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Baldwin Technology Company, Inc. (NYSEMKT:BLD)

Wall Street Analyst Forum

September 8, 2008 10:30 am ET

Executives

Helen Baud - Wall Street Analyst Forum

John Jordan - Chief Financial Officer

Host

The next company that we have presenting this morning is Baldwin Technology Company, Inc. (Host Instructions) Baldwin is a leading global supplier of process automation systems and their associated consumables for the printing and publishing industry. Baldwin offers its customers a broad range of products designed to enhance the quality, productivity and cost-efficiency of the print manufacturing process while addressing environmental and safety issues.

Baldwin sells its products both to printers to upgrade the quality and capability of their existing presses and to printing press manufacturers, who incorporate them into their own equipment. Headquartered in Shelton, Connecticut, Baldwin has product development and production facilities as well as a network of sales and service operations in strategic markets worldwide.

And presenting for you today is the Chief Financial Officer, John Jordan.

John Jordan

I'm John Jordan, Vice President and CFO and Treasurer of Baldwin Technology Company. I'm pleased to welcome you to the Baldwin Technology Company presentation at the Wall Street Analyst Forum. This presentation will provide you with some background on a great company, the products, the market we operate in, and our priorities to succeed in the market.

Since our fiscal year end is June 30, we have the opportunity to review full year results for the fiscal 2008 at the end of the presentation and after the presentation we should have some time for any questions you might have.

Before I start with the presentation I want to draw you attention to the cautionary statement. I assume we're all familiar with this statement so I won't read it, but any forward-looking information in this presentation is presented within the context of this statement.

Baldwin was started in 1918 in Baldwin, Long Island with the introduction of an automatic ink roller washer. The company was listed on the American Stock Exchange in 1987. Almost all the company's revenue is derived from products that serve the printing industry on the press where the ink meets the paper. Baldwin is the leading supplier of equipment, parts and consumables in the offset printing market. We have 655 employees around the globe.

Ninety years of staying power and leadership. Since its founding in 1981, Baldwin has introduced or acquired many of the products used to improve the performance and efficiency of printing presses. The two timelines in this graphic show the global development of the company and the development of the product portfolio over the last 90 years.

We have operated in Japan as a Japanese company for 40 years and in Germany as a German company for almost as long. The centers of competence in those countries are operated as local companies by country nationals.

As a market leader in web accessories and controls, we're continually introducing new products and solutions to our customers. Our focus on innovation and standardization enable us to stay in the forefront of the industry.

Baldwin has presence in most major markets for print. We've opened or acquired sales and service offices in almost all major print markets. We have an unparalleled global infrastructure, and we have existing interfaces to virtually every printing press in the world. This graphic shows our 16 sales and service and 7 manufacturing operations in Europe, Asia, the U.S. and Australia and what we refer to as centers of competence for newspaper and commercial business in Sweden, Germany and Japan.

We operate in the context of two sets of customers, OEM press manufacturers and end user printers and publishers. Our objective with the OEM press manufacturers is to make the processes between us and them seamless by fully integrating our equipment with their presses. Key account managers interact with each OEM for quick and proactive communication. Our focus is to add value to the process of manufacturing and installation of printing presses, with Baldwin process automation equipment and controls. Approximately half our business is with OEMs.

We serve the end user market directly with our equipment, products and consumables. Our opportunities in this market are to further upgrade the installed base of printing equipment and to supply parts, service and consumables. We track developments globally to capture investment opportunities in all markets, including emerging countries such as China, India and Eastern Europe. We help printers to achieve environmental compliance and to add value to their manufacturing processes.

The list on the right of this graphic is the Baldwin equipment that would be included on a newspaper press, and the graphic illustrates where the process automation components would be installed on the press.

Baldwin is a unique, full-solution provider of printing systems. With the acquisition and successful integration of OxyDry Corporation, which was the global market leader in brush cleaning technology, and Hildebrand, a world leader for web cleaning, to complement our market-leading cross-cleaning business, Baldwin has assembled a complete suite of blanket and web cleaning equipment and has become a truly full-solution provider for cleaning systems in the printing industry.

We now have by far the largest installed base and we offer the most suitable system for every application, from a low-cost tower cleaning system for single-wide newspaper presses to a combination of web cleaning with an impact flex cleaning suite for truly optimized performance.

Consumables that enhance system performance. To further optimize system performance, we also provide related consumables. We combine the best suitable hardware with state-of-the-art consumables to increase the efficiency of the process. And with the continuously increasing demands for print operations related to restrictions on VLC emissions, we provide the environmentally friendly solution.

Our new PREPAC products - PREPAC Extreme, PREPAC Plus and PREPAC Eco cleaning cloth - are examples of our continual development of this patented technology. We get encouraging response from our customers, and this is a strong part of our business.

New product offerings. We leverage our strengths by adding to our portfolio through in-house product development and through alliances and acquisitions. This graphic illustrates some of the products introduced recently - the new Baldwin cleaning platform, our filtration technology and the new line of basic liner, the acquisition of Oxy-Dry and Hildebrand Systeme, as well as alliances with Prisco, Robitech, FALK, and Thermal Care.

We offer environmentally safe solutions. Environmental demands and legislation for the printing industry provide opportunities for Baldwin's technology. We help printers reduce usage of water and chemicals, the VLC emissions in the printing process, and reduce waste on ink and paper, which all lead to the improved energy efficiency of print. With our know-how, we will continue to play an important role here.

In the next slide, we provide an example of how we helped one printer reduce waste and cost. This graphic illustrates the dramatic effect of Baldwin products. By reducing waste water, disposal and incineration of waste, and increasing recycling of fountain solution, our Longlife Filtration product at Trinity Mirror enabled this printer to reduce costs by $58,000 a year, with a payback of less than a year.

The global offset printing market. Baldwin operates in two markets, printing equipment and consumables. The equipment market is about $16 billion. Most of that market is $11 billion of printing presses. Baldwin's target market within that $16 billion market is the $1 billion process automation equipment market. The consumables market is estimated at $23 billion, and Baldwin targets the $750 million specialty chemical segment of that market.

Market trends. Based on the limited growth expectations for printing equipment, especially in the traditional segment of offset technology and the competition among both the OEM press manufacturers and end users, we expect further consolidation among print suppliers. We expect to continue to play a major role in that process.

Parts of Asia, East Europe and Russia and Latin America will continue fast-track growth rates of 10% to 12% over the next five years. And with growth of the middle class, literacy rates continue to expand in emerging countries like India and China, creating demand for print newspapers, advertising and packaging.

In mature markets, retooling for productivity gains will drive demand for equipment upgrades and retrofits, environmental pressure on the printing industry will drive demand for more environmentally friendly consumables.

Baldwin's growth drivers in those markets are the need among printers to improve their competitiveness by improving productivity and efficiency, the trend to import shorter print runs and more make readies, lower quality and more economical paper and ink require more cleaning, more stringent environmental regulations increase demand for greener consumables, printers and publishers not only compete with each other but they also see Internet and other media as their competition. That drives the need to improve color and the quality of print and presentation. All these factors support the need for more Baldwin equipment, parts and consumables.

Our priorities in this market near term are to increase market share in core technology and product areas by increased integration of Baldwin equipment onto OEM presses, continuing to supply end user demand for upgrades and retrofits, and entry into new markets.

Our longer term priorities are to continue to actively expand our existing portfolio of products, to add to the range of equipment-related consumables - razor, razor blade strategy - to enhance equipment automation and controls, continue to drive for innovation, and to continue to pursue alliances and acquisitions where they make sense.

In 2008 we experienced a dramatic 17% sales growth. $16.1 million of that was from the effects of currency, $16.1 million was from the effect of having an acquisition in 2008 for a period during which we didn't have it in 2007, and over $2 million of that growth was attributable to organic growth.

The resilience in our sales in a challenging market derives from the diversity of our product range, customer base, and the breadth of our geographic footprint. We have excellent relationships with German OEMs and Japanese OEMs, so as demand in one area tends to weaken we can field increases in other areas. Our relationships with printers and publishers serve the demand for retrofits and upgrades as well as non-equipment product lines. The most dramatic growth in 2008 was in our recurring revenue product lines, consumables products and service, which are traditionally higher gross margin product lines and help hedge against dips in Capex demand.

The operating income increase of $1 million or 10% was attributable to steady gross margins, only slightly less than 2007 due to some price compression in the market, controlled OPEX - of the $1.8 million increase during 2008, $1.4 million was attributable to currency effects; the OPEX percentage of sales actually decreased from 27.7% in 2007 to 27% in 2008.

The net income decrease was attributable to tax effects. Release of valuation allowance against deferred tax assets in 2008 was $1.5 million, and it was $2.5 million in 2007. The effective tax rate was 42% in 2008 and 40% in 2007 net of valuation allowance release.

Our strong operating cash flow, as you will see on the second following slide, derived from strong earnings, management of accounts receivable and inventory, and centralization of global cash management that enabled us to repay $10.6 million of debt in 2008.

The decreased EPS is totally the result of differences between years in reversal of valuation allowance.

A quick review of the balance sheet, the decrease in current assets was totally attributable to the decrease in cash used to reduce debt. The reported amounts of accounts receivable and inventory increased by $3 million, the result of $7.8 million effective currency. The change in accounts receivable and inventory net of that currency effect was a decrease of $3.5 million. The decrease in current liabilities - I'm sorry, the increase in current liabilities was primarily attributable to an increase in accounts payable at year end.

The intangible asset balance consists of goodwill for acquisitions and patent development and defense costs.

Long-term debt total, including the current portion, was reduced $7.5 million from $32.7 to $25.2 million as reported. Eliminating currency effect, the decrease was $10.6 million. Net debt adjusted for currency decreased from $16.9 million to $14 million.

Cash flow, the operating cash flow derived from the net income of $6.4 million, depreciation and amortization of $2.8 million, other non-cash effects of $3.6, net effect from accounts receivable, inventory, and accounts payable of $6.4 million and decreases from other working capital of $11.7 million, for a total of $7.6.

The cash for investing activities was for Capex, $1.8 - $1.857, actually - patent development and defense costs were $1.6 million, and purchase price adjustments accounted for the rest of that $4.4 million - that $4 million decrease.

As I said, debt repayment, in other words, $10.6 million, and we used $760,000 for share repurchase for a total financing decrease in cash of $11.5 million.

Currency effects rounded the total to a use of $6.7 million.

The case for Baldwin. Baldwin is the global leader in the $1.0 billion equipment market. We have growing and unique product offerings in the [$0.75] million consumables market. We are a well respected and recognized brand. We have very strong OEM and end user relationships with all the OEMs and major printers and publishers around the world. We have proprietary technology and a global infrastructure, expanded product lines through partnerships and alliances. We have a proven acquisition track record, and there's growing demand for Baldwin products in emerging markets. We have solid operating cash flows and a strong balance sheet.

Questions?

Question-and-Answer Session

Unidentified Audience Member

[Inaudible question]

John Jordan

I don't have it for the last five years, but in the last year it was a little over $2 million of the 17%. I don't have the organic growth over the last five years, but I can certainly provide it for you.

Unidentified Audience Member

[Inaudible question]

John Jordan

We estimate that we have about 65% of the cleaning market and -

Unidentified Audience Member

What percent?

John Jordan

65%.

Unidentified Audience Member

[Inaudible question]

John Jordan

I'm sorry. We estimate that our share of the cleaning market is somewhere in the order of 65%. Most of the rest of that market is done by the OEMs themselves with in-house production, which we also consider our target as well.

Unidentified Audience Member

[Inaudible question]

John Jordan

There isn't a trend, but there's an ongoing interface between us and we work at the most productive, efficient, cost-efficient solution. So obviously we're always working with the OEMs to try to impress them that we can do that inhouse sourced equipment better and cheaper.

Unidentified Audience Member

[Inaudible question]

John Jordan

The industry in the developed markets - I'm sorry.

The question was since our global growth was in the order of 2% to 3% and our growth in sales was about 1%, why was our growth in sales less than global growth. And the answer is the industry is not growing consistently with GDP. In the developed markets, the industry is flat and maybe even a little down. So our organic growth of a couple of million dollars was actually a really good accomplishment in the context of the market where we operate.

Unidentified Audience Member

[Inaudible question]

John Jordan

Yes. The question was that our two acquisitions were rather large and how we can improve in combination with them their profitability.

One of the acquisitions, Oxy-Dry, was $18 million, and the Hildebrand acquisition was something less than $5.

Unidentified Audience Member

[Inaudible question]

John Jordan

The Hildebrand, Hildebrand acquisition, which we did in April '07, which is web cleaning technology. It was something less than $5 million.

The Oxy-Dry acquisition was large for us, not only in the context of the cost of it but the effort required to integrate it, and it took us the better part of a year to get it well integrated. One of our objectives when we bought Oxy-Dry was to improve their margins to the level of legacy Baldwin margins, and I think our assurance was that we would have that achieved by the end of 2008. We've made substantial progress toward getting their margins up to the level of legacy Baldwin margins, and Oxy-Dry has been accretive for the better part of this year and is actually substantially accretive now.

Hildebrand hasn't integrated quite as well, but we're still doing really well with their sales and we're working on improving their margins as well.

Unidentified Audience Member

[Inaudible question]

John Jordan

No, that's before.

Unidentified Audience Member

[Inaudible question]

John Jordan

Well, you could actually start with operating profit before restructuring of $10.9, add restructuring to it, and add non-stock comp, depreciation and amortization -

Unidentified Audience Member

The non-stock comp is non-cash?

John Jordan

Non-cash, right. Non-cash. I'm sorry, non-cash stock compensation. And to that you could depreciation and amortization of $2.8 million, overall working capital changes of $0.5 million, and our cash taxes are actually $1.5 million because we have a lot of deferred tax assets. So our cash tax rate is on the order of 18% to 20%.

Unidentified Audience Member

[Inaudible question]

John Jordan

For the next couple of years.

Unidentified Audience Member

[Inaudible question]

John Jordan

Sorry?

Unidentified Audience Member

[Inaudible question]

John Jordan

42%. That's the valuation allowance reversal.

Unidentified Audience Member

[Inaudible question]

John Jordan

$1.8. And cash interest is $2.9.

Unidentified Audience Member

[Inaudible question]

John Jordan

Accruals - the difference between year ends, year end accruals.

Unidentified Audience Member

[Inaudible question]

John Jordan

Well, that's one way of defining it as that we've generated over $9 million. And I think it's kind of dangerous to extrapolate from that and expect that to continue, but for the year end '08, that's one way of deriving free cash flow.

Unidentified Audience Member

[Inaudible question]

John Jordan

The question is since we've made some acquisitions in the past, do we see any - I beg your pardon?

Unidentified Audience Member

[Inaudible question]

John Jordan

Do we see any potential to close down any of them? We actually did close some facilities when we acquired OxyDry and combined them with the Baldwin operation. That was done very early on. We're also closing the Switzerland operation of our Hildebrand acquisition and that manufacturing is being done out of our Sweden center of confidence. Most of the Hildebrand product was sold to the ultimate customer by our Sweden operation.

So we do, we analyze it on an ongoing basis. And wherever we see the potential for productivity improvements, for cost reduction, we act on it pretty quickly.

Unidentified Audience Member

[Inaudible question]

John Jordan

Yes. The question was can I bring you up to date on what's happening with the lawsuit. The lawsuit was with technotrans. We sued them for patent infringement, and they sued us to try to invalidate the patent. We won on both cases. They were appealed, and now they're - we won the appeal; they're now at the German Supreme Court. We also filed for a judgment of 32 million euro because we had won on those cases, and the decision on that judgment was postponed until the decision is made by the Supreme Court.

The expectation is - or the update from our attorney in Germany is - that that's going to come up on the docket in early 2009. We had expected it in 2008, but I guess the German Supreme Court docket is long and slow and we got deferred.

Unidentified Audience Member

[Inaudible question]

John Jordan

Well, we filed for a judgment of 32 million euro, which is worth on the order of $45 to $50 million. And like I said, there hasn't been any decision on it and there won't be until there's a decision from the Supreme Court on the patents.

Unidentified Audience Member

[Inaudible question]

John Jordan

The question is on stock repurchases. We've been in the market repurchasing stock. We do it when we think it's appropriate. We have not bought any stock during the first quarter. It's traditionally our lowest quarter so we're watching our cash, but we'll evaluate whether to be back in the market second quarter.

Other questions? Yes.

Unidentified Audience Member

[Inaudible question]

John Jordan

The question is how much stock does management own. I know mine. I think it's around 8% - 8% to 10%.

Other questions?

Unidentified Audience Member

[Inaudible question]

John Jordan

The question was would I comment on further reduction of debt. We expect to use whatever free cash flow we generate to repay debt and, as I said, when appropriate to make repurchases of stock in the market. We don't give any guidance, so I'm not going to try to give guidance for one data point and none of the others.

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