Cenveo, Inc. Q2 2008 Earnings Call Transcript

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 |  About: Cenveo, Inc. (CVO)
by: SA Transcripts

Cenveo, Inc. (NYSE:CVO)

Q2 2008 Earnings Call Transcript

August 7, 2008 10:00 am ET

Executives

Rob Burton, Jr. – SVP, IR and Communications

Robert Burton, Sr. – Chairman and CEO

Mark Hiltwein – EVP and CFO

Analysts

Charlie Strauzer – CJS Securities

Jamie Clement – Sidoti & Co.

Chitra Sundaram – Cardinal Capital

Operator

Good morning and welcome to Cenveo's second quarter 2008 results conference call. Today's host will be Mr. Robert Burton, Chairman and CEO of Cenveo. This call is scheduled to last approximately one 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.

Rob Burton

Good morning, ladies and gentlemen. This is Rob Burton. Welcome to Cenveo's 2008 second quarter conference call. Today's call will be hosted by Robert G. Burton, 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, impairment, and other related acquisition charges. For further details regarding these factors, please reference pages 11 and 12 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 Burton, Sr.

Good morning, ladies and gentlemen. This is Bob Burton speaking. And as you know, I am your senior manager at Cenveo. For the past 37 months, I've been reporting the Cenveo results.

Historically, when we have these calls, I get up in the morning and turn the news on just hoping that it's positive instead of negative, as it was today, with a lot of people reporting not so great news. But what we got to report is very good news. We are going to be reporting our results for the quarter and how we delivered the quarter.

We are going to be talking about the back half of the year and how positive we feel about the year. And talking about how we get to where we're at and where we're going. So this is going to be a positive kind of upbeat versus some of the other calls you've had where people have missed numbers and have excuses.

We started back in 2005 here at Cenveo delivering a full year EBITDA of $96 million and a second quarter performance of $20 million of EBITDA. And today, we are delivering EBITDA of $65.3 million versus a budget we gave you of $64 million, and that $65 million relates to the $20 million that Cenveo delivered the first year we were here.

And the $300 million EBITDA number that we are going to be talking about for the full year relates to the $96 million that Cenveo did for the full year in 2005. So we've come a long way. We've come a long way, and we've got a much further to go. But we are delivering what we say we were going to deliver, and I think that's a very positive thing.

Once again, we were able to achieve our financial commitments and post record results, despite facing a challenging economic environment that has to be the worst that I have ever faced in my business career.

And we did this during our seasonally slowest quarter. And during this quarter, we were able to, number one, we were able to improve our operating margins from 8.1% to 9%, you know our long-term goal is a 10% margin number.

Number two, we generated strong cash flow of $126 million of cash flow from our continuing operations for the first six months of this year.

Number three, we've decreased our debt by approximately $14 million during the quarter despite paying for the acquisition Rex and despite paying our seasonal highest cash interest payment during the second quarter. So if you look at those benchmarks, those are all very positive.

During our March 14th 2008 conference call, as most of you remember very well, we reported on our fourth quarter results and alerted you to the fact that we were seeing a major slowdown in the so-called multiple color financial mailings that we're a leader in, in this market.

And the question keeps coming up. Why are we able to deliver our budget when other so-called printing companies are missing their numbers? And we were one of the first to talk about problems in the economy when we talked to you on that conference call and talked about the lack of information in the direct mail market, but we immediately, after that call, and before that call, implemented a plan that we will call cost reduction improvement plan 2008.

And that was a plan that we committed that we were going to deliver $300 million of EBITDA. And we had a lot going on for us. Most people think you can just go and layoff a lot of people and make numbers. And you can do that, but we don't do that. That's part of the plan. But the other part of the plan is a continuous improvement and focus in areas that most people don't look at. And there are 10 of them. And I just want to run through those 10 just to remind you that when we talk about cost savings and improvement plan, there is more to that than just cutting discretionary expenses.

So number one is headcount, everybody does that. And the only thing we don't give out the numbers of headcount because it's competitive information, and competition takes that number and add a couple zeros to it, so we don't do that. But we did reduce heads, and we reduced heads where we felt we had margin improvement to go.

Number two, we also did discretionary cost reductions across the board. And by the way, we have those identified when we put our budget together for 2008.

Number three, we've talked to you about productivity improvement in our plants and how it takes three to four years of actually getting presses to run at certain speed and having certain kind efficiencies. We are seeing that improvement now.

Number four, in the workmen comp area, it is without a doubt, we do the most superior job in this industry of making sure that we keep workmen comp numbers down and a leader in the industry, and we continued to do that this year.

Number five, medical costs. We've put together medical plans that benefits our employees where they can pay less and the company benefits more by the structure of the plans that we implement.

Number six, waste paper, which people normally – when we first got here they thought it was the stuff you just throw and put them in the waste can. This waste paper has turned in to be a profit center for us at our company and is doing very well for us in 2008.

Executive sales, we talk about all the time of looking in that large accounts that we haven't been in. We have been working on that before, and we have been very successful in closing some of those as long as we have, with item eight, in cross selling, which I started at World Color and everybody seems to say they are doing that, but we have been very successful this year in cross selling our products.

And that's because of leadership of our three Presidents, who actually are pushing cross selling within their own area of responsibility and beyond that.

Number nine, when we first got here, the purchasing department made a commitment to come up with new supplier contracts. And we have done that and we have continued to reap benefits from that because we really were asleep at the clutch before we got here on what we were signing up for.

And lastly, the vendor improvements, on everything we do and everything we spend, we try to get the best possible price, and we have done that through the leadership of our purchasing department.

So, if you look at how do we constantly deliver our numbers on what we talk about, it's because we have a mix of cost reductions and all these other pieces that we've developed over the years that help us deliver what we say we have going to deliver. And I told you all along, we always have a plan every year to get to where we want to go.

And on top of that, on top of these 10 improvement items, we really, when you look at our business, we really are a targeted niche product offering, but that we offer our customers as the rest of the printing industry really doesn't have the same kind of products and doesn't have the same kind of growth potential we have with the products that we offer our customers.

So if you put all that together, that's the reason why that the $65.3 million is up 17% versus prior year and that sales are up some 6% versus last year.

And on the subject of sales, I just want to remind all of you – and we sometimes get lost in this that our primary focus is and has been on profits. It's not revenues. And it's not that we don't focus on revenues we do, because we look at the top accounts and we look at the sales people, we constantly rotate the sales individuals where we are not getting performance. But our focus is on profits and not revenues.

And to improve profits and margins, we do consolidations, we do close downs the plants, we close down back office functions and just functions in corporate. And we do those close downs part of our ongoing operations, especially doing acquisitions and that improves results.

And we have been doing these integrations since 1991 at World Color, we did them at Moore, and we are doing them at Cenveo. And these actions allow us to improve margins, like at Cenveo, we are going from 2% to our 9% this quarter.

And some of you want to add these acquisitions that we do to our current revenue total and come up with new total. It just doesn't work, because of the way we operate. And we are really not in the business of counting same-store sales each quarter.

But we do integrate a lot of businesses, and you will find that in some businesses we are doing multiple locations, and we are selling products, and we may close down one location to improve another location, but it's not a primary focus, and you hear us talk about profits and EBITDA, as I told you, was our primary focus, and that's the reason why.

But if you look at our revenues for this year, just for the record and for your models, we are going to be looking at about $2.2 billion or $2.3 billion in that range, give or take between now and the end of the year. I just want to say that again it's not something that we don't talk about much, but the profit allows us to do a lot of things that we haven't been able to do before.

So, following our normal format of a one hour meeting, Mark Hiltwein, our CFO, is going to review our financial results, and then I'm going to come back and cover four business items, and then we will open up the call for Q&A.

Now, the four items that I plan to discuss, one is I want to give you an update on our acquisitions and what's going on there, both small and large.

Secondly, I want to talk to you about something we are very proud of, our employees scholarship plan for the children of our employees.

Number three, I want to talk about the third quarter and full year guidance for 2008, and item four, I want to talk to you about purchasing stock and what's going on with stock with us.

And now, I am going to ask Mark to review our second quarter and six month results. Mark?

Mark Hiltwein

Thank you, Bob. Today, I will be covering the following topics. First, I will provide a highlight of some key financial measurements for the quarter, and then I will give a general business and segment overview, and lastly, I will review the financial statements including restructuring and integration activities and key balance sheet and cash flow items.

Net sales for the second quarter of 2008 increased 6% to $524.5 million from $497 million in 2007, an increase of $27.5 million. This was primarily due to the acquisitions of ColorGraphics, Commercial Envelope, and Rex Corp.

Gross profit margins increased from 19.1% last year to 20.5% this year. This was significant because we have seen an increase in material costs, and we have been able to offset the impact of the increases with all of our cost savings initiatives and by passing on increases to our customers.

Non-GAAP operating income increased $7.1 million from $40.3 million in the second quarter of 2007 to $47.4 million this quarter, representing margins of just over 9%. Non-GAAP income from continuing operations was $18.3 million or $0.34 per share, compared to $15.9 million or $0.29 per share last year. EBITDA for the second quarter was $65.3 million, an increase of $9.4 million or 17% over prior year.

Our cash flow continued to be strong as we generated $72 million in net cash from operating activities for the quarter. The major contributor to this was the $26 million cash flow from the reduction of our accounts receivable. For the quarter, we reduced our DSOs from 52 days to 49 days, and we expect to see that continued improvement through the back half of the year.

The cash generated was used to pay down our debt. Our debt balance was reduced by $14 million versus the first quarter ending balance. This was accomplished in the quarter in which we acquired Rex Corporation and the Rex facility for approximately $50 million and made cash interest payments of approximately $35 million.

Next, I would like to provide an overview of the business. The second quarter can best be described as a solid performance in a difficult environment, achieved through aggressive cost reduction programs. The cost reduction programs were not only attained through head count reductions but also through manufacturing efficiencies, waste and spoils reductions, safety initiatives, and an overall discipline on all discretionary spending.

The overall general economic conditions had a direct impact on both of our segments. Most of our customers are working to produce their products at reduced budgets. They are looking for ways for us to help them cut their costs. In addition, we are seeing rising input and distribution costs that are passed to us from our vendors. This has caused us to adjust paper grades, basis weight of paper, and the facilities where the work is to be produced.

One of our competitive advantages is the strong geographic footprint we have across North America with our 78 facilities. In our Envelope group we have just finalized the system integration of all of our facilities. This allows us to estimate, price, and schedule work across our entire platform, which provides us with the best opportunity to place work into the best plants for distribution purposes. This also allows us to provide our customers with better service and better response times.

At the end of the first quarter, we announced and executed on our $25 million cost savings program. These savings were primarily achieved through head count reductions. These reductions did not impact sales or manufacturing and actually improved our estimating, scheduling, pricing, and customer service functions.

We continue to meet weekly with our field operation leaders and continue to make the necessary adjustments in our cost structure to align our costs with our expected revenues. Although we've made significant progress in the cost savings area, we believe that there is room for additional cost to be driven out of the organization, and we are focusing daily to deliver on our commitments.

The Envelope group continues to experience the same trends we discussed in the first quarter concerning the financial institutions' reluctance to use high-end direct mail envelopes. Recently though we have seen an increase in quoting and testing and believe that this will eventually translate into increased business.

Our labels and forms business continued its positive performance. This was achieved by rationalizing the documents manufacturing platform as well as excellent operating performance from our custom label facilities.

In relation to our commercial printing business, we feel very good about the prospect for margin improvement. We have talked at length about the state of our general commercial business and the fact that we were not at all satisfied with the results and the margins. The change in management that occurred has improved the prospect for margin growth and provided significant cost savings opportunities as well.

We have seen an increase in sales activities as we have concentrated on cross selling across all of our business lines. Our journal and specialty magazine and our packaging business continue to be strong contributors with steady revenues and solid margins.

With regard to our segment information, our Commercial Print segment consists of general commercial printing, Cadmus, which is our short run journal and specialty magazine business, and our packaging business.

Our second quarter Commercial Print revenue of $296.6 million was relatively flat with the prior quarter and approximately $12.6 million higher than the second quarter of 2007. The increase over prior year relates to the acquisitions of ColorGraphics and Rex, offset by lower sales resulting from plant closures, the impact of the economic environment, offset partly by higher sales as a result of material cost increases.

In regards to operating income, the Commercial Print operating income was $13.3 million, which includes restructuring, integration, and acquisition charges of $5.8 million and includes the benefits relating to the implementation of our $25 million cost savings program instituted in the first quarter.

When you add back the impact of the restructuring and related charges, the Commercial Print non-GAAP operating income was $19.1 million or a 6.4% EBIT margin.

Consistent with our strategy, we have been successful in growing the journal and packaging business to mitigate some of the exposure that the general Commercial Printing product experiences during economic downturns. Our journal and packaging business continued to do well even in the current environment. And specifically, our Rex Corp. exceeded our expectations for contribution in the second quarter.

With our current management alignment in our Commercial Printing platform, we believe that we have seen the bottom in the Commercial market and are now positioned to increase our margins through improved manufacturing efficiencies, reduction in waste, and by achieving sales wins through our cross selling efforts.

Turning to our Envelopes, Forms, and Label segment, our EFL revenue for the quarter increased approximately $15 million to $227.9 million compared to $212.9 million last year. The increase over the prior year is due to sales generated by the Commercial Envelope acquisition as well as price increases due to paper costs.

This was offset in part by plant closures associated with the integration of Printegra, lower volume due to the general economic environment, and the impact which is being felt in our high color direct mail envelope business.

In regards to operating income, our Envelopes, Forms, and Labels operating income was $32.2 million or 14.1% of sales. Sequential growth in operating income from the first quarter of 2008 to the second quarter was $6.6 million or a 26% improvement. This is a clear indication that the cost savings initiatives that were executed on in the first quarter are taking hold, and we are gaining traction daily.

The restructuring, impairment, and integration charges for the EFL segment were $1 million in the quarter. Our EFL non-GAAP operating income after adding back the impact of restructuring and integration charges was $33.2 million or 14.6% of sales. The first quarter of 2008 non-GAAP operating income margins were 11.5%.

The improvement in the Envelope business has been achieved despite the financial institutions continuing not to use any high end direct mail envelopes.

Our Label and Forms business continued to perform well both from a revenue and profit perspective. This product segment is driven by our custom label and prescription drug label business that continued to prosper. They have also done a tremendous job on the cost side and continue to look for opportunities to achieve greater results through organic and acquisition growth or as a result of continued cost savings.

Next, I would like to provide a summary of our financial statements. As highlighted in the press release, our GAAP income from continuing operations for the second quarter of 2008 was $3.1 million or $0.06 per diluted share. Our non-GAAP income from continuing operations for the period is $18.3 million or $0.34 per diluted share.

The differences between our GAAP and non-GAAP net income from continuing operations for the quarter can be summarized by the following. Restructuring, impairment, and other charges of $5.4 million.

These charges relate to employee separation, asset impairment, lease terminations, and building cleanup. $4.3 million relating to non-cash stock-based compensation. A loss on the early extinguishment of debt of $4.2 million relating to the conversion and issuance of the $175 million, 10.5% Senior Notes.

Integration acquisition and other charges of $1.6 million, and the tax expense was adjusted to reflect the company's cash tax rate of approximately 11%. Cash restructuring for the quarter was approximately $6 million.

Continuing down our income statement, on a consolidated basis, our non-GAAP operating income for the second quarter was $47.4 million, an increase over last year of 17%. Our interest expense was $26.2 million for the second quarter of 2008. The increase was primarily due to additional debt incurred for the acquisitions in 2007 as well as Rex Corp. in 2008, partially offset by lower rates.

Interest expense in the quarter reflects average outstanding debt of approximately $1.4 billion and a weighted average interest rate of 7% compared to an average outstanding debt of approximately $1.1 billion and a weighted average interest rate of 7.4% in the second quarter of 2007.

Our goal for the remainder of the year is to reduce our leverage ratio closer to the 4.5 times. Our next maturity is in June 2012. This is our revolving credit facility which had only $27 million outstanding at June 28, 2008. And our debt portfolio is 90% fixed versus variable as of the end of the second quarter.

Some key balance sheet and cash flow items include the following. Cash balance of $12.5 million at quarter end compared to $15.9 million at December 31st 2007. Total debt of $1.38 billion versus $1.44 billion at December 31st 2007, a decrease of approximately $63 million even after the acquisition of Rex.

Net cash provided by operating activities was $126.4 million for the six months ended June 2008, a 233% increase over prior year. CapEx for the quarter was $16.3 million, and $25.4 million for the six months. Cash interest for the quarter was $34.9 million. Cash taxes for the quarter was less than $100,000. Keep in mind that we still have approximately $220 million of net operating loss carry forwards.

In summary, this difficult economic environment has required us to reassess our costs platform constantly and ensure that as trends in the business environment change, we can proactively adjust our cost platform. Our cash flow remains strong, and we will continue to pay down debt. And when appropriate we will make acquisitions in the product segment that we feel provide us the best growth opportunities and the strongest profit margins.

With that, I would like to return the call to Bob.

Robert Burton, Sr.

Thank you, Mark. I will now update you on the business items that I would like to discuss. Item one is acquisition update. Our primary focus has been to generate cash and pay down debt for the last six months. We're not out of the acquisition business as we are doing some very small deals that we talked about, this Rex and a couple of others that we are looking at, small deals meaning the $20 million to $50 million revenue kind of deals.

And the economy really has made these deals more reasonable to purchase and more likely to happen in this kind of environment. And as you know, no one does a better job than Cenveo with acquisitions on cost cutting and being accretive. And I am very proud of the fact that we have done 63 acquisitions in my business career, and we plan to do more in the future. But we need to do bigger deals to reach our short-term goals.

And those short-term goals we have outlined to you is the $3 billion of revenues and the $400 million of EBITDA. But we really need to look at these bigger deals where they have the right price, they fit within our platform, they have good management, and they give us an opportunity to grow with our company.

And this is what we do better than anybody in the printing industry in manufacturing, and I just want to advise all of you that we're actively looking at these larger deals, at the same time doing the smaller deals, and we feel that there is an opportunity out there in the marketplace and hopefully the financing is going to get better as the year progresses along.

But we are active in all of these things because again this is what we do, we do it better, and we think there's some opportunities to help us reach these kinds of goals and even help us in some cases to delever.

And there has been a lot of rumors around about us getting back into the long run magazine business. And I will tell you we have been approached several times by certain investors that feel that we could add some value into some of the businesses that used to be in that or are in it.

But right now we think our platform that platform that consists of the journals, the labels, the envelopes and the packaging and commercial, and especially the international packaging really gives us more opportunity to grow faster and to protect ourselves for short-term. So, there is a lot going on there and a lot of opportunities, and we will continue to look at some of these other things as they come up. But I just want to keep you advised that we are active in these areas.

The scholarship program may not sound like a lot. You say how does – what does that have to do with the business? It has a lot to do with the business. We need to, as managers, to really communicate to our employees and let them fully understand that we are all in this thing together and we want to do what we can to help, especially in light of the difficult economy that we're in.

When we first took over the management of Cenveo, I outlined a 15 point program that we wanted to take place after the proxy fight took place. And we committed to developing a scholarship program for the children of our employees. And I feel very strongly about this.

Most of you know that I have said this about 100 times that if I hadn't received a scholarship to go to college I never would have gone and probably still be in that same coal mining town that most of the guys that I went to high school are in. But we started this same type of program at World Color, and we started a program at Moore. And the program is pretty simple. It is funded by the senior management and the board of directors.

And I just want you to know to show you my commitment. I personally donated $100,000 for the first year, and have donated or committed to donate another $100,000 per year for the next nine years for a $1 million commitment. And again, I feel very strongly about this program. And there is nothing that we can do that sends a clearer message to our management and our employees that, hey, we do have some programs and we want to help out.

And you should be assured that there is no Cenveo dollars that are being spent on this program that assists the children on our full time employees to attend college. We are paying for all of it ourselves, and I think that's good. The application process is (inaudible) already gone out.

We sent these applications out to our employees or to the HR department. And we plan to go through a process here where we are hopefully – we are going to be mailing about 100 checks to 100 students by the end of the year, which I think is pretty good.

And again, we feel very strongly about giving back on this. And I don't know how many companies actually have these programs. I think a lot of them have some matching programs, but I don't know of any company that management is actually funding the program, and we have treated this the same way we treat contributions, that, that ought to be a personal thing and not a company thing.

So I wanted you to know that we are doing some good things with our employees, and we think it is going to pay dividends over the long haul.

Item three, I talked about the third quarter and full year guidance. I want to again remind all of you that EBITDA and free cash flow are the key measurements for our business.

We talked about that and we will continue to talk about.

That's what's going to determine if someone is going to buy us or if we are going to be integrated or how we are going to end up this story. EBITDA is the measurement, and we talk about it every day on our calls, and everyday in all of our meetings is our primary focus.

So if we look at the full year forecast, probably sounds like a record just keep going over and over again, but the EBITDA we are still forecasting $300 million. It may not sound like a lot to you, but last year, we did $256 million and that $300 million is a 17% increase in a very, very difficult kind of marketplace.

And I would venture to say most people would have backed down on that early in the first quarter and look for new numbers, and we haven't done that. We have committed to deliver that $300 million because we think it's the foundation for where we need to go in the next several years.

The free cash flow number is going to be at least $130 million. And the CapEx number that we have committed to is $40 million, and that's the full year number. And some of you asked how can we do that with so little? You got to remember that the acquisitions, the major acquisitions that we've made, we have made sure that capital had been spent; dollars have been spent before we acquired those companies.

And that's a major reason for us to buy certain select companies. But the CapEx number of $40 million is still a good number for us.

If you look at the third quarter, and that third quarter number is for EBITDA is $80 million. That's a big number, but you got to remember we did $69.4 million last year, and we are looking for a 15.2% increase in that number. We feel good about it because we know that is a busy time of the year.

Mark talked about a lot of activity of quoting that we have seen. And we are still not counting on any major improvement in the direct mail. We still haven't seen it. We have seen bits and pieces, but we haven't seen the major take and I still think that's a 2009 event.

So, for the third quarter, we are looking at $80 million and that's the third step to get us to the $300 million. And the free cash flow number is $50 million. So again, for the third quarter, $80 million for EBITDA and $50 million for free cash flow.

The last item, I call, purchasing stock, and I have been thinking about this for a long time. Never could understand it. As most of you know, the Burton family owns 5.3 million shares of the Cenveo stock. When I say family that sounds like some kind of trust, it isn't. It's the money that we made on all the other printing deals that we have been involved in. And that's the money we have invested here.

And I will tell you we have most of our net worth invested in this company. And I think it's good for you to know that, that we probably sleep less than you do at night worrying about what's going on with the stock price.

We are the largest individual shareholder when you think as an individual, and rank number two in total stock ownership, plus we own some bonds, probably $10 million to $12 million of Cenveo bonds. We started purchasing those because we wanted to have a deeper ownership in several areas.

But each quarter, I have personally purchased Cenveo stock in the open window, and I plan to do that this quarter. And I say that because actually three quarters ago I didn't say that, and there's an individual who sold out his entire section of stock because he thought we were going to have some problems that I wasn't buying. But I want you to know that the window opens this afternoon, and I plan to buy in this open window.

And most of the time, I spend over $1 million in purchasing stock in this open window. And I have bought not on the downs; I have bought every month whatever the price is. And I don't try to figure it out anything, I just basically call my broker and he probably wants me to say his name, but I'm not and actually give him an order to buy Cenveo stock.

And this does not include what I buy on the employee stock purchase plan, which I spend the max every month of buying, which is $10,000 a month. And everyone around this table here that are on this call and the senior managers also are in the employee stock purchase plan, and most of them buy in the open windows as some of the board members buy in the open window.

But when I think about it, that this is the same company that was selling for $26 not too long ago, and here we are at $9 and $10 and change and the company hasn't changed at all. We have delivered every number. Our growth plans are on target.

We did have a bump in the road with the Jacksonville Dallas controller issue which really turned out to be an isolated case, where we spent fortune on, where you are seeing still some of the dollars that we're paying. But that's behind us, and that's a good learning experience, and it will never happen again.

And I have always said that this is a $30 stock and when the market gets better, I am going to be the guy with a big smile. And I tell our employees constantly that they need to prepare and do for the future and buy whatever they want to buy, not necessarily Cenveo stock.

But if you work here and you're a senior manager, we have requirements for all of our people. And it's basically 5 to 2 times I think on their base and bonus and that is a requirement. And we don't really have to tell them that. They know that, because they want to actually show that they are investing.

But I always wonder how much impact it has upon investors that I purchase $1 million of stock each quarter when there is some of our competitors who don't buy anything at all. I would say for them to know what a Form 4 would be a strange question to ask.

And I just ask myself to ask our investors how many CEOs do you know, and you actually own their stock, who is committed to their companies that I am of buying the stock and not having wealth to do that with. I am changing assets to spend that $1 million each quarter because I believe in it that strongly and know what we have done before and what will happen.

And I think if you really look at it, and I have asked myself this many times. Would I buy stock in a company that the management wasn't buying? I don't think so. I think I would buy stock in the company where management is buying and where the CEO has a lot at risk.

And I have never sold a share of stock in my life. I sold my stock at World Color when Quebecor bought us. I wouldn't even think about selling a share now, and none of our managers would think about selling a share. They have hardships. We will figure out some other way to loan money personally. But I am just telling you, we wouldn't do that.

And I bring this up for a reason just to let you know what our commitment is. Our commitment is all the way through. We are going to ride this thing through. I have signed up for a long time. I am not going away until this stock is at $30, and we have a plan to get there. And I keep saying that, and we do, and we implement, and I just hope that you have some comfort in us the fact that we are delivering what we say we are going to deliver.

Also, I would like to mention in all the downturn when the stock really failed – or not the stock market failed, that in our top 10 investors, none of them sold, which shows you a lot of confidence and makes us work 10 times harder to know that they are still counting on us to deliver the stock price that where we should be at. So with that, that's item four.

Operator, I would like to now open up the call for Q&A and we have some time for some couple questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Charlie Strauzer with CJS Company.

Charlie Strauzer – CJS Securities

Bob, can you hear me, okay?

Robert Burton, Sr.

Good morning.

Charlie Strauzer – CJS Securities

Good morning. How are you?

Robert Burton, Sr.

Good.

Charlie Strauzer – CJS Securities

Thanks for taking my call. I just wanted to just touch basically on when you kind of look at the environment, obviously, direct mail has been pretty tough. You have done a remarkable job kind of given the economy of taking costs out of the business and to stand behind your guidance. You have generated basically $100 million or so of the $130 million of free cash flow that you have pledged. When you kind of look out towards next year, and if you don't see a return to the credit markets, I would assume that your main priority for cash right now is going to be the pay down debt and maybe a couple of select tuck ins. Is that correct?

Robert Burton, Sr.

That is correct. You know, and we are no – we have no crystal ball, but we look at this thing, and I have said all along I think we will end the year the way we started the year from a market standpoint. I think the market is going to continue to be what it is, and nothing exciting to get us where we think we're at. I do feel that next year, getting into the second quarter, things will be better, strictly from the standpoint that comps may look better. But I don't know. We are prepared to go into this next year and continue to focus on cost, continue to pay down debt, and look for these smaller little deals that we can do. Now, saying that, there's some other opportunities out there that may present itself. When you look at financially, that it makes sense, that can accelerate our growth, and we feel comfortable enough that we can get it done. But I think we are going to ride this thing out. And I – we think as we talk to our people the most important thing we have to do is to demonstrate to our investors that we can deliver this number and probably – without a doubt the most difficult economy we've seen. But yes, that's the direction we're going. And hopefully things will get little better where we have an opportunity to do something larger that we can integrate it and move this thing on little faster.

Charlie Strauzer – CJS Securities

That's great. And then also when you talk to some of your customers, some of the larger customers especially, who kind of dial back some of their direct marketing spend, are they saying it's not just a shift, it's not a permanent shift away, it's just more that they want to just dial back some more of what they view discretionary spend, is that correct?

Robert Burton, Sr.

Yes. I think you got to really ask yourself, which I have done. When you look at people – and I look at every piece of mail that comes into my house, and we send it out to all of our sales managers and operators and ask them, hey, is this ours? We do this or what happened? We have seen no major shift. What shift meanings that if they have $100 million to spend and they are not going to – they didn't spend that on television, or they didn't spend this on some other kind of marketing thrust, they basically have just cut back. And they have cut back, but they still then which – the good thing about this direct mail and you've heard us talk about, they are doing a lot of testing. And that's sort like you got to get dressed and put your helmet on before you go on the field. And that has told us that there is still opportunities, and I think there are CEOs of some of these large companies that continue to measure the environment every day to make decisions on if they are going to spend that money or not. And we may get a couple of breaks that some of these programs do come out. But I think if they just cut back and we just – that's why it was so confusing to us. Because the purchasing people, the people that we deal with and some of the executives, they were waiting for the green light on how well their company was doing. And I can understand that. You got to protect your home first, and that's exactly what they were doing. But I am hoping that the fact that we have been there, we continue to do a good job with some of these customers and helping with their planning that there is going to be more of an opportunity. Because we are number one in all of our fields. Some people will say they are, but they are not. I mean we are number one in the image of our customer and we are in size too. So that's another reason why when I talk about we look at some of these things that come to us in the middle of the night because of our prior background of wanting us to run these businesses. The businesses we have now we chose ourselves, we wanted to be in these businesses, we have selected people, the people, the Dean Cherrys and the Harry Vinson and Joe who runs our direct mail and labels operation I just say. Those people have been with us for a long time and have done a terrific job. And we have selected them, and I think that's going to be the road that you're going to see us, you're not going to see us do some stupid by buying a business that we know nothing about.

Charlie Strauzer – CJS Securities

That's great. Thanks very much, Bob.

Operator

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

Jamie Clement – Sidoti & Co.

Morning. Can you hear me?

Robert Burton, Sr.

Jamie, good morning.

Jamie Clement – Sidoti & Co.

Yes. Good morning. Bob, if I could just ask a follow-up to Charlie's question, just about the operating environment and bad acquisitions, I mean, one of the things you all have done well over the years is actually take some businesses that have fallen upon some hard times and turn them around. I mean it seems to me we might be in the midst of a phase where there might be quite a few businesses that might be falling upon some hard times. As you talk about the potential for some potential deals above the $25 million to $50 million range, I mean, is that part of what you are talking about? I mean do you actually – as you sit there and you look at the operating environment and some of the companies that are out there in various product lines, I mean, to a certain extent are you looking your jobs a little bit?

Robert Burton, Sr.

I will say and try to be as professional as I can and answer the question. We continue to look at the smaller deals and we continue to look at deals that are $500 million, $700 million, some a billion that people bring to us and want to talk about and have the opportunity to manage. And it's just a question if you can get those done and how good you feel about the management. I feel that a lot of those companies that we've looked at Cenveo was the real sick puppy that we spent all the time on as we did with Moore and World Color. And I think you have to have that integrity. And when you look at some of these other businesses, they should be in pretty good shape. There are some that have problems. And you know as well as I do there is one very large one that's in the industry that was a leader in the industry that's fallen on some hard times. And that company needs a lot of help to come back. But right now, we are trying to look at everything and to come to the conclusion that, hey, here's the two things that we're working on. We are not – we are beyond this exploring stuff. And that was a point I was trying to make. And I keep bringing up these acquisitions because sooner or later we are going to be talking about doing a deal, and you're going to say, well, you guys didn't tell me you were looking at acquisitions, and so I am telling you, we continue to look at the smaller ones, and we are doing them, and you see us doing some of the smaller. We are looking and talking at doing some of the midsize to large ones. And those discussions go on everyday, and hopefully we are a going to be able to get one of those that make a lot of sense.

Jamie Clement – Sidoti & Co.

I appreciate your time. Thank you very much.

Operator

Our next question comes from the line of Chitra Sundaram with Cardinal Capital.

Chitra Sundaram – Cardinal Capital

Thank you so much, and congratulation on a really solid quarter. First, a housekeeping question. In the reconciliation from GAAP to non-GAAP operating income, the $1.588 million, would that be adjusted against cost of sales or SG&A?

Mark Hiltwein

Most of that, Chitra, is on the SG&A side.

Chitra Sundaram – Cardinal Capital

Great. Then on the cost savings side, the $25 million, how much of that did we see in Q2? Or did it all kind of come into Q2 and so that forms the basis of the –?

Robert Burton, Sr.

No, no, none of it. I don't know the answer to that because of a couple of things. I would say that we gave you a $25 million number that we were going to look at and that continues to be discussed as we look about the back half of the year and what we are anticipating. But I would say that $25 million – and again we are pretty careful about how we describe this in an open forum with all the competitors on the phone. That's going to be spread throughout the entire year.

Chitra Sundaram – Cardinal Capital

So it's an annualized number, and we should probably see more benefit coming through the second half.

Robert Burton, Sr.

We have to. You have to – just because of the size of the number you are looking at. When you're looking at $80 million and $100 million in the last quarters, you can do the math. I gave you an $80 million number, and you look at what we have done so far. To get to the other numbers, we need to deliver pretty substantial numbers in the back quarter. We feel very comfortable. The whole industry does that. So we are expecting to have those cost savings. And what really takes time – and we try to stay away as much as we can from the headcount. But some of these other plans it just takes time. The best one is like this whole waste program that we have that we have been working on for two years. We are now just seen the benefit of that, and we are going to be seeing that from now and until the end of the year even into next year. So lot of these plans that I went through this ten point discussion these plans fall into next year. And that's why I am more optimistic than most about what '09 looks like.

Chitra Sundaram – Cardinal Capital

Sure. This is such a basic question. I apologize. But that $25 million, just to get clear, so that's an annualized number. But you all don't really want to discuss sort of how much of that we would perhaps lend up seeing this year, correct?

Robert Burton, Sr.

That is correct.

Chitra Sundaram – Cardinal Capital

My last question was on the M&A front. Is – would you be able to expand a little bit more as you all consider that some of the larger deals – I might have misunderstood at some point, I thought you said some of the M&A might be an opportunity even to delever. Could you please just sort of talk about how one would fund maybe some of the larger deals outside of the credit markets? Is there a suggestion that there might be some equity issuance?

Robert Burton, Sr.

Who knows? I mean when you get ready to do a deal you're going to look at the market and see what happens. We look at deals. Deleveraging means when you buy companies that have a lot of the same businesses that you're in, and you can eliminate all the entire back office function and probably a lot of the other complementary support kind of functions that allows you to what I say, delever, where you can actually bring in revenues and you don't have as much cost in. On the financing thing (inaudible) I'm sorry.

Chitra Sundaram – Cardinal Capital

No, sorry. So, you mean cash flow accretive, probably (inaudible)?

Robert Burton, Sr.

I don't understand what are you saying. I'm just saying that that is correct. So we bring a business in and acquire that business. I'll give you an example, it's like Cadmus. We brought in Cadmus and we had certain functions that we already had such as the back office kind of function, and they had some. So we cut those out and we keep some. But we have a large cost savings that allows us to realize savings. And the fact about what's going on in the marketplace, we constantly are in touch with our banks. We have a long history with our banks of doing deals. I gave you a number of 63 and you remember when I used to call on you at Goldman Sachs and your people there. And we have been doing these things for forever. And we think that the marketplace, when we are ready to do kind of those deals is going to be there for us, and we will figure out something to be able to get those done. We wouldn't be wasting our time, meeting with people, and doing deals we didn't think we could do them.

Chitra Sundaram – Cardinal Capital

Sure.

Robert Burton, Sr.

I'm not trying to be secretive about it. But we are just trying to let you know that we are in the business, and we are doing them without giving a lot of stuff. It wasn't too long ago we were talking about this, and Donnelley came in and made an offer for Banta. I still don't know what they have done with the business. They came in the middle of the night and made them offer and bought the company. So I am very careful about what I say about anything on any acquisitions on these calls, because I know Donnelley is listening.

Chitra Sundaram – Cardinal Capital

Great, thank you so much.

Robert Burton, Sr.

That's it. I think we have run out of calls, out of time. This is our hour, and I want to thank all of you very much especially those investors that stayed with us and didn't sell stock. And we are moving in the right direction and hopefully we can get a couple breaks here in the marketplace and do some more. So, thank you very much.

Operator

Thank you. This concludes today's Cenveo's second quarter 2008 results conference call. You may now disconnect.

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