of our businesses and potentially strategic options. We began this process earlier this year and we are currently exploring several different options for several different parts of our business. Given the relative low cost of capital and increasing consolidation that we are seeing in parts of our industry, we believe that this is the appropriate time to explore other options. As we continue to transform our business away from our legacy operations, we will potentially dispose of businesses that are not strategic to us, like we did last year when we disposed of both our forms and documents business as well as our wide format business. However, any disposition will have to make sense from multiple perspectives. These businesses are all leaders in our areas that we focus in on and are generating positive cash flow, so the purchase price that we have to receive will be something that makes sense to us, and we're not giving anything away at a fire sale price. While we cannot predict any outcome or give any specifics at this time, given the confidentiality, we are currently actively pursuing several options, which we expect to conclude over the coming months. We look forward to providing much more in-depth review on our next conference call.

To briefly review some of the quarterly highlights and some operating trends, we'll start with the Envelope business. During the first quarter, we have started to see stabilization in the Direct Mail marketplace, driven by mid-single-digit growth in credit card volumes and significant improvement in other verticals, such as insurance and mortgages. While we are very pleased to see a return in volume, mix remains weak as we have not fully seen a return to high-color value mail at this time. We remain cautiously optimistic for the remainder of 2013 that we will continue to see an improvement in Direct Mail market. Bookings to date for Q2 show that the positive sales patterns that we've seen in Q1 are continuing. And in talking to our customers, we believe that this -- we will see further improvement throughout the year. We're also continuing to look to grow our market share, and we believe that the postal announcement that came out recently that a 6-day mail week is still going to be here for the foreseeable future is a positive for our customers.

In regards to our footprint, as Scott discussed, we consolidated several smaller facilities over the course of last year in an attempt to remove fixed cost from the operations. We expect to see a full benefit of these actions as we enter the back half of the year.

In the office products market, as we noted last quarter, consolidation is rapidly occurring in this space, and we expect this trend to continue. In advance of some customer consolidation that has been previously announced, we have seen some disruption in ordering patterns. We do anticipate this consolidation trend to occur in the future and probably accelerate in the near term. In regards to waste recovery, in terms of byproduct recovery, while relatively stable, the waste market remains soft with pricing down slightly year-over-year. But please remember that, as we enter the back half of the year, the comps do get easier.

In our Labels and Packaging business, we had a solid quarter with relatively flat sales that was adversely impacted by a fire in one of our Packaging facilities. That was more than offset by some growth in our Label operation going forward. As we mentioned last quarter, our investment in our e-Commerce platform has begun to deliver results, and our short-run business continues to perform well, as we have seen online growth of north of 8% in our custom business year-to-date. The rest of our Labels and Packaging business performed to our expectations, with good performances in our coating and pharma operations and solid growth in our point-of-sale business.

As mentioned on this call before, we had a fire in one of our Packaging operations that significantly impacted operations. We were able to move all of our customers' work around during the quarter and accommodate their needs. However, we did incur incremental costs due to overtime freight spoilage as well as losing a press. We do anticipate having this press fully operational at the beginning of the third quarter.

In the Print business, of all of our businesses this quarter, our Print business was the one that was most impacted by customer timing and the shift in business. During the quarter, we had several large customers delay or move work that was traditionally done in the first quarter into the remainder of the year. While the economic environment played a role in this, we believe that most of this movement was due to timing of marketing campaigns and a significant customer supply chain issue in one of our larger customers out west. It also is very important to note that from a strategic point, we have made efforts to diversify our customer base into verticals such as managed care, travel and leisure and food and beverage as we continue to see softness in the publishing and transactional print markets. These verticals are predominantly seasonally more back half weighted. So going forward, we anticipate much more seasonality in our business.

For instance, our focus on growing the managed care business has been quite successful for us. By offering these customers all of what Cenveo has to offer, including content management, digital print, print management and envelopes, we've been able to grow this vertical over the last few years from a relatively small number to something that is approaching close to $40 million on an annualized basis. We are continuing to focus on these verticals and believe that our unique footprint and offering sets us apart from our competition. And that concludes my portion of today's call, and I'll turn it back to you.

Robert G. Burton

Okay. And before I open the call up for Q&A, operator, I'd like to reinforce our statement in the press release that, number one, we reaffirmed our cash flow guidance for 2013, as we talked about, to $75 million. But tied through that is really our CapEx, the $25 million. Those things are really tied together, and both of those, we feel very comfortable. The others, though, instead of speaking to them, we'll wait until the 6-month period of time because we really need 6 months just to get any trending here. We already talked about EBITDA and some of the movements. The debt-to-EBITDA ratios we're making progress and we'll continue to make progress on. You know that last year, we had a 5x multiple in 2012. And in '13, we're looking at a 4.8x. In '14, we're looking at a 4.3x. We're making progress, but I think you need 6 months to really have something to show you something. And the same is true on our margin business. You're not going to see much improvement in the first quarter margin business. It is what it is because of the industry and the timing of most of the sales, but we will continue to see improvement, and we'll speak about that in the second half. And the same thing we'll do on sales cycle. We really feel, today, of looking at the business -- and we've had some real things come out of the blue like what happened last year on the Envelope business, but we really feel we have our arms around it this time when we sort of lose an account and it sort of goes away for a quarter. A couple of years ago, it would take us a couple of months to figure out what happened. And in today's world, and then smarter the people we have running these businesses, we know what's happening and where that account is, and that customer has already communicated to us what's going on. So we're ahead of these things, and we feel that we really are on top of it. And we see no reason whatsoever to come off any of our commitments for the full year that we talked about when we put our budget together, and we still feel the same way today. So with that, operator, why don't you open up the Q&A, and we'll have a couple of calls here, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Bob, can you maybe talk a little bit more about -- I know you spoke that you're going to have some more information about the asset dispositions as the months progress here. But if you're successful in selling some assets along the way, what are the -- can you give us a little more color as to what you would do with the cash? And are there some businesses that you can find in the Packaging and Labels area, for instance, that could add back some higher growth to EBITDA at reasonable multiples?

Robert G. Burton

Well, let me jump in on the first part, and I'll have -- let Rob handle the rest of it because he's really handling all the process. I will tell you for as looking for -- you know what our strategy has been for the last couple of years. We've been buying small Label and Packaging operations. We're still doing that, and we have put resources behind that to seek those out in the industry, and all of our management is looking at different opportunities that are out there that are available to us, and we have really hit some home runs, not to talk about the numbers and margins but -- of these smaller kinds of deals. We've been talking about doing a mid-sized deal that can give us some presence because, quite frankly, I think, we almost need to do that to let investors really feel that we're serious about this. The smaller ones we have and we just -- we do very well with them. We have outstanding margins, but they just don't add up to a lot of money, and we don't get the recognition from a margin or from a stock price on any of this stuff. So we really started looking at some of the larger ones, and we have been doing that for the last 6 months. And I'll say that just to give you a feel that we -- it would be great and wonderful if you could sell something, which Rob will be talking about in a minute, and we've got the cash here, and then we can buy it. Then we can buy something. And those things don't always happen, but I will tell you that we're trying to see if they can happen as close as possible. So I just want you to know that we've got a full press court right now on Labels and Packaging that are out there with reasonable kind of multiples that we feel can make a lot of sense to us. And you know, Charlie, that unless you're in the business, it really doesn't make a lot of sense if you're just trying to build up an empire. It's just having the base and being able to add these businesses and get the same kind of pricing on paper and ink and all the other stuff that makes a lot of sense. So that's the first part of the answer. Rob, why don't you jump in on strategically from a company standpoint?

Robert G. Burton

Yes, Charlie, it's Rob. I think we've been focusing on this probably for the last 90 days pretty extensively. We're talking about various -- a numerous amount of businesses and possible combinations here. So we're farther along than -- we didn't start this process yesterday. So we were pretty far along in the process. I'd probably call it mid-innings if you want to use a baseball reference of this process. So I think what we do with the cash out of the box would be paying off our higher-cost debt, first and foremost. So we have some higher-cost debt that we need to make go away. It's not good for anyone to have that around, so we're going to do that, first and foremost. And then again, as we continue to transform this business into more of the Labels and Packaging and higher-value-added businesses, that's where we focus our growth on. But hopefully we will get there soon, sooner rather than later, in terms of getting the first part done.

Charles Strauzer - CJS Securities, Inc.

Ultimately, when you kind of go through this process and you kind of transform the business into more Packaging, Labels, higher-margin Envelopes, things like that, what do you think the mix would look like maybe 2 or 3 years down the road, ultimately, what's it kind of like -- what would you like it to look like?

Robert G. Burton

Yes, I think, today, we're talking about having close to 60% of our cash flow coming from these higher-value businesses. That number is only going to get higher. So I'm never going to say we'll be 100% Labels and Packaging, because we do like some of our legacy businesses, but I'm thinking probably it's getting closer to 75%-plus over the coming couple of years here.

Charles Strauzer - CJS Securities, Inc.

And that's obviously areas that are showing growth versus some of the more legacy kind of slower-growth or no-growth businesses, too?

Robert G. Burton

Charlie, it's interesting, every one of our businesses makes money. And that's the reason we're getting a lot of calls. And Rob's answer really was 100%. That's -- when we arrived here, you know how many commercial plants we had. I mean, there were plants that we didn't even know about existing in some of these locations, and that's when we started divesting those, and you sort of -- and we've had these discussions openly with our employees. So they fully understand what's going on with it, and they can benefit from it by owning the stock and -- when the things get where they ought to be. But if you look on one side, you know you've got the Labels and you've got Packaging and you've got this content material that does extremely well, and then you look at the Envelope and the Direct Mail kind of business. These are businesses that we're going to be around with for a long time. But who knows. We've gotten some calls from out of left field that are very interesting because we've announced it. Most people tell you, you're going to sell your business, you don't say anything about it. After doing this for some time and buying and selling these businesses, I always find it's better to put it out there and let people know that, hey, if you really have an interest in these businesses, we're interested in selling and moving 100% to these other areas. And why? Because we've got a young, aggressive, experienced management team running these businesses, and they're really terrific, and I want to give them as much support financially with assets as we can to grow as quickly as we can. And I'm telling you, when you sit in some of these meetings and see the progress that we've made on returns since we've really focused on this, it's pretty outstanding for what's going on. But to give you a sort of map of what we're going to have and what -- I think, right now, it would sort of be a little unfair because we really haven't communicated that to our customers. Probably, I would say, on the next conference call, we could give you a little more direction -- Rob can, at that time, on what looks like it's going to be heading in another direction. But every one of these businesses, Scott, correct me if I'm wrong, make money. Because we cleaned those other things out early on, just trying to clean house and to make sure that we were making -- getting the couple hundred million dollars of EBITDA in the company tills here. And just to remind you all, and people just have a tendency to forget about it, the fourth quarter last year, we did a 9.4% EBIT margin business for the company. And you wait and see, we're going to move in that direction this year. I can't promise you a 9.4% at the end of the year, but I tell you, it's going to be in that 8%-plus going toward 9%, and that is a very good number with any kind of company you have out there in the printing or publishing kind of industry, because I've been in both of them.

Operator

Your next question comes from the line of Kevin Cohen with Imperial Capital.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

I guess kind of elaborating a little bit further, to the extent you can, on the asset sales front. Are the nature of the buyers -- is it starting to skew a little bit more towards sponsors, or is it still largely strategic interest that you're seeing potentially?

Robert G. Burton

You'd be surprised. I think given the low cost of capital, thanks to our friends in Washington here, we have had gotten some phone calls from people who we'd not have expected to. So I think it's a mix. Obviously, there is benefit for consolidation in this space, Kevin, as you know. But surprisingly, still, we are seeing some people who have not been in the space before showing up to the table as well.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Then I guess, Rob, in terms of the assets that might get sold, should we infer up to 1/3 to 40% might get sold, given the sort of 60% by inference roughly, is kind the higher-growth, higher-margin Labels, Packaging, Direct Mail and Content business?

Robert G. Burton

I think you hit the nail on the head.

Robert G. Burton

I hadn't looked at it that way. That's probably a good way to look at it. I'm not going to give you credit for it, but that's probably a decent answer, don't you think, Scott?

Scott J. Goodwin

Yes.

Robert G. Burton

Yes.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

Great. And then, I guess, in terms of the fire at the Packaging plant, I know it's a little bit difficult to quantify the effect on EBITDA, and there were some cost issues as well. But I guess from a business interruption standpoint, any preliminary sort of rough guidance you can provide? I know it's early in terms of interruption insurance moneys.

Robert G. Burton

Yes, the numbers are going to be significant. It's north of probably $5 million to $7 million results. And remember, that does include part of the press as well, and that number is still growing. I think every single day, we're incurring incremental costs by having duplicate shifts and overtime and incremental freight. But the number is not insignificant.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

And then, I guess, going back to an earlier comment about the topic of being public or private. And I guess, when you think about potentially the latter, what do you think is the path to the company being private? Does it involve primarily selling roughly 40% of the business at a large multiple, or are there some other sort of avenues that you see for the company to potentially go private?

Robert G. Burton

Well, I've had that experience at KKR, and I'm a very good learner when I was there and listened very carefully, and I know there are several options to go there. The only driver on that -- I would much prefer to be a public company. I think there's a lot of advantages from having the paper, that stock that gives you cash, but it's not an advantage if you continue to not get any recognition for the stock and it continues to stay at a certain level. But I would tell you that we have had people come to us directly and privately and have sort of outlined a couple of possible ways, but there are some things we have in the back of our mind, and there are people that want to become partners with us, and we looked at that very early on. There were some international players early on that came to see us that wanted to do something with us, and we decided the stock price was not right, so -- and I'm not trying to avoid your question. I would say that there are several alternatives. But before we would do anything, I'm smart enough to know that we would have a pretty strong dialogue with all of you in a forum such as this and let them know what some of our thoughts were and the directions we were thinking about and would appreciate any guidance from anybody because these things can be very sensitive issues. I'm hoping we don't have to get there, but we've been fighting this battle for 7 years, and I've never done one that's taken this long to get a return on what we've put in to this deal. And I'm just hoping that with the stuff -- that getting recognition of being as Labels and Packaging company, like about 95% of our process or recognition would be that we could get that kind of recognition, where we wouldn't have to talk about these things of being private. Because there are advantages and disadvantages on both sides, and I know them very well, and that's probably it, unless you want to add something, Rob?

Robert G. Burton

No, I think, again, I think that's probably appropriate answer, given where we are in this process, Kevin.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

And then just one last question, I guess. When you kind of think about the capital structure and creating equity value by repurchasing the bonds, I guess, how aggressive would you guys want to be after the unsecured 15% term loan is repaid, I guess, in terms of managing toward at least a minimum total liquidity number, how aggressive would you be? And can you remind us roughly what the RP basket is to be able to repurchase the 11 1/2 and/or the converts?

Robert G. Burton

I think the answer, as large shareholders, as a management team, we are going to be as aggressive as we possibly can be. So not only do we focus on the 11 1/2 notes, but we will also focus on the converts. So we will be -- that is an issue that we are going to aggressively go after here as soon as we possibly can. And as Scott said before, that process should probably commence beginning at the end of this year. So it's going to be a 2013 event possibly.

Robert G. Burton

And Kevin, keep in mind that I'm also a large bondholder. I want you to know that. I'm on your team, remember that.

Kevin J. Cohen - Imperial Capital, LLC, Research Division

We are definitely well aware of that.

Robert G. Burton

And I want to buy more.

Robert G. Burton

Yes. In regards to RP capacity, I think -- a couple of things. In terms of the term loan, we have a 50% ECF. So anything after that, we can use for what we want, including debt repurchasing. And the notes have at least $50 million -- around, don't quote me dollar for dollar, but around $50 million RP capacity in them all. So that number will grow, too, as we continue to generate income.

Robert G. Burton

You want to add something to that, Scott?

Scott J. Goodwin

No, I'm fine. He's spot on.

Operator

Your next question comes from the line of Lance Vitanza with CRT Capital Group.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

The questions here, I think most of them has actually been answered. But just maybe just back on the fire, could you go through again the timing of the insurance proceeds that you think you might be getting back here? When do you think that comes in and to what extent you feel like you're covered there?

Robert G. Burton

Okay, I got to frisk you, Scott, to make sure he gives the right answer. Paul?

Paul K. Suijk

We expect the timing of the proceeds to come in the third quarter.

Robert G. Burton

Paul is our CFO from the Labels and Packaging Group, and he's joined us because Mike is at another business meeting today. And you're saying when, Paul?

Paul K. Suijk

During the third quarter.

Robert G. Burton

Third quarter.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

And you expect that to be essentially -- how should we think about the -- I mean, is that going to match up pretty nicely to the $5 million to $7 million, I think, that Rob was talking about in terms of the damage?

Scott J. Goodwin

Yes, we've received some monies upfront so far. So through the first quarter, and we've gotten some additional money here in the second quarter. But to Paul's point, the large chunk of this repayment will come in the third quarter once the press is up and operational, and we certainly expect to be right in that $5 million $7 million-type ballpark.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Okay. And then on the waste side, how meaningful do you expect the pricing to be as we move through the balance of the year? I think there were some comments about that becoming a little bit more favorable?

Robert G. Burton

Yes, I think the answer is the comps got -- get easier as you enter into the back half of the year, because remember, waste pricing last year probably cost us up to $10 million of profitability. We expect that we've seen some relative softness as we got in the first part of the year, but we do anticipate those comps to get easier as we get into the midsummer months.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Okay. And then lastly, just following up on Kevin's question, just to make sure I heard this right. So in the new term loan, you've got a 50% excess cash flow sweep. But everything beyond that, you can actually use to go out and take out unsecured bonds or converts. Is that once the unsecured term loan is paid down?

Robert G. Burton

Correct.

Operator

Your next question comes from the line of Jamie Clement with Sidoti.

James Clement - Sidoti & Company, LLC

I was going to ask a question about potentially going private so you didn't have to take calls from people like Charlie anymore, but...

Robert G. Burton

Well, I like Charlie, except that he likes his university. I don't know about that, but...

James Clement - Sidoti & Company, LLC

Somebody's got to do it, I guess. Anyway, getting back away from the strategic alternatives and sort of more back to business, if I could, when you highlighted some of the gains you had in areas like managed care, travel and leisure, what was unclear to me from the release and from some of your comments is those were areas that you could hit from a multiple product standpoint. So I didn't know if you were talking about from -- I mean, because, obviously, you can certainly sell envelopes. You can certainly sell commercial, all of those kinds of things. So I mean, are these -- how does the concept of cross-selling fit into also the concept of potentially dealing off some assets?

Robert G. Burton

A couple of things, Jamie. One, on cross-selling, I would tell you without trying to telling how good we are, I think we're the best in the industry. And the cross-selling starts with the one individual that's a very successful salesperson who actually changes and continues to do what he's doing, and he sells another product that's not one of his products. And all at once, he sees the commission and realizes how the light goes on. But what we've done here and started this process, we started giving -- and I did this at IBM long time ago. We started giving product line targets. Product line targets, meaning cross-selling targets, where individuals are responsible for going out and selling not only what they're selling, but also looking at another area. What has amazed me about our people -- or our salespeople, and again, you'll have to excuse me because I'm bragging about them, but we have some guys and gals who have gone out there in the marketplace, and we got, maybe, I don't know, 25 or 50 of these individuals, and have gone into some of these areas that they have not been in, and some have been in, and we started actually looking at those individuals, and I won't give you -- away our key strategies, but have not been in these industries and have gone out and delivered major, major $10 million, $15 million, $20 million sales in markets that we had not penetrated in. And I give you those numbers to get your attention on how successful we've been and how we continue to want to get this moving, and that's only happened in the last several years. We really started this, if you want to know, is when this Direct Mail just fell out of the bottom, and we said, "Hey, guys. We don't have all these customers to call on. Let's just go start calling on all these new customers." And we put up the lineup of different businesses that we want -- I think we had 9 major line segments that we want to be in and listed the customers, and I won't give you the areas what they're in because we got competition listening on the call here, but we started and started knocking some of those things right out of the ballpark. And extremely, these are just one-on-ones, and now the fact that we're starting with the cross-selling and the fact that, yes, you did, you sell me that and then what about the Labels, what about the Envelopes and all the other opportunities, and we really haven't touched the surface of that.

James Clement - Sidoti & Company, LLC

Yes, and none of that was going on at the old Mail-Well, and they obviously said -- they said it was, and obviously, it was a joke. But I just want to make sure that, as you discuss in asset sales here, you've got some product lines that, whether you look at, for example, some part of your Commercial business and some part of your Direct Mail business, go along very well together, some of your Envelope -- the rest of your Envelope business may well go better with some office products, and -- can these things be carved up? I mean, it sounds like they can be carved up.

Robert G. Burton

Well, they have been carved up. We think those 25 or 50 people, we've told those people they're going to be with us until we're dead. I mean, they're not going anywhere. They're part of our special team that goes after large customers that we really haven't serviced in the past, and they're working on those accounts now, and they know what their future is. So that's not even an issue. [indiscernible]

Well, ladies and gentlemen, the hour is over, and thank you very much for your support, and we will continue to work as hard as we can, and see you next quarter. Thank you.

Operator

This conclude today's conference. You may now disconnect.

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