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Cenveo (NYSE:CVO)

Q3 2012 Earnings Call

November 08, 2012 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 - Corporate Controller

Michael Burton

Analysts

Charles Strauzer - CJS Securities, Inc.

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

James Clement - Sidoti & Company, LLC

Operator

Good morning, and welcome to Cenveo's 2012 Third Quarter Results Conference Call. Today's host will be Mr. Robert G. Burton, Sr., Chairman and CEO of Cenveo. This call is scheduled to last approximately 1 hour. Mr. Burton will speak, and then the call will open up for a question-and-answer session. I will now turn the call over to Cenveo.

Robert G. Burton

Thank you, and good morning, everyone. This is Rob Burton, and welcome to Cenveo's 2012 Third 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 or other related acquisition charges. For further details regarding these factors, please reference Pages 11 and 12 of the company's press release or the Securities and Exchange Form 10-Q, which was filed last night as well. And with that, I turn the call over to Mr. Burton.

Robert G. Burton

Thank you, Rob. Good morning, ladies and gentlemen. This is Bob Burton speaking, and I am the senior manager of Cenveo. Normally, we open these investor calls with some pretty related story of mine related to business and what's going on. But today, I want to change the format a little bit. First, today, I want to advise you that all of our employees are safe and sound from the recent storm that hit the East Coast. We did have some delays in our New Jersey location and Philadelphia area, but we were able to meet our customers' needs and demands. And I personally want to thank all our employees who went the extra mile for our customers. The one advantage that we have with some 70 different locations, we can move business around. And if we can't get it done at one location, we can get it done at another location. So everybody's safe and sound, which is the most important thing, and we're up and running, even though we have some slight snow on the ground, or at least it snowed here last night. So hopefully, things will be moving back to normal very quickly.

Also, today, we want to focus on how well our team has performed in a market that could have caused us some very bad results. And traditionally, we stay away from this, we just basically talk about the facts. But I want to go into a little more details today because we're very proud of the $57 million of EBITDA that we delivered here this quarter versus last year's results. And also, our EBITDA margins for the quarter and for the year-to-date performance were just outstanding, and I'll dwell upon those some more in my presentation. Our cash flow is on target for our $100 million for the year. And we are working and looking at the different alternatives of our refinancing that Rob will be talking about later on, talking about our 2013 maturities.

So as you know, 4 out of 5 of our businesses are reflecting growth over prior year. And have really assisted us in delivering the $57 million for the quarter versus $58.2 million last year.

When we started out this year and the quarter, we had 3 major problems to overcome. Some you know about, and we've talked a lot about, the direct mail and we talked about it, the direct mail of being a $14 million EBITDA kind of hit, coming from the nonexistence of the credit card kind of business. And we knew that, and we thought we had its size, and we'll tell you how that story goes. But we also had another $14 million that we had to face in our budget, and part of that came from waste. And we actually sell our paper to different vendors and it's been a revenue stream, not only for us at Cenveo, but also for the entire industry. And as we speak, we are running $9 million below where we should have been because of the waste cycle. This is a cycle issue, and we are starting to neutralize itself, and hopefully it's going to get better. It just depends on what's going on in the world and in the environment. But we had the waste issue, and we also had a $5 million pension allocation that we needed to overcome.

So we had 2 big pieces there that we needed to work on for the year of 2012. We knew that the direct mail was going to be delayed because the larger player in the industry, and that's our customer, was integrating several acquisitions into their business and not looking for new credit cards as their #1 priority. And we have always, as a company, looked at August and September as the key months for the revenues to materialize for the direct mail. And you sort of look and you talk about those, and if they don't show up, they don't show up. The problem this year is that they didn't show up at all during August and September, except some slight business from some of the larger players. The industry leaders sales did pick up in September and October, but the rest of the credit card players really did not mail to an extent that would lead the needle up or down.

So the fact that we will deliver some $57 million of EBITDA for the third quarter, which will almost equal last year's results, along with a 39% reduction in 2012 credit card revenues, is a very positive statement for the future growth of Cenveo and our management team. If you look at that -- the direct mail, there's a chart out that almost all of the analyst has, that shows the history of the direct mail or credit card business as they categorized it. And it has cycles that go back 10 years, and there are cycles and it depends upon a lot of things, and this was just a very unusual year, after a very, very strong year.

We are the largest player in the business, in the envelope business, and we're the largest player in this direct mail business. So when those envelopes appear in your mailbox, those are coming from us. And we feel this is still a terrific business to be in. As I've said about the envelope business, it's a great business to be in because of cash flow. So we're looking at this as sort of an aberration in 2012, and we definitely feel that it can't get any worse for next year, and looking forward to a more positive kind of outlook on this whole issue of credit cards and direct mail.

And it's really -- it's one thing to lose an account to a competitor. So you can always go and meet with the sales people and try to understand how and why you lost the account. But that was not the case, and we've never had an opportunity to really get in and try to fight for that 39% that just didn't show up. That 39%, in our mind and the way we've looked at it, represented about $12 million worth of EBITDA and between about $35 million to $40 million of revenues, however, you look at it, and the time and the when it's coming. But our cost reduction plans for 2012, knowing that this could be a possibility, were just outstanding, and I feel very good about our overall 2012 performance based upon that and some other items I'm going to talk about.

Cenveo was the only traditional printing-related company that put together a 2012 budget that reflected growth over prior year. I went back and looked at all the competitors, some are very difficult to understand, if they're going backwards or sideways. But our number last year was $220 million of EBITDA. We felt pretty comfortable that $230 million was a good number for us to have as a budget for this year, and that increase year-over-year was really my decision, and was my fault because I felt that we are paid to increase our profits every year. A lot of companies don't do that. And we think, as the management team and as a board, that we should have targets out there that are challenging, and should be growth kind of targets unless there's something unusual going on in the market itself. Many printing companies, they could only hope to be flat or down for the year. And we feel that the credit card growth will be better again, as I said earlier, in 2013, and it sure is not going to be down some 39% as it's trailing right now.

So what I did, I stepped back and looked at what had transpired this third quarter. Some of it's in the press release and some of that -- some of the information just came to me this morning on getting results of some of our major accounts. So I have 10 items that I sort of listed here, and you might want to jot these down because I think some of them are pretty critical and tells you what's going on with our business.

Item number one, the EBIT for the quarter, we've already talked about, with $57 million versus $58.2 million last year, with the major revenue shortfall, and the problem with shortfall would be in the direct mail and nothing else because our other businesses are fine. When you get 5 children, and you're not going to get them all healthy at one time, and that's what happened here, we have 1 sick child and everybody else was doing pretty good.

Item two is just something that's pretty remarkable in this industry. Our EBIT margins for the third quarter was 9.4%. I'm going to repeat that again, our EBIT margins for the third quarter was 9.4%. And that is an outstanding margin for any printing or manufacturing company in the world. Just to have those 9 -- have a 9 in front of it, because most of the time, you're looking for something that's got a 6 or 7 or an 8 in front of it. And I continue to state that we do a better job in managing our costs and that's a pure reflection of knowing what we were up against and how we had to manage our cost and run our business and continue to service our customers.

Item three, if you look at the same subject, you look at our EBIT performance on a year-to-date basis for 9 months, it's 8.2%. And 8.2% is a very good number. It's not a good -- as good as 9.4%, but it's a very good number to run your business off of, and you know we look at EBIT instead of EBITDA, we look at both of them, but the EBIT number really gives us how much we're spending on capital and how we're handling all of our resources. So our 9-month performance of 8.2% is a very good number for us to be measured on for 3 quarters.

Item four, we continue to make strategic investments in our label business, and how we go to market. Those investments we know and have already started to pay good dividends and results for us as a company. And this year alone, we have invested almost $2 million into this business. And you know that's the lead horse in our company. And that's the direction we're going and we're going to continue to become more and more of a player, and I'll talk a little bit about that as we go through the rest of the -- my comments.

Item five, we appointed Mark Hiltwein, we talked about this in our last call, the President of our envelope business. Mark is a former commercial sales, CFO kind of guy, he spend a lot of time at Thebault, which was one of the outstanding commercial printers in the United States. And he's been our CFO for numerous years. And I've known Mark in a lot of assignments that we've had on the other companies. And he's really jumped in here, getting his arms around the sales organization and focused because we got some competitors here that are on the edge of bankruptcy. And we just need to continue to get as much business as we can and make sure that it's profitable. And Mark, as I said earlier, was our CFO, and he was replaced by Scott Goodwin, who will be reporting today. But Mark runs this business, the envelope business, the exact way we want it to run, and that's a cash driver. This envelope business -- it drives cash for us, and we want to continue to do that, and when we're doing well on it, we're doing extremely well. And Mark is doing a great job already in that assignment.

Item six, we are in the process of finalizing a multimillion dollar sales with several of these pharmaceutical accounts that we've been working on for some time. We don't list the name of the companies, but it's several millions of dollars, and it's a brand new business for us to have this kind of market position, and we're going to continue to get larger and stronger. But we just reported on those sales this past week.

Item seven, we launched a new global strategic sourcing business under Dean Cherry's guidance. Dean has had a lot of assignments with us here at Cenveo, and also with me, and a lot of other stops. And we've always talked about us having the ability to respond to the large orders and contracts or potential contracts, and we've never had a piece of the business that could address the parts that we don't have. We now have that, are in the process of putting that together under Dean's guidance, and we feel that's definitely going to start generating new revenues for us. We feel very good about it. We've talked about doing this for 4, 5 years, and we finally have launched it and Dean's starting to hire staff, and we had this full presentation to our board just last week, and we all feel very good about this bringing in new revenues for us that we haven't had in the past.

Item eight. We started this Cenveo Business Solutions business this past year, really, I think about the past when we named it that, and that's under Joe Burton, who also generates a lot of cash for us with our real estate business. Joe runs all of that. All these close downs we had -- we actually sell all these plants, or at least we try to, all the equipment we have and all the plants, and it's a really, a very specialized skill and had generate us a lot of revenue. As what -- Joe has also put together a business of going after our vendor base, and he's already generated a couple of million dollars of new revenues here, but predominantly, in the envelope side of the business and a lot of other pieces were labels. But this is another $2 million segment of business that we didn't have in the past, that we have now and we expect to see that to continue to grow.

Item nine. Our custom label products have sales growth of 5% for the quarter, which is a very good number. Our prescription label business, we're a leader in the world in that business. And the custom label products is doing very, very well, and we're very pleased with that.

And item ten, this morning, Mike Burton advised me that last night, we won a $4.5 million tobacco sale by one of our brand new sales reps. First of all, we're pleased with that business -- it's new business we didn't have before -- $4.5 million in tobacco business, and it also speaks very highly of the quality of the packaging people that we're hiring to expand our packaging base. We talked earlier about the label business, the packaging business and the content business of being our 3 major players, bringing revenues and profits to us, and here's another example of just a major sale that we just got, and again, we don't list the names, but they're for real.

So if you look at that list, and then despite all the challenges and the direct mail environment issue that we've known about, we've talked about, nothing we could have done about it. I think we've done everything we should've done on the cost side and probably more. But doing that, we've still been able to drive cash flow, we continue to pay down debt, and we've increased our operating margins to numbers that are very acceptable. And we're going to be talking later on, and Rob, about solving this #1 financing 2013 maturity issue, that all of you told me, all we have to do is make it go away, and the stock is going to jump $2 to $3. Well, we heard you. And we've been working on it. And Rob will give you some update -- we can't talk a lot of about when there are some moving parts. But it's for real. And I don't really think I'm supposed to say that anyway, but Rob will talk about that later on.

So those are the 10 highlights of -- that I have, and you have the press release. And so now, we're going to follow the same format we have in the past. It will be about a one hour kind of format and we'll do the presentations, and then we'll have a Q&A. Scott Goodwin will report on the third quarter and the 9 months results. Scott will also report on our debt-to-EBITDA ratio goals. He is going to be telling you you're going to take a little breather here because some additional cost we have incurred in this direct mail issue. But we're still fully committed to get a lower debt-to-EBITDA number and he's on top of that, working with our CFOs on inventory every month, to know where we are at.

And then Rob Burton, our President, will report on the story that I was talking about, the Cenveo alternative evaluation of the different alternatives we have to address our 2013 maturities. And this, as I said, is probably the most important thing we're going to be talking about today, and I know it's very important to you, and this is the price of our stock. And after these 2 gentlemen are done, then I'll come back and cover 3 business items, including our full year forecast, and then we'll open it up for Q&A.

So with that, I'll now ask Scott Goodwin to talk about our third quarter and 9-month results. Scott?

Scott J. Goodwin

Thank you, Mr. Burton, and good morning, everyone. Today, I'm going to review our third quarter 2012 financial results and briefly discuss a few items related to the capital structure. Generally, our third quarter results were consistent with our expectations, with the exception of the direct mail product line. As we have discussed previously and for a number of reasons, we anticipated softness during the first half of 2012 in our direct mail product line related to our financial institution customers. We had expectations that they would return to the market in the back half of 2012, and we have yet to see a complete return of that business.

Net sales for the quarter were $451.3 million compared to $475.8 million in the prior year. As we mentioned previously, entering the year, we anticipated weakness in net sales on a consolidated basis, given a number of factors in our print and envelope operations, despite our efforts to improve sales within our growth potential products, such as custom labels, packaging and content management. Rob will further highlight our recent sales trends here shortly.

Our gross profit for the quarter declined primarily due to the negative impacts related to lower waste recoveries of approximately $3.5 million, incremental pension expense of over $1 million, and lower sales volumes compared to the prior year. Despite these challenges, gross margin remained relatively flat in the quarters compared to the prior year at approximately 19.5%, which continues to highlight our ability to manage our variable cost structure.

SG&A expense has decreased $8.1 million or 15.2%, and SG&A as a percent of sales decreased over a full percent from 11.3% in the prior year to 10.1% in the current quarter. These declines relate primarily to lower compensation expenses, the timely integration of EPG's operations into our platform and other cost saving actions.

Restructuring impairment and other charges for the quarter were $4.2 million, and mainly relate to the closure of an envelope facility, as well as other cost actions in our print, envelope and label operations. The facility closure within our envelope business should have minimal disruption and will be a cash positive event once we are able to monetize the land and the building, which we expect to complete in the fourth quarter.

Cash restructuring and integration for the quarter was $4 million compared to $3.1 million in the prior year. Interest expense for the quarter increased $0.5 million to $28.9 million from $28.4 million in the prior year. Interest expense in the third quarter as compared to the prior year reflected a slightly higher weighted average interest rate and was offset by average outstanding debt.

Cash pay for interest was 2 -- $26.4 million in the third quarter of 2012 compared to $34 million in the prior year. Adjusted EBITDA for the third quarter was down slightly from the prior year of $57 million, compared to $58.2 million in 2011, while our EBITDA margin increased almost 0.5% from 12.2% in the prior year to 12.6% in 2012.

After considering our non-GAAP adjustments as highlighted in the press release, non-GAAP operating income increased 2% to $42.4 million in 2012 from $41.6 million in 2011. Our non-GAAP operating income margin increased over 0.5%, from 8.7% in 2011 to 9.4% in 2012. Non-GAAP net income from continuing operations remained relatively flat as compared to the prior year at $13.6 million while our non-GAAP net income from continuing operations per share was $0.16 compared to $0.22 in the prior year. This decline was primarily due to the dilutive effects of our outstanding convertible debt.

Turning to the cash flows for the quarter. We generated cash flow from operating activities of $6.9 million in the third quarter of 2012 compared to $23.5 million in the third quarter of 2011. The cash flows in the prior year included the impact of our aggressive actions on inventory reduction that we began at the end of the second quarter of 2011. Our cash flow from operations for the third quarter of 2012 include a use of cash of $14.2 million from accounts receivable, which is primarily driven by the timing of our sales transactions in September, which is typically one of the busiest months in our year, combined with the collection of lowest sales volumes from the second quarter which are typically our more seasonally slower months.

DSOs remain relatively flat for the quarter in the mid-50 day range. Our inventories were use of cash of $1.7 million primarily due to the timing of our seasonally busiest months of the year with September and October production levels. We remain focused on managing our inventories and we believe we can continue to drive cash flows from our inventories, however, to a lesser extent that we have over the past year.

Our accounts payable on accrued compensation liabilities provided cash flows of $9.6 million in the third quarter. Again, this is primarily due to the timing of our production levels. We are currently working with our vendor base on a long-term strategy to assist us in improving our working capital. We've had a number of successes in the process, although we are early in our roll out strategy, and we believe we will ultimately achieve our targeted goals.

Our other working capital changes primarily relates to changes in our other current assets and liabilities during the quarter, primarily relates to cash restructuring. Cash paid for interest and post-retirement plans was 6.9 -- pardon me, cash paid for pension and post-retirement plans was $6.9 million in the third quarter of 2012 compared to $10.5 million in the prior year. We expect our contributions in the fourth quarter will be less than $3 million for these plans compared to approximately $4 million in the prior year.

Cash flows from investing activities for the third quarter of 2012 reflect capital expenditures of $4.3 million, offset by a proceeds from the sale of property, plant and equipment of $400,000. Cash flows from financing activities for the third quarter of 2012 reflect our continued efforts to significantly reduce our remaining 7 7/8 notes. In the third quarter, we repurchased $16 million of our 7 7/8 notes while we borrowed an incremental $10.9 million on our revolving credit facility.

Staying on financial activities for a moment, we believe that obtaining an unsecured loan at this point in the process of addressing the 2013 maturity is the most prudent course of action for our company for a number of reasons. We also believe that putting this in our rearview mirror prior to heading into 2013 will allow us to again focus solely on the business and begin exploring strategic opportunities that will allow us to further differentiate ourselves from the peers in the industry.

As of the end of the third quarter, our net debt-to-EBITDA ratio was 5.1x when considering our convertible debt as equity. I'd like to note that the convertible debt had the dilutive effect to our GAAP and non-GAAP earnings per share for the quarter, which further supports our belief that the leverage ratio should consider the convertible debt as equity when discussing our deleveraging efforts.

Additionally, our decision to seek to eliminate the concern around the 2013 maturity, along with our current forecast for the year, should still allow us to achieve a debt-to-EBITDA of 5x or less by the end of this year. While we remain committed to deleveraging the balance sheet, we'll provide an updated leverage goal for 2013 on our next call once we complete this refinancing.

In closing, I'd be remiss not to mention Hurricane Sandy and the impact it has had for most of the Eastern seaboard, particularly the mid-Atlantic and Northeast regions. Notwithstanding the personal devastation that was inflicted by the storm regarding the loss of life and the damage to personal and to real property, we experienced our own bit of disruption as Mr. Burton mentioned earlier. We had a few facilities and a number of employees that were in Sandy's path, and it seems as if almost all those employees experienced a number of challenges in the past week, such as power outages, the availability of gasoline and property damage. However, we were fortunate and did not experience a tragic event such as the loss of a life.

We'll be working with our facilities to ensure our employees and operations return to normalcy as quickly as possible, and we will communicate any significant impacts on our results of operations on our next call. However, we do not anticipate those impacts to be significant at this time.

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

Robert G. Burton

Thank you, Scott. One of the things that Scott mentioned that -- just to put more emphasis on is the -- on the inventory and debt-to-EBITDA ratio. We're committed to these numbers because, one, we know we should get lower compared to the industry; two, it makes us a much better product and the company that could be for sale as we get in and finish this year 2013. But I think we've been in an awareness of our people throughout the organization. And you got to remember that this company, Cenveo, was a whole series of independent companies that were acquired through prior management before we took over this company, and since we've been here. And everyone has had their own way of operating and managing their resources. And it's a pretty enlightening kind of thing to see all of this coming together. And it has, and our inventory focus, and it will -- that will continue to get better. And I think we really have a lot of upside, as Scott talked about, and different ways to look at that. But we make some pretty significant steps, and the organization out there in the field will really get a pat on the back for that.

Okay, Scott, thank you very much. And let's hear a report from our President, Rob.

Robert G. Burton

All right. Thank you, everyone. In regards to financing activities, we sort of mentioned last time, in the press release -- over the course of last week, we've taken several proactive steps to address and extend our capital structure, including our notes that are due at the end of 2013.

Since the end of last year alone, we've made significant progress in chipping away at that maturity and closed the $300 million at the end of last year to approximately $85 million today. We remain very comfortable with our plans to address the remaining portion of the notes by early next year, via cash flow, working capital and sales of non-core assets, especially as we leave our peak season for working capital and head into the fourth quarter. As many of you know, the fourth quarter is typically the period where we generate the majority of our free cash flow. For instance, we generated over $50 million in Q4 2011.

However, given relative strength of the capital markets, we feel it's prudent to evaluate alternatives that'll potentially allow the company to accelerate this process into this year. In that regard, the company is in discussion with our lenders regarding several alternatives, including a potentially and unsecured loan in order to achieve retirement of these notes by the end of 2012. We are in the later stages of our evaluation process and while we cannot go into any more detail at this time, we believe that we will be positioned to enable and enact the solution in the very short course.

Regarding quickly [ph] from sales efforts for the quarter that Scott briefly mentioned, despite a very challenging macro environment, we are pleased that our sales efforts across our pipeline during our third quarter. Our custom label business had an outstanding quarter with organic sales growth of 5% during the quarter. This was again driven by solid growth by our e-Commerce efforts, and continued product expansion. We are continuing to improve the ease of doing business with our customers and this is being demonstrated by our results. As we continue to invest in these operations, in particularly technology, with over $2 million year-to-date, which will help us to grow the [indiscernible] -- we'll be able to continue into next year and beyond.

The rest of our label and packaging business performed to our expectations with strong performances in our coding and pharma operations and double-digit growth in the point-of-sale business, offsetting the -- our decision to walk away from unprofitable business. As we entered the holiday, and cold and flu season, we are optimistic that our longer run business will, again, show positive trends as we enter 2013.

Our print business which for most produces marketing information on collateral pieces for our customers had a very strong performance across the board in Q3. On the same facility basis after factoring in a plant closure, our print business grew close to 2% during the quarter. This is driven by several factors, including a large customer win in the health care space that was produced across our product line. Holiday work contributed to large consumer products company and saw performances by our West Coast facilities in constant operation. Our national footprint in niche product offering has really set us apart from our competition, and has performed very well year-to-date.

Obviously, as we've spoken about a lot on this call already, we've been very disappointed by severely slow direct mail market, in particularly, credit card acquisition mail. As we discussed, this area is going through a cycle where credit card acquisition mail was down close to 39% quarter-over-quarter. This weakness in this 1 vertical alone is attributable to over 80% of our change in sales for the company this quarter.

While we fully expect these patterns to reverse at some point soon, we've been aggressive in other areas in the meantime. In response, we've been aggressive in winning market share across the board in transactional business which services statement operations. We won over $30 million of annual revenue to date to offset weakness in the credit card sector. Anecdotally, we are seeing some minor signs of improvement as we enter the back half of the quarter in terms of customer orders regarding credit cards. While we cannot predict when we will see return to normalized ordering patterns, especially given the recent disruption of the storm on the East Coast customers, we feel that we're uniquely positioned to benefit when the market does come back, as we are the only truly national players that has the service level, the capabilities and assorted assets to service our customers.

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

Robert G. Burton

Thank you, Rob. You can get a feel, we continue to have major success in all of our product lines on new sales, and volume coming in, and we have stepped up to the last several years of walking away from some of these accounts that we've had for a long time, but we really don't make money. We try to make every effort possible to save those accounts, because we have a good relationship with them. Most of them, we've been able to do and get pricing through. But some, we can't and when we can't do it, we need to go another way.

So, let's go on to -- as I said earlier, I have 3 items to discuss today. They are very familiar, but I just want to come back and repeat them again because they are worth repeating. I want to touch upon acquisition, as item one. Item two, I want to talk about the 2012 forecast. And item three, I want to discuss and remind everybody about year-end 2013 decisions that we've been talking about for some time.

Item one, on acquisitions. I have nothing to report because everyone gets nervous when we start talking about acquisitions. Spend the money, but we've been spending our time on paying down debt, and watching our costs and investing into the business. And we focused and we have said this several times on the 3 areas that I have priority on acquisitions, the labels, the packaging and the content. And we have a couple of that we've been working on, and hopefully, we can get those resolved sooner than later. But we will continue to be in the acquisition business. And we think, as we exit 2013, there will probably be some opportunities of larger size we want to focus on. But right now, we are really focusing on the old saying that paying down debt and getting this 2013 maturity issue resolved once and for all, so we can get it off the table and quit talking about it, because I know you're more tired than we are. But we want it to go away so we can focus on the real business. So that was acquisitions.

And item two on our forecast, I told you that we had a budget for the year on EBITDA of $230 million. And I told you that we felt very comfortable, and I'm pleased with the $57 million versus the $58 million. And we're going to feel that same way when we look at the full year. We think, right now, in light of what we've seen in the direct mail and what we can forecast that's going to come in this year versus what we've lost and we'll not have, that we're going to be coming in with the forecast of $220 million of EBITDA for the year. We're pleased to mention that, we're sad that it's not $230 million. But $220 million is a number that we delivered last year. And I think to say you're going to deliver last year's number after losing some $40 million in sales that just never appeared, that's not a bad statement to make. But we're talking about an EBITDA of $220 million. And that number, and I just checked today, is pretty well in line with most of the analysts and what numbers they have for us for the full year.

The second item is free cash flow. We're going to -- initially, we had a number of $100 million to $110 million. I think $100 million is a number that we're focusing on. We know that's going to be tight with the direct mail shortfall, but we still feel that's a good number and we want to hold in there with the $100 million free cash flow number.

And the last item that we focus on is the CapEx. We haven't changed that. We've been very focused on the $20 million number, and that's the number that we're going to give you now, of the $20 million in CapEx that we will spend for this year.

So the line up for the forecast right now will be $220 million in EBITDA for the year, $100 million of cash flow, and $20 million of CapEx.

I will remind you that we started this past year of having cash flow being one of our critical measurements. As we move into 2013 and we've already started it now, free cash flow is going to be our primary measurement as a company. We think it should be, it's what people look at when they buy companies, and it's something that we think we do well on collections, and the kind of accounts we have out with us now at Cenveo. So that's item two.

Item three, I want to remind everybody, and I've been saying this for 3 years, that at the end of 2013, we're going to make a decision. And I've told you about that decision, that we're either going to sell this company as we continue to get offers, we're going to sell it or we're going to take it private. And the private issue -- and I've said it many times about the sector cloud that we continue to get punished by, even though we're not in this business, and even though half of our profits come from nontraditional printing kind of businesses.

And the third alternative is to leave the business alone, and add a primary, large acquisition in one of these areas, get some new partners and make this a much larger company, and maybe even add a dividend. But that will depend upon our debt-to-EBITDA number and what we have. But we've been here for going on, I guess, it will be 8 years at 2013. And we think this is a time that we ought to step-up and see what's going on out there. We've had several people kicking the tires over a period of years, we think this thing can grow more and faster with a couple of tweaks and here, and especially if we had a much larger base in some of these areas that we call growth areas.

But I want to mention it now, and I've mentioned it before because I don't want someone to come up late in 2013 and say: "What are you talking about? You didn't say anything." And rest assured, I'm the largest shareholder in this company, and I continue to buy stock, and by the way, I'll buy again this week or next, whenever legal tells me that I can buy. And I also hold our bonds, and I do the best that I can and will the best for this company, as we continue to move forward.

So those are the 3 items that I have. And I have one other, just general comment because a lot of this stuff we're talking about -- our business plan that we put together has really not changed. It has not changed at all. The only thing that's changed has been this direct mail cycle that sort of jumped on us this last year and hopefully will smooth itself out next year. But I sort of look at that as a bump in the road going down to where we want to be at in 2013. The direct mail problem delayed us, but this debt-to-EBITDA is something that we continue to look at and focus and want to have a much lower number than we've had in the past. And we look at where we're at right now, we think there's still a lot of improvement in some results that we can make in an environment.

And I don't know what the environment's going to be like, we just had a major election, and things are sort of settling out. We're focusing on our business. The business that we have and what we can control and we think all our children are healthy. The cycle with direct mail, I think, will come back in hand and we're going to be going full steam this next year and give it 150% to see what we can get done.

But -- the last comment is that we have appreciated all the people that have been with us for the long-haul and also the newer stockholders we have. We have a lot going on and I think, once we get this financing issue to go, we can start seeing the stock move in the right direction. So no one is more disappointed than I am about that 1 segment of what we've done.

So with that, operator, this concludes our presentation. And let's now open up the call for a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Charles Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

I just want to kind of expand on a little bit, if you can talk a little bit more about, when you look at the credit card markets kind of been depressed this year for a number of factors. And when you talk to your customers going into next year to kind of plan out their years, are you seeing kind of a turn there in that sentiment? Kind of how you're hitting the inflection point at this point?

Robert G. Burton

Well, the real key was, we think that the larger players, the larger player in the business, and we're just like anybody else. We're a vendor, we do what our customers want us to do. We're seeing business there. I think there's some other major players in the credit card business that has not come in. But as we sort of moved here toward the end of the year, I think almost all of them have, except maybe one, that has not been a major player, to come back into the marketplace. So we expect those people to be in the market this next year. No one has told us that they are out the market totally. But I would think you would see them back into the market, and there's not going to be a switch that goes on or off. Rob, you want to add anything to that?

Robert G. Burton

Yes. I think, Charles, there's just been really perfect storm in the credit card market. Not only you had a large customer with a large acquisition go through, you also had some government intervention, like once again, this marketplace sort of advent to Dodd-Frank and sort of led a couple of these guys to reevaluate their, sort of, model, and what they can or can't charge their customers in terms of rates, and assorted features. So that's sort of have been settled out, you've seen that play out of the press here in the last couple of months, large players settled with the government in terms of that function. I think you will see people return to normal -- to ordering patterns, I think this election also, sort of, puts a sort of ground rules in place for next year as well. So I think you will see, once people will know what the rules are going forward, they can get back to patterns. And we have seen that a little bit so far in the back half of Q4.

Robert G. Burton

And I also think, Charlie, that Mark Hiltwein is going to have a positive influence on us, get us up to speed on what's going on after the industry.

Operator

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

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

A couple of questions on the business and then one on the refinancing. And just kind of picking up where the last caller left off. I mean, obviously, your direct mail is not where you want it to be. But as we think about Q4, should we expect about the same amount of pressure that we saw in Q3? I think you mentioned that you did start to see some improvement in September, October, but is that going to be enough to sort of move the needle on the numbers?

Robert G. Burton

No. I don't think so. We have seen the movement, the movement would basically, would be our major player that we talked about. But we did not see all the other players come in. But we did sort of see some -- I know it sounds like a child's discussion, but it sort of dribbled in here toward the end of the quarter. But we keep looking for it and we hear some of these stories of major orders come in and then it sort of goes away. So our position is, we're going to be a lot more conservative on our discussions with the people such as yourself on this direct mail, because fool us once, but not twice. So I would say, we have a forecast that we've put together, and Scott, wouldn't you say that our assumptions for direct mail are pretty similar with what we had earlier? Yes, so not anything that would be. And who knows, I mean, we could go back to our office and there could be some major orders that have come in today and then tell us we don't even know what we're talking about, but I don't think it's going to happen right now. So...

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

Okay. Got you. So -- sorry, go ahead.

Robert G. Burton

The only thing I'm going to add is, is the comparisons to last year do get much easier as you enter Q4. So Q3 last year was pretty much the zenith for the credit card market in 2011. And you did see a falloff pretty precipitously as you entered November, December last year. So while we're not expecting a big increase in Q4 versus Q3, there are some seasonal benefits. The comparisons will be stronger in Q4.

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

Okay, and so it sounds like that in terms of thinking about the new kind of $220 million guidance, which I agree is kind of more in line. Yes, it sounds like that's not really a lot of downside risk, you're not banking on a big rebound in Q4?

Robert G. Burton

That is correct. 100% correct.

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

Okay. So then, in terms of the pharma, I think you mentioned earlier that there was some new sales prospects in the pharmaceuticals vertical. Could you talk a little bit more about that? Anything you could let us know, with respect to the magnitude of those potential sales and incremental margins and so forth?

Robert G. Burton

Let me -- I'll ask the President of that division. I'm not going to talk specifically about the accounts, because we can't do that legally. But just to talk of what our strategy has been, and what we're looking for and the kind of position we're trying to establish in the marketplace. Mike?

Michael Burton

Thank you. I think our position in pharma is pretty good. We have a large relationship with one of the companies that are out there. And I'm talking about the script business in particular where we benefited naturally from some organic growth that they've enjoyed, which is good. And we're also going after some new pharma or script business that's out there and available. And these things come up in cycles, and you got to play them right, you got to have the right people dealing with them. And that's where we see some of the advantage we have today. We have the right sales people dealing with the right people with right cost basis, so we can get in there and try to win some of this sizable business. And we have had some success today.

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

Okay. That's helpful. And then with respect to the refinancing, should we be thinking about any new money that comes in? Should we be thinking about this as a permanent increase in capital or more of a short-term bridge to repayment out of cash flows, asset sales and the like?

Robert G. Burton

Yes, obviously Lance, I can't really go into details in terms of what the options are. I think what you threw out were probably reasonable options. I think we're out to do what's best for the company and I think we enjoyed a very good relationship with our lender base for the last couple of years. And I think we'll be as, try to be as flexible and make something happen. So I really can't go into more details at this time, though.

Robert G. Burton

And might I add that comment that Mike made about the quality of the sales individuals going into the market on some of these major accounts. One of the things that we've really focused on is hiring more senior type executives, and giving them assignment to penetrate some of these major, major accounts. And major, the top 100. And we have been very fortunate to have some people that have been part of the team before and other people that we've hired and we've given them a chance to handle these accounts. And we've been very successful with them. And not that we know all the answers, but I think the quality of our sales grew, consolidated, has helped us win some of these bigger kind of new accounts that we haven't even been close to in the past. This is an added comment about that. And why don't we take one more question and then we got to get back to work.

Operator

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

James Clement - Sidoti & Company, LLC

Bob, quick question on the commercial business during the third quarter. I mean, it seems nationally, your competitors were probably down over the summer. I think given what was going on in the economy, that's no surprise. Sounds like you all were slightly up in that business? And we're just curious for your thoughts is as to why that was, and whether it's sustainable?

Robert G. Burton

Okay, I'll let Rob take this one. Rob?

Robert G. Burton

Yes. I think it's a couple of factors. I think, first of all, I think we've done a very good job on the west coast operations in terms of growing that business. I think, secondly, it's sort of 2 facts. We talked about the customer back in Q1 being very, very weak in terms of some cycles. These people have returned and they returned in a big way here recently in terms of product launch that is probably going to be hitting the shelves here in advance of the Black Friday holiday, so that's been very well. We think that's sustainable going forward, depending on the success of that project. And we've also been very successful like we sort of talked about it on -- with Mike in terms of his sales force, we've been able to go out and win a couple of new accounts on the health care side. Just sort of keep that trend going, then we'll be able to bring a sizable job, north of $10 million in size, that we sort of produced across our platform, that we'll sort of be able to feed to various regions to keep to the presses full. So we do think that sort of trend is continuing, we feel pretty optimistic that the holiday season will be relatively strong, sort of in the cases that we're getting. So I think it's sort of something we've had seen across, and have been proud of and I think with going into Q4 we're optimistic the trend can continue.

Robert G. Burton

And another comment on that, I'm talking about quality of the sales people. The guy that heads that up is Harry Vinson, who really was a salesman, sales manager, been in sales all his life with us at World Color and all our others stops. And the other guy right along there, Cathy Charles [ph] is as good as you'll find in this commercial business. I've never seen one that's better. And I think we have 2 senior executives there with a group of underneath that just do a super job of coming after and going after some of these major accounts. Just to add that as a comment and as a plus to those 2 individuals.

Robert G. Burton

Thank you very much, ladies and gentlemen. Have a good day.

Operator

This concludes today's Cenveo's 2012 third quarter results conference call. You may now disconnect.

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