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Cenveo (NYSE:CVO)

Q2 2013 Earnings Call

August 08, 2013 10:00 am ET

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

Michael Burton

Analysts

Charles Strauzer - CJS Securities, Inc.

James Clement - Sidoti & Company, LLC

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

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

Operator

Good morning, and welcome to Cenveo's 2013 Second Quarter Results Conference Call. Today's host will be Mr. Robert G. Burton, Sr., Chairman and CEO of Cenveo. Please note this event is being recorded, and 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, and good morning, everyone. This is Rob Burton, and welcome to Cenveo's 2013 Second 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.

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 and other related acquisition charges. Also, no assurances can be made to any disposition our acquisition discussed on todays call will be consummated.

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 the turn the call over to Mr. Burton.

Robert G. Burton

Thank you, Rob. Good morning, ladies and gentlemen. This is Bob Burton speaking, your Senior Manager of Cenveo, and welcome to our second quarter conference call. As you know during these conference calls, we discuss the past history and the current quarter in some detail. Today, we'll discuss the second quarter results, but I'm going to focus my remarks on the potential acquisition and what our results could be in 2014 and beyond and spend quite a bit of my time on trying to explain to you why we're sort of changing our strategy here in the middle of the year.

Also, this is covered by our confidentiality agreement where we are -- that we have been advised that -- to not to mention the name of the company and I will try my best to do that. And when we talk about this acquisition, we'll call the company, Printer A.

So today, I have 5 items to discuss. One is this potential acquisition versus the label and packaging strategy that I spoke to you about for the entire year. You'll hear today that the label and packaging business is on track, as a matter of fact, doing better than budget and really having a very good outlook for the back half and opportunities that we feel will be coming our way during this year. The packaging business, which is a very fragmented business, we continue to do well and had a very good quarter, which we'll talk about in more details. But we've told you that we want to focus really primarily to be a label and packaging company because we think that's where the growth is and we've been able to demonstrate that since we started focusing our assets and our people and our money to support that, and the results are also showing that. But we have an opportunity with this Printer A to make some very significant moves if we can pull this thing off and if a lot of things happen and sort of fall together at the same time. And I'm going to discuss those today so you'll have a full understanding of what the process has been as we go through this, of coming to you now and say, hey, there's a possibility that we may want to double down on this one kind of business that we haven't done in the past. So we'll talk about that.

And also, item two, I want to talk to you in some detail of what this acquisition could do for us as a company. And this potential acquisition -- and I'd really like you to listen to these words. I don't know even who wrote them, but this potential acquisition would be significantly deleveraging to our capital structure and would be accretive to earnings and cash flow per share. Accretive to earnings and cash flow per share, which is very good news when you're looking at an acquisition in today's environment.

Cenveo is currently -- item three, is currently in discussions with several partners regarding alternatives for certain assets. And we expect to conclude these discussions shortly and conclude our review of all of our partners over the next 2 months.

Item four, we're working on a potential, smaller label acquisition by the end of 2013. We've sort of been able to focus on these smaller acquisitions that are less than $20 million, $30 million in top revenues but the margins are really not there. And we've been able to focus on these and, with our kind of organization and structure, be able to make all of these smaller acquisitions very successful. We started an internal organization where Mike Burton and his team -- and Mike runs that division for us. His team has actually put together a focus of looking and identifying these companies out in the marketplace and seeing how they would fit to us and starting with a couple of 100 and working those down to a much smaller group. And we've identified several of these smaller potential label acquisitions that we think will fit within our structure. And we've had discussions with many of these individuals and they think it fits, so I think we have a sort of a small pipeline that can sort of continue to add these smaller acquisitions to our organization. And we hope by the end of the year, we'll be able to complete this one in the label business and that'll give us another one that we haven't had in the past.

Item five, I also want to explain, especially to some of our second guessers, I want to explain to you why our stock price never rebounded to the pre-mini depression year level or why the stock price fell from the $20 and has been in the $2 range for the past 3 to 4 years, and why I feel that 2014 and '15 and '16 will be the years that those promises that we made to you when we took over this company and you saw in the first 4 or 5 years will materialize in the back half or the back section of our management of this company. And I want to go through that in some detail later on in my presentation.

And yes, this has been a very busy time for all of us. And I would like to sort of point out that we've had several individuals who have played a major, major role in working on this acquisition and running our company. And that's Rob and our friend and CFO, Scott. And at the same time, we've had Mark Hiltwein that you'll be hearing me talking about what he's been doing with our envelope group and his team of David Law who continues to have a very good year in the envelope business and expecting a better year in the back. And Mike Delsignore, who is our, really, manufacturing expert. And we've brought in a new financial person name Joe Axisa -- and I can't pronounce his name so I just call him Joe A. But all of these 4 people have done a great job for us in doing their regular job and also working on this acquisition.

Okay. First of all, I want to touch upon what took place in the second quarter in a very busy, and I'm going to call it a distracted, second quarter and say that the majority of the management time has been spent on this potential acquisition other than the group presidents who've been focusing on their business. And we also made one change in our group presidents. Our results for the quarter were mixed, considering what's going on with the company. And I want to talk about each one of them as we're walking through.

A, the labels and packaging group is ahead of budget. They continue to do extremely well. We are $400,000 -- if you looked at the press release, we're $400,000 of EBITDA ahead for 6 months. And we were able to do that even with a major press fire in Jacksonville, Florida that shut down the access of getting certain businesses in and build it and done. And without presses, they're just impossible. And we had a major press that was down for a full year, but that press is back up and we've just had a very, very good 6 months. And we feel that the outlook for the back half is also favorable.

The packaging group is really starting to show growth. And we have a new sales leader, Wendy Holmvik who is really our Vice President and leader of that group. And she was just recently named a -- the first recipient of our sales leadership award. We've started giving more and more awards in sales. And you'll find that I kind of -- after working at IBM for 10 years, when sales got down, we started doing more awards. So we're going to try the same strategy here.

But our labels and packaging group is on target. We have a very good team there. We have all the right kind of tools to manage this kind of business and we feel very good about, as I said earlier, about the first half and the second half. There are always challenges because we got a lot of competition, but we feel with Mike and Wendy and Paul Baker, our CFO's leadership out there that we're going to be fine in that area for this year.

The envelope business, except for a lowball pricing situation for $2.5 million of profit that we sort of walked away from -- it was a large office products customer due to Printer's A low pricing. Without that, we're really back on target. And we're really better than back on target. And you remember last year how we all just cringed when we talked about where's the credit card business and everybody would ask us, "When is the sales going to come up on the credit card?" So the credit card mailing's today. Today, as we speak, for the first half, we're up some 20% versus last year. So you can see that cycle and we have a graph that just shows you what goes on with that business. But the credit card business is strong. We've had record backlogs. I think it's the strongest July we've ever had. We got over $38 million in backlogs of products to ship and customers to satisfy. But this business, ever since Mark Hiltwein, our former CFO, has taken over, has moved in the right direction. And we've had a lot of bumps and a lot of challenges, and we're going to be talking about some of those in a minute. But you really have to ask yourself when you're talking about continuing to add companies and people and assets to a segment of a business, you've got to ask yourself do you have the management team in place to be able to do that? And I don't think there's any question about it. We're not only the largest, we're the best in this industry and we've been able to demonstrate that every year by looking at what kind of volume we've been able to put out, out there. So the envelope business is doing pretty good. And we hope we're going to do better in the back half of this year.

The print business -- and you know when we talk about the print business, we talk about the journal business and we talk about the content business and we also talk about what we call the commercial business. The print business, we continue to examine parts of our print business, including the journal business and content operations. These are very profitable businesses. They've been with us since, really, it seems like forever. But they came with us as we started growing this business here at Cenveo. And we feel there's a lot of opportunity. We feel we can show further growth by making some investments in certain areas that we haven't in the past. But the other hand, we got to ask ourselves, do we really want to be a player in this business. And we're still going through that process and that discussion. And we've told our people that we are still committed to this business. But like anything, you got to look at your assets the same way you look at all your players at the end of the year.

The other segment of the print business is the -- what we call our commercial business. And this is a business that's always been a challenge. I started in this business with World Color when we first started and started to understand what kind of business it is. And we really have some super kind of salespeople and we have delivered some outstanding kind of sales. But we also have some people that really we need to get a better focus. And I made a change in the management group and moved that group over to Mike. And we've already started with those changes. We have looked at this industry. And you've heard Donnelley and Quad complain about print sales being down and down and down. Well they're still down, but we think we have some plans here to start moving this business and it's not going to be overnight. But we have a plan and if you haven't seen this, and I'm sure you have, in your own business if you look at this new sales.com where you can actually communicate with your sales staff and all of their accounts on a daily basis and see if they upgrade this, we've actually done that for all of Cenveo. We still have some segments to compete. But hopefully, by the end of this year or next, we'll have -- every salesperson we have will have that information on-screen and online, so we can test that. So that print business did not do well, and we know that and we're working on it. We're going to make progress. And we've made a change.

So if you look at this, these distractions of sales have really had some serious interest and always will sort of get your attention. And I've been with companies that have been for sale. I know that happens. But still yet, I think majority of our people are working very hard and striving to achieve our goals. And just when you look at all of our businesses, we only have really that one business segment that we're just not sure about and needs some work on. And that's a hell of a lot better than it was when first got in here.

So if you look at -- the next thing, if you look at for the quarter's cash flow, our 6-month cash flow, we thought we were going to be there, but we made some decisions, decisions, events, the price increase on some paper that we knew was coming and we wanted to go ahead and build up some inventory. We did that. That was done with my approval because I knew that it would help us down the road. And we still feel that there's a $75 million cash flow number that we want to be measured on this year, will be achieved. And with a lot of things going on, we know there's distractions. But right now, we feel that, that's possible. And with some of these other things, you sort of forget we've already brought in about $50 million of cash, of course in the forms business and some other pieces that we divested. And hopefully, we can make some decisions on these other assets to either bring in some more cash to pay down debt or to keep what we have and make some more investments in those businesses.

Now, I'd like to talk a little bit about this Printer A and what's going on here and let's see if I can say all of this the right way. Our management team, when I talk to you about Hiltwein and his team, has spent a great deal of time and money visiting these Printer A sites. We've been trying to understand how our group can work together with their group, how we can create jobs in a very difficult job market. We've been working on a final purchase price that we can afford to pay for a low-margin business where we will need to spend money to move equipment around to meet our consolidated -- the first quarter we get to the business, we're going to have to spend money to move our equipment around to meet our needs, to satisfy how we're going to address the revenues we're going to bring in.

Bankruptcy is a very difficult and slow process. And we've had 2 looks at this before, at least I have. It's a distraction to your primary job of running your business and it is just a very slow kind of thing. We're trying to acquire this business before the beginning of the fourth quarter. We feel -- and you should listen very carefully to what I'm saying now because this is the whole crux of why I asked you to come to listen to this call. We feel we could break even with the cost of moving our presses around in the fourth quarter. And we feel that if we are successful in this process, we will be able to achieve on their -- their, meaning Printer A's revenue base, our EBITDA margins by the end of the first year, resulting in incremental $30 million of pro forma EBITDA. So what I basically said, if we can acquire this Printer A company and we -- our margins are better in some businesses than others and some is just the nature of the animal. And we have had in our fourth quarter last year, our best. We had a 9.4% EBIT margin. That's EBIT, not EBITDA. That EBIT number is the best quarter we've had. But 10% is a number that's pretty good to us. And we've been able to do this once before when we brought this ESP acquisition in. So again, you know what this company is today. And I say again, we feel if we can acquire this company and be successful in this process, we'll be able to achieve on their revenue base our EBITDA margins of 10% by the end of the first year, resulting in an incremental $30 million of pro forma EBITDA. And naturally, I don't have to tell you that we would expect then, as we've been able to demonstrate when we bring segments in, they get better the second and third year on their EBIT margins because when we first came here, we had a lot of businesses that were 2% to 3% kind of businesses. And we told them, we just don't keep those around too long. And I think we would find the same case here with whatever we did, that we would be able to move that along pretty good. So I wanted to tell you that.

And more importantly, and just as importantly, I want to tell you this sort of story. You remember when we came over here telling all these great stories about World Color and 10 years and how we took this business. It was losing a lot of money, its $600 million of revenues, no profits and sold it for $3 billion and everybody made money. And we talked about the Moore Corporation, how we turned that thing around. A couple of other investments we made, we didn't even acquire the company, we made money on it. And then Cenveo came up. And that baby was hanging around, $1.25, $1.50 a share on their stock price. And the first year that we took this over -- we took it over in a proxy and by that first year, that stock was $14.23 in one quarter. Naturally, we had some other stuff -- roadshows and stuff during the proxy buy that helped build that up. But it was $14.23. The next year, in 2006, it was $21.81. This is the Cenveo stock that you own today. In 2007, the stock was $26.78. I remember this, he's called financial consultant, he's a guy where I have -- what money we have that's not in Cenveo stock. He said you really ought to think about selling some of that stock when it was a $30 a share or $26 a share and I sort of laughed at him and told him we don't do those things. And then the next year, when we started getting close to the recession, the stocks sort of went from $18 to $2.24. And then when we look at '09 and '10 and '11 and '12 and '13, we realized by doing this study to figure out what we were doing, we were lowering our price by 5% in one of our market segments to be competitive with what was going on in the industry. 5%. And we were all part of that looking at -- we needed to drop our prices 5% to even be competitive to get the pricing. Even though we were the best manufacturing and dependable kind of printer out there, we were losing 5% every year. So that 5%, ladies and gentlemen, is $25 million a year. So that's $25 million that I owe you and someone owes me to get back -- to come back down to EBITDA. And I know where that is. And I'm telling you, if we get this deal done, that's what's going to happen. And those numbers are numbers that I didn't put together in a dream. I had all our financial people look at it and we had our people running the business look at it. That's $25 million a year that's going to be coming in the right direction.

And I want all of you to know that after working some 10 years for KKR or World Color, that $3 billion company, we had nothing but and still have nothing but the highest respect for these small printers out there in the marketplace that are out there every day trying to make a profit. And sometimes, when they acquire a company, it works and sometimes it doesn't. We've done about 72 deals, I have, in the publishing and printing side and all of those have been accretive. If we can add right, they sort of come up the right way.

But our objective on all these deals that we've done are to create jobs -- that would be -- if you create jobs, you can create profit. And I tell our people constantly, when we went through this depression kind of year and you know as well as I do, we reported -- we laid off over 2,000 people and told them every time you lay off 1 person, you affect 10 people's lives. And we take this pretty seriously about these acquisitions as we're taking this as serious about having an opportunity to acquire this and doing something good with it. So our personal objective on all these deals again is to create profit. And we plan to be doing that and be competitive out in the marketplace. And again, our outstanding manufacturing performance has kept us in the game and been able to get us where we're at today.

Even though we got a long way to go, if you looked at the results today, well, we got 3 of our businesses that are doing terrific. We got 1 problem, we'll correct that. And if we get this other situation going and get this done, you're going to see some big, big numbers and I can promise you that.

So as we have on all in the past in the same investor call, we want to follow the same format that -- with some of the changes, this is going to be shortened because we are going to allow more calls. You seem to want to voice your opinion more and I think that's good. And we're going to allow that.

So Scott Goodwin, our CFO will now report on the financial highlights that are not in the press release, but Scott's really been a major player here in all the things that are going on.

And Scott, why don't you give them an update of what's in your report, please?

Scott J. Goodwin

Sure. Thank you, Mr. Burton, and good morning, everyone. Today I'm going to briefly review our second quarter 2013 financial results and provide select financial highlights from the quarter.

Net sales for the second quarter were $415.7 million compared to $433.2 million in the prior year. The decline in net sales is substantially attributable to our commercial print product volumes and a low margin account that we decided no longer to pursue in the office products business. These declines were offset in part by higher sales volumes in our direct envelope products due to our market share initiatives and higher direct mail volumes.

Our gross profit for the quarter was impacted by lower sales volumes within our commercial print products as well as pricing pressures within our envelope business. We've also experienced rising input costs in several smaller raw material categories, such as film and adhesives, over the past several months that we have not yet been able to pass along to our customers.

As a result, our gross margin declined from 18.6% in the prior year to 17.3% in the second quarter of 2013. We anticipate improvement in gross margin throughout the remainder of the year as we saw signs of price stabilizing in our direct envelope operations during the second quarter. We expect higher print sales volumes in the back half and our costs actions enacted earlier this year to take effect.

SG&A expenses for the second quarter were up slightly over the same prior year period due to investments in our information technology and e-commerce platforms, including their underlying support functions.

Restructuring impairment and other charges for the second quarter were $2.7 million compared to $4.4 million in the prior year. And our net cash restructuring and integration for the quarter was $900,000 compared to $3.3 million in the prior year.

Interest expense for the second quarter decreased over $0.5 million to $28.2 million from $28.8 million in the prior year. This decrease was due to a relatively flat weighted average interest rate on lower average outstanding debt balances.

Cash paid for interest was $25.4 million for the second quarter of 2013 compared to $16.6 million for the prior year. The early extinguishment of debt charges of $7.7 million primarily relate to our April refinancing of our first lien debt, as well as the write-off of approximately $1.3 million of costs associated with the early repayment of our unsecured term loan.

Other income net for the second quarter of 2013 includes a $2.7 million gain on the insurance settlement for the replacement press in our packaging operations.

Turning to our cash flow highlights for the quarter. We generated cash flow from operating activities of $6.2 million in the second quarter of 2013 compared to $32.8 million in the prior year. The change in our cash flows year-over-year is due to an inventory build related to potential supply constraints and pending price increases for certain raw materials and the timing of interest in vendor payments compared to the prior year. We expect to work down the inventory build by the end of the year, and anticipate significant cash flow improvement as we enter our seasonally higher cash flow quarters in the back half. Over the last couple of years, we have historically experienced over 60% of our operating cash flow during the back half of the year.

Additional operating cash flow and working capital highlights include: DSOs having been reduced more than a full day in the current quarter compared to the prior quarter -- pardon me, prior year quarter; improved DPOs, which remain a focal point; cash paid for pension and postretirement plans in the second quarter of 2013 of $3.5 million compared to $4.8 million in the prior year; and cash paid for income taxes that was a net refund of more than $0.5 million in the second quarter of 2013 compared to cash paid for taxes in the prior year of less than $0.5 million.

Our cash flows from investing activities for the second quarter of 2013 reflect capital expenditures of $5.5 million, cash proceeds of $3 million related to the insurance settlement for the replacement press and cash proceeds of $1.7 million for the Atlanta envelope facility that we closed in the first quarter of 2013.

Our cash flows from financing activities for the second quarter of 2013 primarily reflect the refinancing of our first lien debt in April and the related transaction costs.

In regards to the unsecured term loan, we have repaid $15 million to date and expect to have this loan fully repaid this year. Once the unsecured term loan is fully repaid, we will look to further improve our capital structure by focusing on repaying not only our first lien borrowings, but also our higher interest rate and convertible debt securities.

In closing, as we report to you today, there are a number of opportunities in our marketplace with distressed assets and potential nonstrategic divestitures that would improve our current capital structure. We are optimistic about the future of our labels and packaging operations, given several equipment, personnel and technology advancements -- investments, pardon me, that we have made over the past several months. We also believe that a renewed focus on the top line performance within our transactional commercial print operations may return it to meaningful performance levels in the near term.

And with that, I'd like to turn the call back over to Mr. Burton.

Robert G. Burton

Thank you, Scott. I'll now ask Rob, our President, to give us some update on our strategic alternatives and status, what's going on.

Robert G. Burton

Thank you. I'll give a brief update on the strategic review process and some of the alternatives that we're looking at. As we mentioned previously and again in our press release last night, we spent the past few months working with our advisors in evaluating each of our businesses and potential strategic options. Our recent focus is now on divesting certain unperforming assets or assets that do not fit our future strategic plans. We are currently in advanced discussions with multiple parties for certain of our assets, including negotiating letters of intent, which I expect we'll conclude shortly over the few coming months. We've been very pleased with the response we have received to date. However, we are only are going to dispose of assets that makes financial and strategic sense for us going forward.

One thing that I'd also like to mention is that certain industry events that transpired in the last couple of weeks have thrown a wrench in some of our original timing. There have been several well-publicized deals that have been announced that's delayed our process given the buyer universe that we sort of deal in. We believe that once these opportunities are finalized and run their course over the coming few weeks, we'll get back on our original time frame. More importantly, since our last conference call, we have begun evaluating certain assets within certain industries that we operate. I know we've spent a lot of time on this call talking about this, but given how focused we are in deleveraging our capital structure and paying down debt, I want to overemphasize to everyone that any potential transaction being currently contemplated would have to make extreme financial sense and be in the best interest of our customers and shareholders. Any deal must be meaningfully deleveraging to our capital structure and must be immediately accretive to earnings and cash flow per share. Given all that is going on with our current operations, potential acquisitions and multiple potential dispositions, we've been working closely with our bank group on how this all may come together and fit under our credit agreement.

I'm very pleased in how supportive and constructive they have been to date and believe that we will get the support on any consent and waivers that might be needed, if at all, to accomplish our stated goals. We have shared with them our vision for how this may fit into our future and I believe they share our enthusiasm and optimism on how we can transform this company into something special going forward.

And with that, I'll turn it back to you.

Robert G. Burton

Thank you, Rob. I mentioned the sales.com and I thought it'd be appropriate, we have our Group President, Mike, who's in charge of labels and packaging. Mike, won't you take just a couple of minutes to talk about that and how that works within the organization and how we feel that's going to -- is helping us and will help us better?

Michael Burton

Sure. So salesforce.com has been rolled out to all of our sales personnel throughout the second quarter, which was a huge endeavor, which was really led by Paul Baker, our CFO of the label and packaging group. And we are now beginning to see the benefits of the tool. And what the tool really does is allow you to see a real time sales pipeline, which will allow us to be more accurate with our forecasting, but more importantly, will allow us to be more tactical in driving more opportunities. We really expect this tool to enhance throughout the remainder of this year. And we expect to see real benefits here in Q3 and Q4. Like I said, this has senior level support from the top level down. The rest are responding well to it. It allows us to see the whole Cenveo customer base, where our opportunities reside within our customers. It'll really allow us to sell more products -- of our other products to our existing business, which is really our best chance to grow our sales in the short term. So salesforce.com is often rolling its in best-in-class and we're excited to have it.

Robert G. Burton

And it's sure helping your group, I'll say. That's terrific. Okay, with all the open issues and pending potential sales core and some of the things that are going on, we're going to -- I'm not going to be able to give you a complete forecast. We feel -- we can probably do that at the end of the month or end of the next month. But what we do feel -- that the $75 million of cash flow we feel comfortable with that. We know that's going to be a challenge, but we still feel comfortable about it. We feel comfortable with our $25 million of CapEx that we're spending. We've pretty well got that laid out for the year. And we know we're going to be there. And I guess some of the other potential stuff that Rob talked about we're working on, we just need some time to see if we're going to get letters of intent. And when we do, what those mean and should we operate and move one way or the other. But we will get back to you with the rest of the stuff. But right now, it would be more like throwing a dart against the wall and I'd rather give you something more concrete than that.

So with that, operator, we want to open it up so we can have some Q&A from our audience, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Bob, I know you're under an NDA, but obviously in the media it's been talked wildly about this distressed competitor being National Envelope and this is their second charge into the Chapter 11 process. Back when you look in 2010 at their business, it had roughly $600 million of revenue and it's been reported that's down to around the $450 million to $400 million level now. When you look at that revenue and what you can probably assume is -- you'll probably take -- end up taking less than it's currently performed because of the lower margins that's probably on some of that work, are there any impediments that would prevent you or -- I know you're talking about kind of getting to that $30 million of EBITDA number, but what potential impediments could get in the way of that margin getting there?

Robert G. Burton

Well, any time -- and we've done this a lot, me probably more so with different companies. Anytime you acquire a company, you acquire a culture. But you need to make sure that, that culture fully understands what the game plan are -- and what its requirements are such as margins and sales goals and so on. I think where a lot of people fall short, they don't communicate to these companies coming in what we expect. And we've been able to pretty well do that. And we have review sessions constantly throughout the year where those individuals that run those businesses are sitting across the table and we just don't give them a lot of time. We put together or ask for a plan. If someone has a business that's a 7% or 6% kind of business and we feel it could be a lot better, and we have some ideas and naturally they have some ideas, they might have been restrained by capital and other things. And we'll give them time as long as there's a plan there. But there'll be a plan for everything because 10% is the floor on what we would expect. And we've been able to do that and we're not going to take anything less unless it's a staggard kind of plan that's based upon certain kind of milestones that they feel they need to do. It could be a customer churn. It could be a new piece of equipment that they have or whatever it is. But I've never seen a situation in my entire business career, both on the media side and on the manufacturing side, that you couldn't improve margins because it's just an easy thing to -- it's just like bringing home your report card. I mean, it's there. You see it every day and every quarter you know where you're at and how you got to be there. And there's no impediments on that. I mean, you either can get there or you can't get there and it's cost and it's focus and all the other things. There will be some managers that you always have that are used to doing things their way and those things don't work out. And we try to find those very quickly to make sure that they understand we're going to go one direction and if they want to go somewhere else, then they'll do that. But I will tell you what has happened today -- and I throw these numbers out constantly. When you talk about how many companies should be around and you talk about 50,000, then you talk about 23,000, there are very cooperating, let's say, cooperative employees in companies that are taken over by other companies realizing that there are just not that many jobs around. And when you have to travel halfway across the country to find a job that, that's just not good for your family or anybody else. So I have found very few people that really don't want to be part of our team. And I've talked to Mark Hiltwein and his organization on just the general thoughts of the organization that they have visited. And we feel very comfortable that we won't have those kind of impediments. I don't see it.

Charles Strauzer - CJS Securities, Inc.

And Bob, you talked a lot about pricing pressure. And obviously, when you have a wounded competitor like that, they can get much more aggressive, kind of trying to survive. Are you starting to see some of that pricing pressure abate a little bit?

Robert G. Burton

Well, it's interesting. Abate -- those are pretty good words. I never -- if we ever find -- it's the salespeople today -- when you have people, when they're selling, they have certain things they can do. There are limits and how high they can go. And I've never understood how people can come in and almost just give things away. But no, I would think that we're going to find that people are going to be looking forward to be part of the organization and what we're going to have, and I don't think that they won't be able to do what we could do because they're smaller or larger. That's -- forget about it. If you're managing people, if you're managing -- you got 12, 15 people you're managing, they know exactly what they can sell. But if you've got a sales organization and the strategy of the company is to go out and be a low-cost producer -- and by the way, that's not bad. I'm not saying that coming into an industry and being a low-cost producer is bad. But what you got to do once you get in, you got to get out. You got to come back and you got to be able to convert those customers. But if you do that and then you also have manufacturing problems, you're dead in the water. And in today's world, it's like you go buy a Chevy and you can buy it from a guy that's selling it for $15,000 and everybody else is selling for $20,000, you're going to go to that guy that's going to sell it for $15,000 no matter what. But what has happened and some people will try to build up inventory, which they have. They've tried to build up inventory, anticipating that there may be some changes taking place. And there are some that will just play it right to the end and try to make their own kind of decisions. But I think it's going to be all over and we will find that if we do this thing, we're going to be able to control it in an orderly fashion and not be any kind of hiccup that would give us problems with inventory or pricing out in the market. But there will be some people that have used this customer for a long time and will search the world over and maybe go, I don't know where, looking for those kind of prices. But what happens when people -- a person that's a low-cost producer goes away from the market, normally the market neutralizes itself to a price that is at least where there's some margin where in the past there wasn't margin.

Charles Strauzer - CJS Securities, Inc.

And then just lastly, what -- just give us a sense of timing as to when you think a decision might be made on these assets?

Robert G. Burton

Well, Rob, I'll let you answer that because I'm -- I've been beating him up everyday and asking him and he's not looking too good these days.

Robert G. Burton

No, I think the answer, Charlie, is I think the -- like you said, we're subject to confidentiality, but I think it's our goal to get something done by beginning of fourth quarter.

Robert G. Burton

Charlie, I will add that we really -- we're pushing ahead. We're trying to do everything possible. And our objective, and I said this earlier in my earlier comments about trying to save jobs and then trying to -- the quicker this thing gets resolved, the more jobs will at least have an opportunity that they'll be part of our organization because I'm telling you, these costs and stuff and margins are a real issue. And you need to get it done because things just happen and things go away and they're not what they used to be. So we're pushing as hard as we can to get this thing resolved as quickly as we can. There's no thing that I know that we're holding up on any side.

Operator

Our next question comes from Jamie Clement at Sidoti.

James Clement - Sidoti & Company, LLC

Bob or Rob, the press downtime that you had in the first half, I understand that the new press is in and up and running as of -- was it this month or last month?

Robert G. Burton

End of June.

James Clement - Sidoti & Company, LLC

End of June. So effectively, it was essentially out of service for most of the first half, right?

Robert G. Burton

That is correct.

James Clement - Sidoti & Company, LLC

Okay. So I think -- I mean, just doing some math on -- some basic press math and that kind of thing, I mean, should we assume the overall impact to first quarter -- excuse me, first half revenue was somewhere in the $10 million to $20 million range? Is that, in terms of lost revenue, is that a safe assumption?

Robert G. Burton

Yes, I think the answer is it's incalculable. I think that's an easy answer. Because again, we're not able to install [ph] a press for 6 months, especially the type of press that went down, which was probably one of the most heavy-running, best running completion equipment we can have across this organization. But yes, it's...

James Clement - Sidoti & Company, LLC

In one of your best markets?

Robert G. Burton

Yes. And so again, the number, it's big. It's probably -- I don't think it's the wide end of your number, but it's pretty close to probably the short end of your number in terms of that sort of financial impact. But what we can't calculate, Jamie, is that sort of the -- if you put good cost of sort of we're sort of using for the first half year by outsourcing work that we did keep, running over time, running work in less profitable facilities, that's a big number that we'll probably never going to get back from our insurance company just given the fact that we can't prove it. So it's a big number. The brain damage is now behind us so we can move forward in the back half of the year with it sort of resolved. So we're very happy about that.

James Clement - Sidoti & Company, LLC

Yes, and I think, Rob, I think one of the reasons perhaps the stock is down today in addition to perhaps some people looking for some short resolution on Company A or National Envelope, to quote Charlie Strauzer, other than that, I think that perhaps some people look at your typical first half EBITDA percentage versus your second half EBITDA percentage and say, "Hey, there's no way that you can come even close to the numbers that are out there." And I think that if you factor in the press and you figure that revenue flows or in fact did not flow to the EBITDA line at a probably a pretty high margin, maybe the numbers, in fact, don't look so bad, right?

Robert G. Burton

Yes, I think that's a portion, too. I think we did talk about the sort of envelope pricing dynamic that we saw in the last couple of years. We definitely saw within the last 18 months, we saw probably 5% revenue -- of average price down across our business. So extrapolate that over a $700 million platform and you can get a number here. That definitely impacted our quarter and I think that's unsustainable. And we sort of alluded to that before. So I think that's going to change. And we have seen that sort of change in the last 30 days as well. I think we have seen our average selling price tick up here. I think it had better mix with credit card sort of roll in and also with sort of the competitive dynamics out there. So there's a lot of things going on behind the scene in Q1 and Q2 that we think are behind us or will be behind us shortly. That sort of -- you can't necessarily use a historical sort of 60-40 back half split. I think we're very comfortable about that trend is continuing on the cash flow side. EBITDA is a little fluid right now given what's going on with some of these dispositions and acquisitions. But I think we're feeling pretty cautiously optimistic about the back half and what we're seeing right now.

James Clement - Sidoti & Company, LLC

Okay. And a follow-up just regarding this bankruptcy process and I think you said a couple of times you might have resolution in the fourth quarter. When you're talking about the fourth quarter, are you talking about actually finally owning this business because, I mean, obviously, we know what the bankruptcy process looks like. I mean, there are -- I assume we could be hearing some announcements. There are going to be public announcements out of the court, I would assume, before that, before the fourth -- long before the fourth quarter, from what I understand?

Robert G. Burton

Yes, I think, Jamie, to answer your question, we expect this thing to be fully resolved by the beginning of the fourth quarter.

James Clement - Sidoti & Company, LLC

Okay, but that there would probably be some sort of court-dated bid process that would be long before that, I would assume, right?

Robert G. Burton

You could assume.

James Clement - Sidoti & Company, LLC

Okay. Moving on to strategic alternatives in general. How much does the resolution of whether you end up or don't end up with some of these assets -- how much do the rest of the alternatives that you're all considering are dependent upon the resolution of the National Envelope situation? Like, in other words, is it relevant to you whatsoever to unload a product line or 2 product lines in advance of a potential purchase of some of these assets? Or are you pretty much -- are you basically hamstrung from essentially getting rid of something until you buy this? I don't see any reason why you couldn't necessarily do away with something that you weren't committed to for the long term and still be involved in this process. It wasn't clear from your remarks, in my opinion, whether this needed to be resolved first before you could take action on the others. So I was wondering if you'd comment on that.

Robert G. Burton

The answer is, no. Jamie. No, meaning it doesn't.

James Clement - Sidoti & Company, LLC

So in other words, your ability to continue with the strategic alternative work and potentially get rid of assets that you do not view as core has nothing to do at all with the process involving this...

Robert G. Burton

No, we're looking at these as individual items. And where do we invest and is this going to be a good deal for our stock price. And the answer is no. And also Jamie, the -- as Rob mentioned, the $25 million I mean, since we've really focused on this, I haven't had a chance to go out and buy any stock because I have been blocked. But rest assured, because of what I know now and you asked about the future of this company and what that $25 million does to us on a quarterly basis -- and I know everybody looks at "what can you do for me yesterday," but I know what that does for me going forward and to our business with or without whatever we're doing. And that's a factor that's going to make -- at least to me, it makes it a lot more appealing both from the stock side and also on the bond side because smart people are going to look through that as I am and other people will understand what that means. With this conversation here, when we come, they tell me I can't say this, I can't say that. Hell, I don't know what can I say. But I can say one thing, I know what $25 million does to you when you add it to your EBITDA that you haven't had in several years. It means a lot.

Operator

Our next question comes from Kevin Cohen at Imperial Capital.

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

I guess, Rob, going back to your comment about the 5% sort of degradation envelope pricing, to the extent that the envelope industry does rationalize vis a vis competitor A, do you think you can recoup all of that 5% excluding any sort of mix changes?

Robert G. Burton

I think -- again..

Robert G. Burton

Hell, I hope it's more.

Robert G. Burton

I think the answer is there's a couple of things going on. The pricing obviously is unsustainable given some of the carnage in the industry. So and then I think at some point here, the mix is getting slightly better. So I think the answer is, I think we can. It's just unsustainable. And we've seen smaller competitors just being thrown on the side of street here in terms of what's going on here. So the pricing in the current market is unsustainable. We do think it starts to head in the right direction, but obviously I can't control that. So the answer is hopefully.

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

And when you look at the envelope spaces, Tension Envelope, are they being generally supportive of industry pricing? How are they sort of behaving price-wise?

Robert G. Burton

Yes, we're not going to be talking about specific competitors here. I think there is a competitive dynamic out there. And historically, there's been one competitor who has led the sort of pricing going in one direction here, but we're not going to talk specifically about competitors, Kevin.

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

Sure, and then going back to the asset disposition comment about potentially talking to the banks about consent and waivers. Can you shed a little bit more color on that in terms of the use of proceeds? Is that sort of a signal, perhaps, to buying some of the junior debt at a discount? Or how should we kind of think about those comments?

Robert G. Burton

Yes, absolutely. I think just given there's a lot of different options on the table depending how each one of those sort of play out, it is our goal to, obviously, pay off our highest debt as soon as we possibly can while at the same time living under the current construct of our credit agreement. So the answer is yes, I think that's our end goal here. Obviously, we're trying to pay down debt and obviously lower our sort of cash out the door to interest payments. So that is something we're definitely considering in this whole process, Kevin.

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

And Rob, when you think about asset dispositions, I know you talked about a little bit of a delay vis-à-vis what's happening with sort of Printer A, if you will. But in terms of the order of magnitude cumulatively of the potential asset sales, is there anything out there to suggest that, that has changed at all versus...

Robert G. Burton

No, not at all. I think you're right, Kevin. I think what's changed has been there's been a couple deals out there besides Printer A, that have been public and some of them are not public, that has, given the sort of buyer universe that we live in, has sort of distracted people. And I think that hasn't changed our thought process at all on what may ultimately get done.

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

And then lastly, just from a bookkeeping standpoint, the working capital in the second half of the year, I know you mentioned about intentionally building up inventory ahead of a price increase. How much, roughly can you potentially source in the second half versus 6/29?

Robert G. Burton

Well, I think Scott said it pretty well. I think we anticipate all that inventory and then some to come back in the back half of the year. I think we had a material price increase of, if you add everything, it's only probably 15% in one the grades of paper that we consume. So we thought it was prudent for us to go out and buy ahead of that. And also sort of going into the second half of the year, Scott sort of mentioned on the AP side of things, we've done a good job getting those numbers headed in the right direction. So we're probably talking about tens of millions of dollars, in addition to the $15 million of sort of inventory coming our way here in the back half of the year. So we've got some work to do, but we definitely see a clear path to getting that done.

Operator

Next question is from Lance Vitanza at CRT Capital Group.

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

Just back on the M&A front. So if all goes according to plan, you buy some assets, you sell some assets, is this likely to be a net inflow or outflow of funds? In other words, are assets and proceeds likely to be greater than purchases or vice versa?

Robert G. Burton

Significantly. So I think the way we're sort of looking at the world right now, we sort of made the comment it's got to be significant deleveraging. That's where we want to focus people back to sort of our EPG acquisition of a couple of years ago where we bought something and when it all ended up paying for 1x to 2x. That's sort of what we're looking at here to get anything done on the purchasing side of things given what we're looking at. But on the disposition side of things, if you sort of do the math here, it can be significant. So it should be a not only probably a cash inflow, but hopefully our EBITDA should be relatively the same when it's all said and done.

Robert G. Burton

All right, okay. Thank you, ladies and gentlemen. And we'll keep in touch. Very good.

Operator

The conference is now concluded. Thank you for attending. You may now disconnect.

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