Cenveo's (CVO) CEO Rob Burton Sr. on Q2 2016 Results - Earnings Call Transcript

| About: Cenveo, Inc. (CVO)

Cenveo, Inc. (NYSE:CVO)

Q2 2016 Results Earnings Conference Call

August 04, 2016, 09:00 AM ET


Rob Burton, Sr. - Chairman and CEO

Rob Burton, Jr. - President

Mike Burton - COO

Scott Goodwin - CFO


Pete Lucas - CJS Securities

Matt Swope - Baird

Lance Vitanza - Cowen and Company

Trent Porter - Guggenheim Securities


Good morning, and welcome to Cenveo's 2016 Second 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 one hour and is being recorded. Mr. Burton will speak and then the call will open up for question-and-answer session.

I will now turn the call over to Cenveo.

Rob Burton, Jr.

Thank you very much. Good morning everyone. This is Rob Burton and welcome to Cenveo's 2016 second quarter results conference call. Today's call will be hosted by Robert G. Burton Sr., the Company's Chairman and Chief Executive Officer and members of the senior management team.

Before I turn the call over to Mr. Burton, I'd like to remind everyone that certain materials covered on today's call are considered forward-looking and are covered under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995.

Also, any forward-looking estimates given on today's call will exclude any effects of restructuring, impairments, and other related acquisition charges. For further details regarding these factors, please reference pages 11 through 13 of the company's press release that was issued last night.

And now I'd like to turn the call to Mr. Burton.

Rob Burton, Sr.

Thank you, Rob. Good morning ladies and gentlemen. This is Bob Burton speaking and I'm CEO and Chairman of Cenveo and the largest individual stockholder of Cenveo's stock as well as a growing Cenveo bondholder.

Today's conference call will be in the same format as the previous call. We'll spend less time on our general operations and other items to have more time for your Q&A session. As I stated in our press release, we are very pleased with our second quarter operating results. We achieved our sixth consecutive EBITDA quarter where we've delivered or exceeded our EBITDA budget and I'm very pleased that our six months EBITDA results are ahead of budget.

When I talk about this momentum that we've shared with you before, we're just driving the business to deliver quarter-by-quarter to get the momentum going and moving along the commitments that have made to you, our investors.

We now look forward to the back half of the year and most of you know that the back half of our business is the largest part of our year because of the heavy sales volume during these two quarters and the holiday season.

And we really need to prepare our self as we have in the past for not only selling products into the back half and creating new sales, but also being able to manufacture those products and to get them to our customers on time.

In order to hit our back half numbers, we need over $82 million of EBITDA in the last two quarters to be in our full year budget range and that's what we plan to do. We put our plans together by Regional Manager, by locational, plants and where we're going to be manufacturing and it gets very, very busy during that period of time.

We look forward to increasing also our back half margins in the following areas as we look -- as we complete six months and we look to the back half, we look at where we're expect to get margin growth.

And if we look at our Envelope business, so we plan to be into the 11.4% kind of range and most of that it will be driven by the direct mail operations and our Manager there, Mark Greenberg and Mike Burton will be talking about, because he's done a terrific job because of the increase in direct mail and what we've been able to improve on with our margins in the Envelope business.

We're looking at the Label business, still be in the 18% kind of range and when we look at the total company and where we want to be in the back half, total margin should be somewhere in the 10% kind of range.

And it's very important for us to look at that margins because those margins tie to EBITDA and that EBITDA is a number that we're looking at.

Before we ask our Senior Executives to cover their areas of responsibility, I'd like to once again mention one of the most important aspects of what has occurred during this so-called refinancing period.

You might will know that it's no secret that some of our competitors were out meeting with our key customers, telling them that we were going out of business and that they ought to start looking for new vendors during this refinancing period. And that happens in most cases. We don't run that kind of business, but it happens in lot of times where companies were trying to fill up their presses.

But I'm delighted to report and to say that we did not lose one major customer during this period of time that we were working on the refinancing and that is a remarkable statement because the stories that people can tell can really -- as a customer, and I've been on both sides of it. You get very nervous about what's going on.

But our Sales Executives met with all of our customers, all the major customers and explained our action plans to them and how we were going to really run the business and the fact that we would never consider actually going out of business and they did a terrific job.

And again I'd say that we did not lose one major account and there were sometimes that there were some serious questions, but we did not lose one major account during this period of time.

And also for the record, we've never missed a covenant in my entire business group. As a matter of fact, we don't even have covenants any more. And we're not ready to start that process now. So, our records of paying our bills and being there where we should be there is impeccable and the fact that we did not lose a customer really says something about the trust that we have -- or the customers have with us and the dependability, they are really waiting and depending on us to do the right thing.

And frankly most people don't even worry about bonds that are coming due two to three to four months or years down the road.

More importantly, our customers, again, trust us, and our customer also respect our sales and manufacturing teams. You know that we're largest and the best in what we do, and I just I wanted to bring this up because it reflects upon the quality and what our major customers think about and you, as an investors, need to also think about that because of the importance of what happens when you get into times like those.

To help you better understand the magnitude of what we've accomplished with this refinancing -- and by way, Rob is going to talk about it in some detail later on. And I don't want to take away anything from him and Scott, but I'll do it anyway.

But I like to discuss three major changes that are taking place since we finalized the refinancing and these changes were outlined in the press release and I think if you really focused on, it's just pretty remarkable what's happened.

Number one we have made $80 million of our prior debt go away. We made $80 million of our prior debt go away during this financing period. Number two, going forward, we have $20 million less interest expense on our annualized basis. So, we have $20 million less than we have to pay and the interest going forward than we had in the past.

And number three, which is really significant when you look at the numbers, we have net income -- we had net income in the quarter of $47.6 million in the second versus a net loss of $2.4 million in Q2 in 2015.

So, those are pretty remarkable kind of numbers that we've been able to achieve and again, Rob will talk more about our refinancing efforts, but I'm very proud of our team and the results we've produced and the hard work that all of our people have done to be able to get this whole things wrapped-up.

So, that's sort of my update. I'm trying to make it less time -- each time we do these kind of presentations, so you can hear more from the operating units. And our first presenter today is going to be our, Chief Operating Officer, Mike Burton, and Mike is going to cover a selected field updates that's going.

He is going to talk a little bit about the general industry, he is going to touch upon the Envelope business and just as important talking about the hiring upgrades and some of the things we're doing to fine better and more effective salespeople out in the organization.

So, Mike, turning over to you please.

Mike Burton

Great. Thank you and good morning. For the six consecutive quarter, our teams have delivered results are in line or ahead of expectations. We have once again experienced year-over-year EBITDA margin expansion within the quarter, while we continue to focus on improving our overall customer experience.

Our largest business segment, direct mail, has performed strongly, as customers continue to demand at large and complex direct mail programs. We're also seeing traction and sustainable growth in our two value based platform offerings. The first of which is Kadena, our major customer supply chain portal and the second is managed care -- Managed Service Offering.

These customer-focused programs allow us to leverage our expertise as a global provider and our ability to offer advanced analytics with our integrated customer facing web portals.

Our customers continue to demand value for their business and we have shown the capability and capacity when new accounts by offering new services that provide them with new savings and supply chain insight.

I will now give a brief overview of our three business units. The first unit which I'll address is our Envelope group. Margins increased in the Envelope business roughly 40 basis points in Q2 of 2016 compared to Q2 of 2015.

This performance is led primarily due to our direct mail segment. We continue to see growth in overall direct mail volumes coupled with increased sophistication of the packages which our customers are dropping into the mail system.

Traditionally, complex mail design was limited to a handle of core Fortune 500 accounts. But recently we've experienced a trend in mid-cap and regional customers requesting tactile and sensory aspects to direct mail packages.

These higher end mailings are performing well in the mail boxes across the United States. This is fast becoming the standard for high end mail packaging. We attribute the portion of this growth to recent United States postal service promotions that offer postage discounts to customers for tactile mail pieces.

This type of package and promotion fits our production capabilities extremely well. We're both market leaders and innovators and see this a key difference between Cenveo and any of our competitors.

Our print group maintained both healthy topline and steady margins in Q2 of 2016 relative to the same period prior year. In Q2, we saw recent investments into our content, publisher services group, our St. Louis facility delivered real results.

Our St. Louis has grown into the hub of our print group in the central part of the United States. It is the result of a three for one plant consolidation, which took over two years to fully complete and they delivered margins that exceeded budget commitments in the first quarters of this year.

Our content and publisher service segment has also been the recipient of multiple digital equipment and personal investments over the past three quarters. These digital upgrades position us well to service the evolving needs of our publisher service group customer base and our true testament to our commitment to this customer segment. We have felt the immediate impact of these upgrades to both new account wins and continuing margin expansion.

The last business unit which I'll touch on is our label group. In Q2, our label unit experienced EBITDA margin expansion in excess of 65 basis points. The introduction of multiple new presses have provided a positive lift to our production teams in both our short run and long run label segment.

The new press is continue to set monthly and weekly plant production records and a [Indiscernible] ability to bid on and win work that otherwise would have not met our minimum EBITDA thresholds.

During the second quarter, our label business also experienced the exiting of our coating operation in Meramec and Hampshire. This business represents roughly $25 million in annual revenue and we seized operations in May of this year.

This combined with the conscious decision to exit some lines of business that we consider to be both non-strategic and below acceptable margins thresholds will most likely result in some topline degradation in label business in the back half of this year, all of which is expected.

Overall, Q2 was in line with expectations and our commitments. Our Label and Envelop business units experienced healthy margin expansion within the quarter, while our print group has demonstrated consistent performance.

We continue to feel confident that our diverse product offering are focused on delivering value and our unmatched production platform in the Envelope segment will continue to perform as we head into the back half of the year.

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

Rob Burton, Sr.

Thank you, Mike. Again our sales operation has just performed outstanding and without a doubt, that are the best in the industry.

Our next presenter will be our President, Rob Burton, who is going to update us on the -- I'll just say the two words, refinancing efforts. We all realize the importance of the project that was to us and Rob and his team did a great job of getting this done and we continue to say it, well, I just want to personally thank all of the employees and vendors and brokers and lawyers and everyone else that was involved including Scott Goodwin and [Indiscernible], these people really work part of the team and did a great job.

So, with that, I'll turn it over to Rob. Rob?

Rob Burton, Jr.

All right. Thank you. So, we're very pleased to have completed several key capital structure transactions in the second quarter and address nearly 90% of our 2017 debt maturities. And with our significantly improved liquidity, we will address remaining $50 million by the end of the year.

So, to say the least, we're very pleased we'll now be able to put this chapter and the story behind us and [Indiscernible] as we go into 2017.

Briefly on these transactions, these transactions accomplished the goals that we set out to achieve when we started this process. And position the company to be successful in the short-term and the long-term.

These objectives that achieved include number one, retiring or extending all of our 2017 debt maturities. Two, reducing our leverage. Three, reducing our interest expense. Four, improving our liquidity position. Five, minimizing shareholder dilution. And most importantly, minimizing business disruption to our customers, vendors, and employees.

In regard to maturity extensions, we extended our ABL maturity to 2021 while the unsecured debt was extended to 2024. Our next maturity is now August of 2017 and that is first lien 6% bonds.

These transactions significantly reduce our NOI's interest expenses by over $20 million a year compared to our 2015 cash interest expense of $9 million. We now expect our annualized interest expense to be approximately $70 million going into 2017.

These transactions won't open market repurchases that occurred in Q1, deleverage our balance sheet. Over $80 million of debt been retired or extinguished since this process has started. This has resulted in over half turn of deleveraging and assuming consistent revenue and adjusted EBITDA performance over the next two to three years, this position the company very favorably to address our 2019 maturity as we expect these are free cash flow to deleverage ourselves in the coming years.

These transactions also improved our liquidity position. Going forward we have accessed the entire amount of our current commitments under $190 million ABL facility as new $90 million -- as a new $50 million term loan falls outside the borrowing base calculations.

In total, these transactions have provided Cenveo with an incremental $25 million liquidity.

In early July, we completed last portion of the transactions contemplated by the support agreement in which we retired the remaining 7% notes owned by Alliance for a price 60% of par.

As of today, there's approximately $10 million of face value of the 7% notes and approximately $39 million of 11.5% noted that remain outstanding.

Going forward to the remaining of 2016, Cenveo was in a very strong liquidity position to address the remaining portion of these 2017 maturities. At the end of July, we had over $110 million of revolver availability. Between now and year end, we will utilize this availability, plus expected strong cash flow to complete the processes of extinguishing the remaining $50 million of the 2017 maturities. Our focus going forward will be to utilize stronger cash flow to continue to reduce our leverage.

Regarding our attempts to minimize equity dilution, on a pre-split basis, the 7% of converts were entitled to withhold a 21 million shares had they converted. With us now buying them back, we were able to offset the 13 million potential shares that we issued in connection with the warrants, thereby reducing dilution to our shareholders.

Finally, in mid-July, we completed an eight to one reverse stock split and I'm happy to report that we're now in full compliance with all NYC minimum listing requirements.

With this chapter now behind us, I want to personally thank our truly exceptional employee base for their support to make us best at what we do every day. The fact that we're able to grow our EBITDA during this period of uncertainty is truly remarkable, especially given all the industry headwinds that we see in the current markets.

In addition, we know these transactions could not have happened with support of our lender base and bank group.

And with that this concludes my remarks.

Rob Burton, Sr.

Thank you, Rob. Our next presenter will be our CFO, Scott Goodwin. Scott?

Scott Goodwin

Thank you, Mr. Burton and good morning everyone. Today I'm going to review our second quarter 2016 financial results, discuss select financial highlights from the quarter, and provide a brief guidance update on certain cash flow items.

Turning to our results of operations for the second quarter, net sales were $404 million compared to $413.4 million in the prior year, a decrease of $9.4 million or 2.3%. This decline is primarily attributable to lower volumes in our transactional and office product envelopes and lower volumes in our long-run label products, primarily due to shut down the coating operation and our decision to exit certain low margin product sets in the prior year. These volume declines were offset in part by higher direct mail volumes.

Our gross profit and gross margins were relatively flat at $69 million and 17% respectively. SG&A as a percent sales for the second quarter was also relatively flat at approximately 11% for both 2016 and 2015.

I'd like to note that the second quarter of 2016 includes $1.5 million related to a one-time litigation settlement. Excluding that incremental cost would reduce our SG&A as a percent of sales by just over 0.5%.

Restructuring, impairment, and other charges for the second quarter was less than $1 million compared to $2 million in the prior year. Our net cash payments related to restructuring and integration activities for the quarter were the $800,000 compared to $2.2 million in the prior year.

Interest expense for the second quarter decreased $3.7 million to $21.5 million from $25.2 million in the prior year. We had a weighted average interest rate of 6.9% for the second quarter of 2016 compared to 7.2% for the second quarter of 2015.

Our weighted average debt outstanding declined over $100 million and was $1.1 billion in the second quarter of 2016 compared $1.2 billion in the second quarter of 2015.

Cash paid for interest was $14.4 million for second quarter of 2016 compared to $17.1 million for 2015.

Given our bond repurchases and financing activities, during the first six months of 2016, we expect our cash interest to be slightly less in the last two quarters of the year versus our previous guidance.

Additionally, once the remaining 2017 maturities are extinguished, we expect our annual cash interest rate will be less than $70 million annually, which is $20 million less than 2015 and over $40 million less from the end of 2012.

The gains on the early extinguishment of debt of $51.3 million are primarily attributable to the exchange offer and related transactions entered into on June 10th significantly address our 2017 maturities.

Of the $51.3 million gain recorded in second quarter, $46.2 million relates to the exchange offer and related transactions, while the remainder relates to the repurchase of 16.7 million face value of our 7% convertible notes, subsequent to the exchange offer and prior to the end of the second quarter.

Other income and expense primarily relates to one-time gain on sale of assets of $2 million recorded in connection with the exit of our coating operation offset by other non-operating activities.

Adjusted EBITDA for the second quarter was $37.5 million as compared to $37.4 million in the second quarter of 2015. Despite our lower revenue, quarter-over-quarter, we're pleased to see our adjusted EBITDA margins improve from 9% in 2015 to 9.3% in 2016 and in line with our longer term goal of achieving 10% consolidated adjusted EBITDA margins.

Also please keep in mind that our 2016 adjusted EBITDA for the quarter includes incremental non-cash pension expense of $800,000.

Turning to the cash flow highlights for the quarter, cash provided by continuing operating activities was $17.1 million in the second quarter of 2016 compared to a source of cash of $7.2 million in the prior year. The improvement in cash flows from the prior year quarter is primarily due to our operational improvements, the timing of collections of customer receivables, and our inventory management initiatives for the current year.

Cash paid for pension and post-retirement plans for both the second quarter of 2016 and 2015 was $300,000. For the second quarter of 2016, cash paid for income taxes was approximately $2.2 million compared to less than half $0.5 million for the second quarter 2015.

I think it's important to note that we utilized over $96 million of our net federal operating loss carryforwards during the first six months of 2016, primarily in connection with the sale of the Packaging business and gains recorded on addressing our 2017 maturities at discounted rates.

We believe that we will utilize over $150 million of our existing federal NOLs during 2016 and we will exit the year with over $180 million still available to us. As a result, we still believe we will not be a significant cash tax payer for at least the next three years.

Cash flows related to continuing investing activities for the second quarter reflect gross capital expenditures of $10.4 million offset by $10 million of cash proceeds, of which $7.9 million relates to a sale leaseback transaction for an Envelope facility and $2 million relates to the proceeds received from the sale of assets in connection with the exit of our coating operation.

We do expect to record a gain of over $2 million on the sale leaseback transaction once we satisfy certain conditions of the sale within the next few months.

Cash flows related to financing activities for the second quarter of 2016, primarily reflect the cash transactions associated with our June 10th refinancing, as well the repurchase of $16.7 million of our 7% convertible notes at discounted amounts prior to the end of the quarter.

As of the end of July, we had approximately $110 million available liquidity under our ABL facility.

At this time, given the announced capital structure transactions, we will have slightly lower cash interest than our previous guidance and we'll be able to quantify that more directly once the remaining 2017 maturities are addressed.

Also with our increased liquidity given the asset sale proceeds from the Packaging business, the new $50 million, 4% term note proceeds and our cash flow generation, we expect incremental capital spend of approximately $15 million to $20 million over our previously announced target of $25 million to $30 million.

We're focusing our spend on three to four critical items which include the remainder of our maturities and the investments that have lessened our three year anticipated payback.

Some of those investments we're spending the incremental capital on are digital label and print equipment, high-speed envelope equipment, and a refresh of IT infrastructure. We expect to go back to our normal capital spend levels of $20 million to $30 million in 2017.

Overall, we're pleased with our financial results for the quarter and for the first six months of 2016. Achieving those financial targets during the first half of the year as well as our ability to now fully address the 2017 maturities, has positioned us favorably for continued success throughout the remainder of the year.

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

Rob Burton, Sr.

Thank you, Scott. I have one other item to cover before I go into the full year guidance. Historically, I've always sort mentioned that I've been buying stock, but you know that when we're going through the refinancing, the window has been closed, but myself and all our Senior Managers with our employee stock purchase plan have continued to buy stock. And now that our window will be open, I'll start buying in the open market, you'll see the Form for us file.

I just want you to know that we were buying as long as the window was open and there was no sign of anyone not believing the story on where we were going and I will start again buying in the open window. And matter of fact, I've actually increased my employee stock purchase amount over what I had before.

So, that not only pertains to me but all of the senior managers, who are in the employee stock purchase plan. And a lot of them periodically buying in the open window and I just think you should hear that and to know that we'll continue to be doing that.

So, let's talk a little bit about the full year guidance. There has not been much change here, but let me sort of walk you through it. If we look at the sales forecast, we're going to continue to stay at the $1.7 billion for the year.

Our full year EBITDA will also stay in the same range of $160 million to $155 million of EBITDA. And our capital expenditure, as Scott talked about will increase to the $35 million, $45 million range and will be put to good use.

And lastly, the margins that we talked about, we're looking at the margins to grow on that 9.9 and we hope that we're going to push that to 10. And it wasn’t too long ago that we were telling you that story about buying this one company for little -- for nothing that had no margins and we were going to consolidate those margins into ours to hit the 10% number and we have done that and I just want to say that as a formal reference.

And the Envelope margins continue to go very strong in the 11%, because people are mailing. People are mailing, being on the publisher side of the business, I understand that. You only mail when you get results and evidently our customers are getting results and we're very pleased with that because we are the leader in supplying and helping our people who are mailing to get the job done.

So, the margins as I talked about, the Envelope margins 11% plus and all the other stuff that we covered. And I will tell you from a personal standpoint that this momentum of making the quarters and focusing on the quarters are now that we're focusing on back half of the company and where we want to need to do in order to get that $82 million plus EBITDA number and here's well within our sights.

And each one of our managers has a plan to get that done, both on the manufacturing side and also on the sales side, it's really -- our major priority to deliver those kind of numbers and get us back to where we should be and where we've been most of our career promising you numbers and delivering those numbers. And we've started, we were at six and we're going to continue that and every one of us are fully committed to get this company going away in the right direction that we're going right now.

So, without any other adieu, let's -- operator, let's open up the call for some questions please. Thank you.

Question-and-Answer Session


We will now begin the question-and-answer session. [Operator Instructions]

The first question comes from Charlie Strausser of CJS Securities. Please go ahead.

Pete Lucas

Hi, good morning. It's Pete Lucas for Charlie. Congratulations on all the accomplishments this quarter. Just want to know if you could expand a little on your thoughts on direct mail trends for the second half of the year, i.e. what are the main drivers? You talk about complex packaging, but is that the main drivers U.S. postal rates kind of expanded. Give a little color there.

Mike Burton

Sure. Pete its Mike. I think it's all of the above. I think the reality is that mail and direct mail, in particularly the high end direct mail that we're really seeing momentum and is performing well.

It's truly a return based model for our clients. And they continue to see the return that allows them to go out and do more of this and spread it wider to more of their client base.

I think postal service has done us some favors here. I think these promotions are meaningful anywhere from 2% off on postage to $0.05 off a piece depending upon which program you're looking at.

And we have sophisticated clients that look at every way they can continue to get a better return and so if we're able to 2% off on any given campaign, I think that's something that's meaningful to them.

And as long as those returns are there, they will continue to mail and like I said earlier, these returns are probably as good as they've been in a long time. So, we expect trends to be consistent and obviously, as you know, election year and Olympic year traditionally are solid. What we've really seen is a leveling off of that kind of statement, but more of a -- not so much in the back half and the front half, but really a true leveled approach where whether out in the mail and they are acquiring a different times, a different promotions and sophistication of these promotions is really what driven a lot of this activity as well.

Rob Burton, Sr.

Hey, Pete, Bob Burton here. We have some insight because we have to prepare and be ready to do those kind of mailings. What we're talking about is not necessarily in the back, it's also in the front of us. So, I mean it’s a continuum process that people really do see that and all of us have the assignment to check their mailbox and look at what the mailings that are coming.

I'm sure you do the same, but you can see, there's really a strong effort. And people are delivering and achieving the kind of results that they want to do. And as long as they are going to do that, they will continue to mail.

Pete Lucas

Appreciate it. Thanks. I'll head back in the queue.


The next question is from Matt Swope of Baird. Please go ahead.

Matt Swope

Yes, good morning guys. Could you give a little more detail on the Envelope, just breaking out the three business, sort of how much direct mail was up, how much remittance was up or down, and then how much that sort of big box segment was down?

Rob Burton, Jr.

Hey, Matt, it's Rob. So, I think we'll get too granular, but you obviously see the direct trends. I think you asked around and look at the sort of stat you're seeing from the post office and from other folks in our space. Direct mail was up three percentage points and I think that's been consistent for the last 24 or so months.

The rest of the industry is sort of -- is what it is. I think the transactional business is continuing to do what it has been. I think there's obviously going to be a churn towards e-bill pay, e-Statements. And that has not changed or accelerated or decelerated at all.

And the office products industry, I think is going through a short-term sort of cycle here where you had a perspective merger of two of the larger players here and that obviously didn’t happen. And there were some inventory management going into that merger and coming out of that merger. And I think at some point here that will resume to more normalized levels -- that's what impacted here in Q2.

Those trends really haven’t changed. I think you look at the out-to-door sales, anywhere talking down three to five percentage points. So, we think those -- nothing has really changed. I think more importantly, I think we're seeing on our perspective that the average selling price going in right direction list on the upper end of our segment in terms of the direct mail side, you've seen more complex pieces and that's driving higher average sell price.

So, I think that positions us very, very well. We're the true leader when it comes to those complex mailings that Mike discussed. So, I think we're seeing things from our perspective headed the way we thought they would.

Rob Burton, Sr.

And another point on that. We've been very selective about focusing on our margins and direct mail is -- no question about it, it's doing terrific. But some of these segments that we have not been getting the right kind of margins, we've been focusing on not really putting a lot of emphasis on that.

We'll continue to do that because we have certain targets now that we want to achieve and we're not getting it with a right kind of customer base then we're going to be putting our efforts in some other areas.

And that's happened over the last two or three years in some segments of the business in the Envelope side.

Matt Swope

And to that comment, on the [Indiscernible] business that you guys closed down, maybe for Scott, is -- can you talk about the $25 million of revenue that comes out there, should we model that as about a $6 million a quarter headwind for the next three and a half quarters or so?

Scott Goodwin

Yes, that's right. So, we got out as Mike mentioned, closure date was late May. So, you've got one month here in the quarter and then you'll see that cycle through over the next 12 months.

Matt Swope

Okay, that's great. And then lastly on the print business, that business continues to hang in there very well. Can you talk about sort of what's different about your print business from some of the competitors who are faring as well?

Scott Goodwin

Yes. No, it’s a good question. I think what we do differently. A, we truly believe we're the best salesforce around. And but more importantly, I think some of the efforts that we have put into both our Kadena, which is our supply chain software and our managed services platform differentiate us.

I mean a lot of our clients, the reality is they are being asked to do more with less people. So, they need to utilize technology and really trust companies that can allow them to be more efficient with their use of time and our investments in those two sectors have started to pay dividends. We think it will become even more evident as in the outer years here, 2017 and 2018, but we have real traction there and some of our larger accounts have performed well as well.

But it’s a across the Board and I think you see the competitive set, a lot of people in this industry are struggling. We have held the line in this quarter, and other quarters, we've grown and a lot of that has to do with our overall strategy of being not just ink on paper, but a full service value added provider and I think our clients are really beginning to see that. And plus some of verticals that we play and are growth-oriented. And that continues to help us as well.

Matt Swope

Great guys. Appreciate the time.

Scott Goodwin

Thanks Matt.


The next question is from Lance Vitanza of Cowen. Please go ahead.

Lance Vitanza

Hi guys. I had three questions I guess. The first time on the Envelope segment and I apologize I had on jump on later with other earnings calls. But do you anticipate continued gradual price increases over the coming quarters or have you sort of been -- you took the price increases some time ago and now you're just continuing to let them roll through. How should we think about that?

Rob Burton, Jr.

Well, if you go back in history, obviously, national Envelope's margins were unacceptable. I think what's also driving the average sell price is the mix. And I think Mike mentioned it's sort of focused towards complex mailings, but more target mailings where our customers are spending more per piece. That's obviously helping us well.

But obviously we have -- we're not in it on for profit business here, but trying to make some money. So, the answer is we got to do, but we're also -- we have done deals [Indiscernible] the marketplace that we're in. So, the answer is yes and yes, but I think a lot of what's driving right now is also mix Lance.

Rob Burton, Sr.

And also each one separately.

Lance Vitanza

Right. The quality of earnings continue to improve. There were only 2 million of add backs to get to the same EBITDA that you reported a year ago and 4 million of add backs then. Should we use 2 million as kind of a good run rate or should we expect similar version to higher restructuring add backs in subsequent periods?

Rob Burton, Jr.

No, I think for the couple of periods that number is probably pretty accurate. At some point, we obviously continue to look at cost containment. So that may change. But for the time being, I expect that to be in that ballpark.

Rob Burton, Sr.

We're looking at different opportunities of growth and it just really depends on what's going on with the marketplace and some opportunities that may be there for us.

Lance Vitanza

Lastly for me, the asset sale of Packaging business, $100 million or so proceeds, maybe a little less than that, but for the most part, proceeds not reinvested in the business would have to -- have been offered or would have to be offered to the 6% note holders at par, is that right?

Rob Burton, Jr.


Lance Vitanza

And so presumably then that made the decision to bump-up the CapEx a little bit easier given that your other opportunity -- your other option was buying back bonds at par, which is despite the rally still a good bit ahead of where those bonds are trading today.

Rob Burton, Jr.

Yes, I will look at it from a different perspective, I think all the CapEx that we have done next year or the year after. These all have returns ROIs of less than three years, in some cases, less than two years.

So, when we got this sort of influx of money, we sort of looked at ourselves and hey, where can we drive return for all of our investors. This was a no-brainer for us. So, you can view that prospect from our prospect, these are things that we have would done anyway and the super charge them and do them now I think only pushes well for 2016, but more importantly for 2017 and beyond.

Lance Vitanza

Great. Thank you very much.

Rob Burton, Jr.

And our focus has been very positive about CapEx and doing the opportunities that are out there with those kind of investments.

Lance Vitanza

Thank you guys.

Rob Burton, Sr.

Thanks Lance.

Rob Burton, Jr.

Thank you.


And the last question today comes from Trent Porter of Guggenheim. Please go ahead.

Trent Porter

Hi guys. Just to follow Lance's question, I wonder if you could give us an update. So, pro forma for the $15 million bump-up. The nut that you've got to do something with whether it’s a par for CapEx or an acquisition, could that be 94 or less 2015, or is it more than today?

Rob Burton, Jr.

No, I think the way -- again, we have until January 2017 to figure out what the reinvestment number is. And again we know what the indenture says and we'll live up to it. I think -- again this is sort of first part in terms of what the incremental CapEx is $20 million is the part of it.

For a total number, Trent, $40 million to $45 million for 2016. We're looking at everything. I think again we're now -- got a lot of assistance [ph]. Guys happy we've had a lot of inbound phone calls regarding assets, regarding everything. You've seen other news of industry consolidation, other investments that we can make. So, we're going to take our time to evaluate what's best for this company. And I think we're going to take all six months if we can.

So, I hate to try to work around you on that one, but that's sort of the reality where we're today. Its August -- early August here, we got some time and again, we want to take a deep breath here as we sort of look at the back half and 2017.

Trent Porter

Okay. Understood. And then just sort of a conceptual one. Maybe too short of related. I wrote down Digital Label and High Speed Envelope and Refresh IT Infrastructure, and so the first part of the question, is it possible to talk -- I think Mike was talking about that, is it possible to talk a little bit about -- more about -- do any of these investments get you into -- allow you to chase business that you couldn’t chase before or is it increasing competitiveness? I recognize you would have made those investments anyway over the next few years?

And then the next thing, just to take a step back, you strong together over the past few years. Some fairly solid against baseline EBITDA, low to mid-single-digit and looks like again this year EBITDA improvement. Despite you have the NECN integration on the table, you've had this cap structure challenge that you've had to deal with.

And then in the meantime, you've been filling in these little things that have always interested me like the platform services, the Kadena managed services and also in print. I think the headwinds from publishing services has diminished and--

Rob Burton, Sr.

So, what's your question?

Trent Porter

So, I'm wondering if I take a step back, now that you're passed all this, is it reasonable to assume that you could accelerate growth in EBITDA on a longer term basis given the fact what you've been able to do despite the challenges?

Rob Burton, Sr.

Well, Mike is going to jump in here. But we always look that way. But you're never going to get away from those challenges in this industry. And if you know anything about this industry, we're trying to sort of spread out and be in different areas and trying to get those opportunities. But there's no way we're going to talk about this on a conference call like this with other people listening and knowing what we're doing.

We have some plans here. We put our money into this deal and we're not doing stupid things and some of the things that we've invested in here will pay results and hopefully we're going to be able to show you some of those things. But we just closed this deal about six minutes ago and we like to just finish reporting on this and hopefully we can give you some good news down the road. Mike, why don't you jump in?

Mike Burton

Yes, that's right on the equipment side, your question is a good one. And this equipment is unique and there's been really quite an evolution in the equipment space over the last five years as far as the width of your presses, the speed of your presses and more importantly, the value which your presses can put on the premium [ph] product.

And I think what it allows us to do is be more competitive in certain markets where there are more competitive in general and the other side of that is it allows us to add more value. And I think that's the bigger play here is that we want to be able to offer our customers new age technologies that allow them to grow and win more share of the wallet. And I think those type of things really do move a needle. Our goal is absolutely grow as fast as we possibly can. And I think this equipment will position us in the future to do so. Just a matter of how quickly it can happen and then we obviously need to educate our clients on some of the bells and whistles that are out there.

But like I said earlier, our clients are sophisticated. They want to do things differently. They want to test the markets. We have some outstanding salespeople that really push the Envelope as far as some of things that are out there. And I think that's where we really get our bang for the buck. We'll be able to play in all the markets that we want to, but adding those value added services is the real key differentiator that we're truly focused on.

Trent Porter

Okay, great. Thank you very much.

Rob Burton, Sr.

Thank you. Yes sir. Operator that's it please.


Okay. So, there are no other questions. Would you like to give some closing remarks.

Rob Burton, Sr.

I just did it. We're done. Thank you.


Okay. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Tagged: , Paper & Paper Products,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.