Cenveo Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Cenveo, Inc. (CVO)

Cenveo (NYSE:CVO)

Q3 2013 Earnings Call

November 07, 2013 10:00 am ET


Robert G. Burton - President and Director

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

Scott J. Goodwin - Chief Financial Officer


Charles Strauzer - CJS Securities, Inc.

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

Brad Tesoriero - CRT Capital Group LLC, Research Division

Daniel Moran - Macquarie Research


Good morning, and welcome to Cenveo's 2013 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 and is being recorded. Mr. Burton will speak, and then the call will open up for question-and-answer session. I would now like to turn the conference over to Cenveo.

Robert G. Burton

Thank you, and good morning, everyone. This is Rob Burton, and welcome to Cenveo's 2013 Third Quarter Results Conference Call. With me today are Robert G. Burton, Sr., the company's Chairman and Chief Executive Officer; Scott Goodwin, the company's Chief Financial 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 the details regarding these factors, please reference Pages 10 and 11 of the company's press release that was issued last night or the company's Form 10-Q, which was filed with the SEC. And with that, I'd like to the turn the call 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. I am also the largest shareholder of Cenveo's stock and a meaningful and growing owner of Cenveo bonds.

As in the past, after our conference call, I have, with our legal department's approval, gone out into the market and bought both stock and bonds, and I plan to do that today at the end of this meeting. I make these statements about ownership because I want you to know that we're 100% committed, as is the entire management team who's focused on the future growth and fully understands what our financial targets are for 2014, and everyone of our senior executives at Cenveo, and I mention this time and time again, is purchasing stock on monthly basis through our Employee Stock Purchase Plan. That's a 100% commitment that we've had since we started, and we continue to have that today as I speak.

But before I get started on my presentation, I wanted to give you sort of an update on our industry stocks. I'm sure that yesterday, you read that most of the industry stocks were down for the day. Quad was down some $7.10, or 20%, but most of the printing stocks were down for the day and we were also down $0.10. Quad said that there were something going on with their acquisition on Vertis. And we have, over a period of time, seen this old thing called the sector cloud of printing problem that is a total falsehood, and that means it's a lie, and Cenveo does not have this kind of problem. And we see it time and time again that there are problems in some parts of the printing industry that are the segments that have nothing to do with it, so they get hit on. But I wanted to say that to you and bring it out, in case you hear that's something's going on with the industry, that is not the case, and definitely not about what we're talking about today because we're talking about our future. We're very positive about our future and with the direction we're going, and the things that we will be talking to you about and what you're going to hear and see in the next couple of quarters, you're going to get very excited about.

But for the past 2 years, we've been committed to sell our nonstrategic assets, and we've prepared for this new Cenveo starting with the first quarter of 2014. And during this 2-year period of time, we have sold over $100 million of nonstrategic assets, sort of rounding a little bit up. And we have focused on developing a new and better Cenveo group with acquisition of NEC under the leadership of Mark Hiltwein.

So keep in mind that all of our Cenveo assets were, we're making money. A lot of these companies are in the red and that are losing money and their turnarounds. Every one of the deals that we inherited when we bought this company, we got them in the black, and that has been case on companies that we have bought, they've immediately been accretive to earnings.

What we wanted to do -- because several people have had this question, we wanted to streamline our focus on several markets that we could be the market leader in. A leader to us is, number one, or a tie for number one, and improve our margins that are what we call industry-leader kind of margins.

So in today's presentation, we're going to focus on how we've been preparing for 2014 and projecting results that have been associated with our successful business background and our track record in the past before the mini depression hit and the lowball competition that we had that was impossible to compete with, the pricing that required us to lower our pricing 5% a year or $25 million per year reduction in EBITDA since 2011, '12 and '13. Yes, that $75 million of lost EBITDA that I talked about the last time we were together, and I wanted to mention it again because when we look at that and we look at those losses and what we've done, we still feel that being competitive in the market is important, but when you're giving it away at prices that are unreasonable and nonsustainable, you're going nowhere but into bankruptcy. But I want to point out again that during that period in time, and you'll hear us constantly say that, in order for us to be competitive, we needed to be able to bid, we needed to lower our prices, and we did some 5% that cost us about $25 million a year.

Today, you'll hear from our senior managers and the management team, and you'll sense the excitement that we feel very good about our growth plans starting in 2014. And keep in mind that we mentioned to you before, we've been preparing for this for the last 2 years, and we really feel we got our arms around it. You would not see us have integration problems. I mean, we are anticipating these issues way ahead of when they're going to come true.

So today, we'll focus on 2014 again, and how we are preparing for that period of time, and at the same time, update you on our other business segments so you'll know what's going on with each of our segments within Cenveo, except -- and about NEC.

So what I want to do is to talk to you about 10 items that relate to the third quarter and what's happened to our business in the third quarter and how they relate to where we're going down the road in 2014.

So the first item I have, number one, basically reads our consolidated third quarter results were in line with our expectation. That basically means to us that we pretty well were at where we thought we were going to be at. I think we had one surprise that took us longer to get out of, but other than that, we were pretty well moving in the direction that we thought we were going to move in. I think we made a lot more, faster process and progress in some areas that I'll talk about. But for the first quarter, if you ask me, "Well, how do you do for the quarter?" I can tell you I thought we pretty well were on target for what we were expecting.

Number two, on the Packaging business, which is still not 100% because of the utilization of the fire and replacing the press and getting that press up and other issues that are just really are always the same no matter what you do when you have an incident like a fire and you replace a press. It always takes more time. But I tell you, the management team has been on top of that. The September results look more positive, and we feel very good about the fourth quarter kind of focus that we're going to be having with our Packaging group and the new press that we've implemented.

Number three, most people have been hearing us talking about this company called NEC and National Envelope, and they say, "Okay, so where's all the revenues and where's the profit at in the third quarter?" Well we've only owned the company for 12 days, 12 days in this quarter. And that's right, only 12 days of ownership, and you need to keep in mind. And by the way, the 12 days is sort of a miracle. You need to keep in mind that this company called NEC lost $30 million to be slightly profitable this quarter. So we have a 12-month integration plan in place, and it's on target. We get weekly and, sometimes, daily updates on the integration of these 2 companies, and Mark and his management team throughout the organization are constantly on all of these issues and keeping us advised of where we're at. And as I talk to you today, we are totally up to speed on the integration of what's going on with the NEC because the NEC integration and to doing this right, will make your stock very, very, very much more valuable in the future than it is today, and that's one of the reasons that I continue to buy it.

So number four, we had revenue growth in the quarter, and you like to see increased revenues. And I'm sure you're pleased, look at the Direct Mail business on a year-to-date basis is up some 15%. We had -- Labels business are doing well, and the Packaging group is moving along as we expected.

Item five, we've started with this fourth quarter process of changing this pricing strategy that was in place by the other company. That cost us $25 million a year, that I spoke to you about. We now have our own management in place, is actually signing off on all pricing and you know how that works in the field. We give salespeople certain levels and parameters that they can deal with and then you get sign offs that go all the way up to the CEO and the CFO, and if need to be, come to myself for discussion. But we are now focusing on pricing that is market-driven, and we feel very good about that, and there are some things that could have been committed in the past that we need to work with. But right now, we're on top of all the pricing that is happening within our company.

Item six, we've talked for some time that there's been very little to no pricing increases in the industry, and you'll find that, that they run in trends. And I can go back 10, 15 years, where there were some times we had them like back-to-back for 3 to 4 years. And then like now, the envelope paper pricings have just increased some 5% for the envelope industry. And we haven't had a price increase for almost 3 years. And keep in mind that we've already started meeting with customers on this paper price increase. And sort of the way that works when you have paper price increases and the world knows what's going on and you haven't had a price increase for some 3 years, each 1% of the price increase over the 5% is $10 million of EBITDA profit. And if anything you want to write down from my presentation today, you ought to write that down. Each 1% of price increase over the 5% is $10 million of EBITDA profit. We feel this price increase is necessary, not only for the industry and Cenveo, but it will be definitely good for us to sort of tie in to everything else we're changing and focusing on as a company.

You need to keep in mind we also probably have about a $30 million bunch of products in the backlog that we already sold and have committed to, and we're working that down before we can start giving those people price increases. And we also have contract arrangements with customers that we need to work through, but we have started meeting with customers. It's a very painful kind of process, where you have to actually go. It's like you've had a car in mind you wanted to buy and you go there, and they say there's a price increase that just come through. It's just painful and it's difficult, and it stresses our relationship with customers for any industry, but we've not only been out in front of them and talking to our key customers, we've also been on the telephone. We also had meetings with these individuals. So we will have covered all of that and feel very comfortable that we're going to be able to implement these price increases as we speak to you today. That was number six.

Number seven, you're aware that we sold the custom envelope group to Ennis for around $50 million to pay down debt. This will allow us to focus on the direct side of the business. And you know last year when we sold the forms business. And just so you know, these are very good businesses. And these are businesses that we had, and the only reason that we sold them is because we wanted to be in these other business segments. These are good businesses. These are market leaders in these businesses, and we feel they'll do very well under their new ownership.

Number eight, the print operation. And the print operation is the one that we used to call the commercial business that no one ever wanted to talk about in any printing company except us. We used to talk about it at World Color, but our print operation has been sort of a lost child without leadership, and it's got great leadership right now. This is the group that's under Mike Burton and Paul Baker and Gary Pawlaczyk and Cappy Childs. And I have said in these meetings, the interview meetings, our focus has been on interviewing and upgrading our salespeople and our sales management. And that's been our focus. We've actually gone to headhunters, and we're looking for not the traditional kind of salesperson that you would find, but we're looking for people who can deliver and can sell and are hungry to make money. And we are making very good progress, and I can't tell you about all that we're talking about because all the competition, they keep their eyes on what we're doing and what everybody else is doing, but we have some vertical sales efforts that are doing terrific, and we're expanding that effort, and we're putting together teams that are working. And we feel very good about the progress of this team. When we first looked at it, I think we took it over last quarter or something like that, and Mike and I thought that it would probably take us to the end of the year to get the team in place. And that's what we're striving for at this time. And once we get that team in place, we're going to be ready to really show some good results. These are not miracles. These are very hard, very competitive kind of opportunities out there that we've been making some very good progress on. And next year, we will update you more in details on our print progress. We want to, again, keep our success very confidential, and I can hear the emails going out to the other salesforces about our success as I speak to you today. So that's item eight.

Item nine, just to follow up on that. We started something that I'm sure all our financial managers will be pleased with. We started ranking our sales staff. When I was at IBM, I was there 10 years, and I started as a salesman. We did the same thing. Not we, it was there. The Watsons put it in, and every IBM-er or no matter where you work, there was a regional office in Chicago, our division, you were ranked. And that's what we're starting to do here. We're going to rank our people, rank them by performance and their ability to deliver, and which we think it's a great thing to do. You rank all employees and managers from #1 to whatever the size of the group is. And our sales tool that we've been using before, the sales-com-dot-whatever. With all our sales personnel, it gives us another major tool to work with as we rank these individuals and show the kind of progress we made.

Number 10, sort of a closure. We look forward to 2014 and hopefully, we won't have any sick kids. You know the old saying, you always have -- you have 3 or 4 children, you always have 1 that's sick. When you have a diversified portfolio of several companies like we do, you're always going to have one business that's not doing well and has got problems. This is the first time since I've been here we're actually looking forward that we're going to have some pretty healthy children as we sort of kick off 2014. And that's just a process of us upgrading our staffs and doing a better job in these areas that we don't talk about. And as we have in the past on the -- these are just the areas that we get very enthused about, and we think we're going to do fine. And this is -- when you get past the depression kind of environment that we had in '08, '09 and '10, and what we faced here with the competitive pricing, I think it just gives us a very good feeling of how is the performance and what we can achieve in the future because we've been able to overcome those things and to continue to grow our business. So that's my 10 items that I have.

And then, as in the past, on these quarterly investor calls, we're going to use the same format that we have used in the past, but we'll sort of shorten it, hopefully, to have more Q&A at the end. But today, we're going to have 2 other people talk. Rob Burton, our President, is going to give us an update on the sale of our nonstrategic assets and why we've been taking these actions and what that really means to us, and what it will mean in the future and what it means now. And then after he's done, Scott Goodwin, who's suffering here with a cold or something, I don't know what it is. We got him down at the end of the table. Our CFO is going to report on the financial highlights of the third quarter.

So that's sort of my update and right now, I'll ask Rob to talk to us about our nonstrategic asset and a couple of other related items. Rob?

Robert G. Burton

All right. Thank you, everyone. As we've mentioned on our previous conference calls, we began a strategic review of our operations early this year. When we started this process, our intentions were to transform Cenveo into a larger label and packaging company and to potentially dispose of assets that were noncore to our future. This mandate hasn't changed, and we've made significant progress to date in our review. Along the way, the National Envelope bankruptcy process start to unfold, and quite honestly, fell into our laps. But we didn't go in this process looking to double down the envelope market. The opportunity to acquire our #1 competitor, who at the same time, was causing serious pricing pressures, which we believe cost us appropriately $25 million in profits over the past year, for a one times EBITDA purchase price multiple was something that we all got behind very quickly. We've spoken at length on the many reasons why this transaction makes strategic sense for us and for the entire envelope market in general, as much of this capacity will be taken off the market and better discipline is instilled. We are very pleased to date on the progress and on the results of this acquisition as we've taken the company that was losing close to $30 million last year into a profit in a very short period of time. And with little or no benefits of our integration being reflected in our Q3 results, we have very high hopes that this acquisition will be a winner for investors going forward

Combined with momentum we are seeing with NEC, we are also able to sell our short-run custom envelope business to Ennis for appropriately $50 million in value. This business primarily sold to distributor network and had sales of approximately $40 million. By selling this asset, we now can focus on the direct side of our business and on our ongoing integration of National Envelope.

Regarding other parts of our organization, we are currently actively evaluating other opportunities on several of our operations and look to have a resolution over coming months. As you can imagine, most of management's time that has been focused on these 2 acquisition dispositions we've completed. We will now focus on this task, call it, at hand going forward.

Given the trend of increased industry consolidation, favorable purchase price multiples and a strong capital market, we believe this is an appropriate time to evaluate our options. We believe that we will see continued consolidation in the industry going forward as customer consolidation and continued overcapacity will accelerate this trend as we enter 2014. One example is the recent consolidation in the office products industry, as the supplier base will now have to react to the realities of having only 2 large customers now driving the marketplace.

Regarding our capital structure, it is very important to note we've made significant progress over the past 12 several months in terming out our debt maturities and paying off our higher interest cost debt. By the end of this year, we fully expect to have paid off our unsecured term loans and continue to lower our cost of capital and cash interest payments going forward.

Also, as we continue to build inventory and accounts receivable that relate to the NEC acquisition, we are evaluating options to potentially look to grow our ABL facility. As many of you know, we may utilize our accordion feature in our ABL facility to borrow some incremental $50 million to further enhance our capital structure by using this lower cost interest rate vehicle to address our highest interest rate cost debt.

As we progress in 2014, we will continue to look to lower our leverage and continue to use our cash flow to pay down debt, including our 11.5% senior notes, our 7% convertible notes, our second lien notes and our term loan. We will monitor the capital markets, and we'll be proactive in looking to address our maturities as the first of our notes become callable in 2014.

In closing, we are very excited about our outlook for the future starting in the fourth quarter. We've worked very hard to re-position our company to the past year, and while we are not pleased with our results in the first 9 months, we feel we addressed many of the issues that have impacted our results. With the benefit to the NEC acquisition still to be realized, the ramp up of our packaging operations and improving trends in our commercial print group, we feel that we will see significant improvement in our operations going forward starting in the fourth quarter and accelerating as we go through 2014. This concludes my remarks.

Robert G. Burton

Thank you, Rob. And I'd like to add, we talked a lot about Mark Hiltwein and Mr. Envelope, David Law, who put that all to work in integration. I can name about 40 people from the field who helped us on this integration and who led it. But really, Rob and Scott and some other people here at corporate dealt with all of these individuals in the bankruptcy courts and all the individuals that lined up to buy NEC if we could ever fine one. But they did a terrific job. A terrific job, and one that has really put us where we're at, and we're very appreciative of that.

And now I'm going to asked Scott Goodwin, our CFO, to report on the financial highlights of the third quarter. Scott?

Scott J. Goodwin

Thank you, Mr. Burton, and good morning, everybody. Today, I'm going to review our third quarter 2013 financial results and provide select financial highlights for the quarter. Before I do, I think it's important to note that the results I'll be discussing today include the operations of the National Envelope assets from the date of acquisition and exclude the results of the custom envelope division, which is classified as a discontinued operation in all the periods presented or discussed.

Net sales for the third quarter were $442.8 million compared to $437.2 million in the prior year. This increase in net sales is attributable to higher sales of volumes in our direct envelope business due to our market share initiatives, higher Direct Mail volumes, as well as the National Envelope sales in the stub period post acquisition. Additionally, net sales in both our label and packaging operations increased versus the same prior-year period.

These increases were offset substantially by sales declines in our commercial print operations due to lower customer demand and continued pricing pressures.

Our gross profit for the quarter continued to be impacted by lower sales volumes and pricing pressures within the commercial print operations, along with irrational pricing that continued within the envelope industry. And as a result, our gross margin declined from 19.1% in the prior year to 17% in the third quarter of 2013. SG&A expenses for the third quarter increased over the same prior-year period due to acquisition and integration costs related to National Envelope and our investments in our information technology and e-commerce platforms.

Restructuring, impairment and other charges for the third quarter were $3.3 million compared to $4.2 million in the prior year. Net cash for restructuring and integration for the quarter was $8.2 million compared to $4.8 million in the prior year, and this increase is due to the acquisition and integration costs related to National Envelope.

The gain on bargain purchase of $12.4 million relates solely to the acquisition of the National Envelope assets and is preliminary. We will finalize this gains as we conclude our purchase accounting procedures over the coming months.

Interest expense for the third quarter decreased over $1 million to $27.6 million from $28.9 million in the prior year. This decrease was due to both a lower weighted average interest rate and a lower average outstanding debt balance. Cash paid for interest was $25.8 million for the third quarter of 2013 compared to $26.4 million for the prior year.

Our income tax benefit for the third quarter was driven by a $15 million benefit associated with adjusting our book income forecast for the full year, including the removal of the custom envelope division from our continuing operations. And this benefit is partially offset by book income tax expense of approximately $5 million, which relates to the preliminary bargain purchase gain.

Cash paid for income taxes for both the third quarter of 2013 and 2012 was less than $0.5 million.

Turning to the cash flow highlights for the quarter. We generated cash flow from operating activities of $8.4 million in the third quarter of 2013 compared to $6.7 million in the prior year. It is important to note that we did not purchase any of the working capital assets or liabilities of National Envelope; therefore, we are building the necessary working capital for those assets over the first couple of months of operations.

Despite the need for the working capital build related to National Envelope, we expect working capital improvements in the fourth quarter due to the seasonality of our business and working down our inventories that we procured in advance of potential supply constraints.

We continue to see improvements in our DSOs and DPOs during the third quarter, and we will continue to concentrate on these areas for future improvements. One additional area that I do like to -- I would like to highlight this quarter is our pension and postretirement liabilities and the related cash contributions.

Through the third quarter, we have contributed $12.4 million in 2013 versus $15.7 million in 2012. Also during the year, we have experienced better-than-expected returns on our asset base within the pension plans and to date, discount rates have increased 75 basis points from December of 2012. As a result, we believe the funded status of our pension and postretirement liabilities have improved over $50 million since the end of last year.

We will be updating our actual 2013 measurement of these liabilities at the end of December, and hope to see continued improvements in these trends.

Cash flows related to investing activities for the third quarter reflect net capital expenditures of $7 million, cash paid for National Envelope of $28.1 million and cash proceeds of $42.3 million for the sale of the custom envelope division.

Cash flows related to financing activities for the third quarter reflect the issuance of our equipment loan to acquire the machinery and equipment of National Envelope for $20 million and the repayment of $15 million of our unsecured term loan.

As Rob mentioned earlier, in regards to the unsecured term loan and our capital structure going forward, we have repaid $30 million to date and expect to have the remaining $20 million of this loan fully repaid in the coming months. Additionally, given that the leverage loan and the high-yield markets remain relatively robust, we do anticipate taking the opportunity to further improve our capital structure by taking advantage of the suppressed asset availability under our ABL facility, which we believe is in excess of $50 million as of the end of October due to the National Envelope working capital assets. We may seek this opportunity as early as the fourth quarter upon extinguishing our unsecured term loan.

In closing, we feel confident that the transactions we completed this quarter will better shape the company heading into 2014. We feel positive about what we are seeing across a number of our product lines, and we believe that there are few opportunities we can capitalize in the fourth quarter on, which should further contribute to our success in 2014. There continues to be opportunities in our marketplace with strategic acquisitions and divestitures, and we will pursue those as desired. So as we finish up the call today, a number of our efforts in the fourth quarter will be focused on tightly managing our operations through the last 2 months of the year. But more importantly, we will be focusing on 2014 and continuing the positive momentum we have going for us today. And with that, I'd like to turn the call back over to Mr. Burton.

Robert G. Burton

Thank you, Scott. And a couple of closing comments and the things we've been talking about, about 12 days in this quarter of NEC, but we're looking forward to seeing some of the results in the fourth quarter on revenues and profits and what we've been able to control and how we've put the integration plan. I think you will be pleased. And until you see it, you're not going to believe it. But -- and I know that, and those are the rules of the game. But I'm telling you, ladies and gentlemen, we have a plan in place, and we feel comfortable that we're being able to implement it. And I think as we look at and move as we put our budget together for 2014 here, you're going to see a company that you're going to like a lot more than one that's had to struggle through this depression like everybody else has, and a series of really pricing issues that were almost next to impossible to function in.

So with that, operator, so we can give our people time to have some Q&A, why don't you just open the call up for questions, please.

Question-and-Answer Session


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

Charles Strauzer - CJS Securities, Inc.

Bob, quick question for you. I mean, if you just kind of expand a little bit more on the whole pricing dynamic. And obviously, when you have a wounded animal like National was, but they're in bankruptcy, they can act a lot more desperate than a healthier company. How much do you think the customers kind of realized that and took advantage of that? And then are you seeing them being more rational about pricing right now?

Robert G. Burton

Well it's like it's going down to you saw the car was advertised before to $5,000, and you got there and it was $6,000. So I mean, customers knew. There's no question about it that when pricing was what it was that they had an opportunity to buy at a lower price. And there's no question about it. And the reason we were able to continue to keep our leadership, and there are a couple of pieces to that. You can say, "Well, envelopes, how can you screw up envelopes?" You can screw them up pretty bad, on the way you ship them, on the way you sort them and the way you sort of put social security numbers, maybe in front where they shouldn't be. But what really saved us from having more of a problem was the quality of our people and their ability to deliver quality goods to our customers. And that was really an issue for -- and I've been on both sides. I was in the publishing business for a long time, and I used to have to deal with those issues on quality and price. And what you end up doing, you sort of go in the middle, but because of all of the problems that were out there, pages were down in a lot of the long run of magazine situations. And when that's the case, you're going to lean more on the pricing issue. And they knew that they were getting something. But they're like everybody else, they're very smart people, and they know something like this cannot continue. And we told them that there's no way that this thing can continue. And I have said it, I've said it so many times to our staff and the sales organization, they were just tired to hear me say it because it just kept happening. But I think the customer fully realized what was going on and this was once-in-a-lifetime kind of thing that cannot happen again because you just have to have a very big checkbook to go for a long time. And that's not going to happen. So I think the customers realize, they don't like it. No one's going to like it when you raise prices, but we are a quality printing company. When I tell you that we do the majority of work for Cap One and you look at that quality work that comes in your envelope or the mail that you get from all the other direct mail people, who were probably the sternest and looking for the A-plus kind of mailings. We do a quality job. And I think with the pricing that they know we were going to have to raise, not only us, but the entire industry, I think they will accept that. Though some will have other feelings about that, but I think they will because they know that we need that to continue to have a reliable source that can deliver quality kind of material. Do you want to add to that, Rob?

Robert G. Burton

Yes, I think, Charlie, the answer to your question, I think, it was unsustainable. The customers took advantage of it. I mean, and they even talked about it and they may take advantage of it. If someone is giving you stuff away for free, might as well take it. So I think everyone in the industry knows that couldn't continue, and it's not going to continue forward, but I think that part of our history is now behind us.

Robert G. Burton

And it's been well received. I might add that we've been out there now with the customers, and we know our customers pay our bills. And we want to keep them forever, and we're not going to be stupid about it, but we got a lot of smart people out there. And that's the reason that they're still in business.

Charles Strauzer - CJS Securities, Inc.

And then when you look at the volumes, obviously, August, September are probably challenged. I think especially in September would be as we kind of have the fears of government shutdown, kind of were hanging over everyone's head or stuff like that. Are you seeing volumes kind of picking back up again?

Robert G. Burton

Well I've got to be careful how I answer this. When we look at our fourth quarter, and when we look up here in the envelope business, you got these months and you're pretty well booked. And we're booked with customers. We know what our volumes were. And sure, there might be some uncertainty, but you don't get the kind of uncertainty that you get on the commercial side, where they may be backed up with a bunch of stuff and then cancel us. That didn't happen. But our volume will -- hopefully, our volumes are going to be up. Revenues are going to be up for the third -- the fourth quarter versus where they were in the third quarter. I actually expect us to be full, and I expect us to have a very robust volume for the quarter.

Robert G. Burton

I think, Charlie, year-to-date on the envelope side in particular, we're seeing volumes are up 7%. So we feel pretty confident that trend is going to continue, and Mr. Burton mentioned the $30 million backlog number that we're working through. And now with the National assets we're starting to burn through that a little bit faster. So we feel pretty good about things where we sit today.

Robert G. Burton

There's something else, too, Charlie. I talked to you about some of the print operation and being able to deliver some of these accounts, and we're now getting in accounts that could be $5 million, $10 million, $15 million in size that we never had before, the markets we were not in before. But because with the sophistication and the leadership and the direction, we're having those accounts and that has nothing to do with envelopes. That just has to do with the new revenues, where we're getting sales that are really filling up a lot of our presses. And you know how it is. I mean, in the game, it's a lot easier to do it in the magazine business than it is in this business, but you pretty well know where you're at for a 6-month window in those businesses. In ours we're looking -- we probably got a couple of months where we can look and see where we're at. But we can get a pretty good trend, and then we're selling a lot of stuff that we have not been able to do in the past just because of the quality and the leadership of our sales organization.


The next question is from Kevin Cohen with Imperial Capital.

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

I guess, when you look at the envelope industry from a 30,000-foot level view, where are margins currently today roughly, and what do you think is par for the course taking into account consolidation and the need for real price improvement?

Robert G. Burton

Kevin, it's Rob. I think if you go back in time, this was probably Cenveo speaking because you obviously saw how poorly National Envelope was doing. But we've historically done EBITDA margins, if you go back to 2007 time frame, they're probably 13, 14 percentage points. Today, we're probably hovering around 10. Obviously, the world has changed a lot since then, but obviously, consolidation will help out. So it should be somewhere in between when all is said and done. I think, while we believe we'll probably have margins that are higher than our competitors, given our sort of size and scale, we're probably 6x or 7x larger than our next largest competitor. So we buy -- when we buy paper a lot better than anyone else does. We think we're more efficient. So I think our goal obviously is pretty lofty in terms of going forward. We have a lot of opportunity to benefit from National, not only on efficiencies, but hopefully on pricing as well. So that should correlate to a number that should be getting closer to legacy levels.

Robert G. Burton

Yes. And also, he was talking about EBITDA. And as a total company, we're going to be looking and pushing as we've gotten there in a couple of quarters at a 9% kind of EBIT, which is the number we'd like to be as a company. We're not there yet, and National will slow us down a little bit, but it's going to help us because in our business, we'd like to be at that 8.5%, 9% EBIT. And what we look at on the EBITDA number, as most of people do here, and this on the envelope side, but just remember that we're always striving to hit on that EBIT number, which sort of limits in what's our capital goal is.

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

And I guess, kind of thinking about the earlier comments that were made about $75 million of lost EBITDA, is it fair to assume that ultimately the company should be able to recoup all of that EBIT pricing?

Robert G. Burton

Well, I'm going to tell you one thing. I'm sure as hell going to try. I lost a lot of money on this thing myself personally. I just don't see where I paid $25 per share of stock. And our objective is to get every cent of it back. And I'd say that very directly, and everyone around this table here is nodding their heads.

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

Well, that's good to hear. And, I guess, thinking about the asset sales, Rob, I know it's a little bit of a sensitive topic. It's a fluid one. But what granularity can you provide us today in terms of what potential might be coming down the pike?

Robert G. Burton

I think, as we said before, everything is on the table. Obviously, we focused recently on the envelope market. I think it is sort of where is probably we've got some work to do on the integration side. On the breadth of this, because I think, obviously, consolidation needs to happen. We need a comment before on the call that we need to be #1 or 1A in all these marketplaces. And some of these places are clearly aren't that. So I think it's a moving target. We're very sensitive about it. But I think, obviously, we want to grow on our labels and packaging business. I think everything else is pretty much on the table, and I'll leave it at that.


The next question is from Bradley Tesoriero with CRT Capital.

Brad Tesoriero - CRT Capital Group LLC, Research Division

I had a quick question for you on the proposed United States Postal Service rate increases, and just wanted to get some incremental color from you guys on how you think that might affect Direct Mail volumes in your business in general?

Robert G. Burton

Yes, this is Rob speaking. I think, obviously, there's a lot of dysfunction going on in Washington today as we all know that's driving a lot of inaction on the Postal Service reform.

Robert G. Burton

That's sort of an understatement, right?

Robert G. Burton

Obviously, they put forth some rate increases, which depending on what sort of size you are and what sort of the standard, first class or any sort of parcels. There's different rate increases being proposed. Obviously, we don't like rates going up. What is proposed for our business is something is highly likely to be. We don't think it's going to change the dynamics of our customers' ordering patterns all that much. There's a reason why these folks are in the mail and they continue to be, especially this year, we're seeing Direct Mail volume's up to 15%. I think at some point here in the near future, you'll see some resolution on this point to get us to a much better place. The USPS doesn't want to kill the golden goose. The only part of their business that is growing outside of Packaging is obviously the standard mail growth they're seeing. So we obviously are very close to this and we lobby on this all the time. So we think there'll be a resolution here shortly that will be hopefully favorable to, not only us, but to our customers as well.

Robert G. Burton

And also, we feel, as our customers do, that they've been very successful with direct mail. They're achieving the kind of results that they want, which just gives us more emphasis. I think we're just going to continue on the direction that we're going, at least for [indiscernible].


Our next question is a from Al Kabili with Macquarie.

Daniel Moran - Macquarie Research

This is Danny Moran sitting in for Al. Just a few on National Envelope. You mentioned that it was profitable in the quarter. Does this mean cost takeouts or synergies are ramping a bit faster than expected? Or how should we think about this?

Robert G. Burton

I think the answer is yes. I think we were -- obviously, this company lost $30 million last year and was in bankruptcy 2 times in 3 years. So when we bought it, we didn't know what to expect, and we were sort of being very conservative with what's kind of breakeven here. So the good news is that given the bankruptcy process left a lot of these costs behind in terms of people, leases, contracts that are unfavorable. We still have a lot of work to do in terms of the heavy lifting, in terms of plant consolidation, but we're definitely on track. And I think when we bought it out of bankruptcy and our competitors can speak to this because they're having issues right now on it, it's uncharted territory and I think we made a lot of progress here, and we're -- quite honestly, we acquired a good company with good people and a lot of good customers. So I think we're pleased with what we've seen so far.

Robert G. Burton

Well, let me add to that. We have been pleased with the leadership issues that we've encountered with the new company, which is always positive. But I will tell you, we pretty well know what the companies look like and where the staffing ought to be and where we have duplication. And you can get a lot done in 4 or 5 days on headcount, and then those things always save you. But more importantly, we're not going to do anything stupid and overestimate what we can or what we can't do. So we were ahead. In day 1, we were ready to go, and we move very quickly.

Daniel Moran - Macquarie Research

Great, that's helpful. And then given that you've had a little more time with the acquisition, do you see any upside to that target you gave us? And is there any update on when we should expect the full $30 million run rate?

Robert G. Burton

We've -- in our press release, we said by the end of next year, so Q4 of next year, we should be in a run rate of $30 million. And I think that the upside to this number potentially could be in terms of the pricing impacts, which were not a part of our forecast. And obviously, it's a very sensitive topic, and it requires sort of the work that our salespeople and our customers on, but I feel very good about it so far.

Robert G. Burton

No. No. I think we're not going to sit around here and sort of walk through and tip toe around. I mean, we have -- you've got to look at it. And you go back to look at when this depression hit and then the years that we've experienced this downturn are in competitive. We had a lot to make up, and we're going to be very aggressive for it and move forward as quickly as we can. And no, I think we're fine.

Daniel Moran - Macquarie Research

Okay. And the last one for me. Just a clarification on the price increases. Are you looking to match the price hikes on that free sheet side? Or should we expect a little more to offset other inflationary items?

Robert G. Burton

Well what do you think if we haven't had a price increase in 2 years? We don't even talk about pricing on calls. That's inappropriate. But we've got a lot to make up on in the industry itself because of the cost that we just haven't been able to cover. And we're going to try to do what's best for the company and also for the customer.

Okay, and that's it then. Thank you, ladies and gentlemen. We appreciate your time, and we're pretty well done here and hopefully, the extra calls are what you're looking for. And we appreciate your support, and we will see you next quarter.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, please.

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