Exhibit 99.1
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FINAL
CONFIDENTIAL
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Mail-Well
Second Quarter Pre-Earnings Release
Conference Call
Tuesday July 9, 2002
9:00 AM, MDST (11:00 AM EDST)
Xxxx Xxxxxx - Chairman, President and Chief Executive Officer
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Xxxxxx Xxxxxxxx - Senior Vice President & Chief Financial Officer
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MICHEL
Before turning over the conference to Xxxx Xxxxxx Mail-Well's Chairman,
President and CEO, I must make the following Safe Harbor Statement:
During the course of our discussion today, we will be making
certain forward-looking statements that are subject to various
uncertainties and risks that could affect their outcome. These
uncertainties and risks are set out in more detail in the
invitation you received to this call, as well as in our filings
with the SEC. We invite you to refer to them in conjunction with
this call. All forward-looking statements that we make today are
intended to come within the SEC's safe-harbor with respect to such
statements.
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PAUL'S COMMENTS ABOUT THE ESTIMATE FOR THE QUARTER:
We have several communications to make today:
1. Both the Envelope and Printing industries have further weakened,
causing Mail-Well to fall short of Earnings Estimates.
2. Our Strategic Initiatives remain on target.
3. PrintXcel has been taken off the list of companies we were holding
for sale. We now expect that our total proceeds from dispositions
will be in the $175 million range.
4. We have closed on a new $300 million credit facility providing
Mail-Well with sufficient financial flexibility in this industry
downturn as well as with the reduced asset sales.
As announced in the press release, we expect our earnings will come in
significantly below the range that had been expected and had been discussed
during our first quarter conference call in April. We have also come to the
conclusion that in the present financing environment, our shareholders would
be better served by keeping PrintXcel. The remaining non-strategic
businesses held for sale are under two separate Letters of Intent on
acceptable terms with buyers we believe to be financially capable of
completing these transactions. One is expected to close this month, the
other in August. We will announce more details of each of these deals as
they are completed. When all of our dispositions are completed in Q3, we
will have received gross proceeds of $175 million.
The first point to be made here is that, clearly, the economic turnaround
has yet to impact either the envelope or graphic arts segments of the
economy. As a matter of fact, order levels have not improved, they have
decreased yet some more. We can not even be sure that the rate of decrease
in
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our businesses has slowed. As we have stated before our return to
sustained bottom line growth can only come with growth in our markets.
Cutting costs, as we have done and continue to do aggressively, cannot be
sufficient to replace profits from lost volume; certainly not over a period
extending over seven quarters, which is how long we have been in this
economic environment. In the next few minutes I'll want to discuss the
following:
1. How each of our Print and Envelope segments are doing.
2. The impact of bringing back in the operations of PrintXcel.
3. The outlook for the rest of the year and the assumptions used in
arriving at a range of $125 to $140 million of EBITDA for the full
year.
1. SEGMENT PERFORMANCE
o ENVELOPE SEGMENT
Sales for Q2 2002 at approximately $178 million should
be lower than last year's Q2 by 10% - and approximately
$7 million or 4% lower than Q1 2002 sales. This sales
decline is due primarily to lower sales to our direct
mail customers. We estimate EBITDA at $23 million, (the
same as last quarter) which represents a margin from
operations as a percent of sales for Q2 of some 50 bps
better than last year on the reduced sales and slightly
better than Q1 levels. Obviously our strategic
initiatives are
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having a positive impact on this business, and they are
allowing us to more than maintain our profit margins.
However the drop in sales made it impossible to attain
our expected increase in EBITDA of some $2 million in
the Quarter.
o COMMERCIAL PRINT SEGMENT
The demand for print materials continues to be weak and
our sales are down some 16% from Q2 last year and some
9% from Q4 of 2001, and 10% from Q1 of 2002. (Normally
one would expect Q2 sales to be in the range of Q4
sales). Sales in Q2 have declined some $19 million from
Q1 and EBITDA has declined $4 million. In the
advertising related part of our print business,
competition continues to be intense for the work
available. Work that is available, is often at prices
that are at or below our direct costs. EBITDA margins to
sales have continued to deteriorate significantly. Also
during the quarter some plants continued to be at a
level of sales such that it has affected their ability
to operate profitably. The measures we took to ensure at
least break-even immediately at these plants proved
insufficient in Q2. We will reduce costs at these plants
further in Q3 so that they at least break even.
In summary the lower performance in Q2 2002 is due to the
continued drop in volumes and lower margins available in the
market. Our strategic initiatives are positively impacting
our businesses. However, we will not see the full impact
until our markets improve.
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Our total commitment to our strategy is undiminished. The actions
we are taking to rationalize the number of our envelope plants,
the application across all of our operations of systematic
manufacturing management practices, the use of the same costing
methods and pricing decision tools across each of the Envelope and
Printing segments are all having positive measurable effects. We
will report fully on the progress made in the conference call of
next week in conjunction with the full results for the second
quarter.
2. Impact of the PRINTXCEL decision.
As you know, during the quarter we disposed of our Label
Segment for the expected $75 million of gross proceeds. These
were applied to the outstanding bank borrowings.
We had stated on numerous occasions that PrintXcel was under
a letter of exclusivity. The potential buyer was unable
however to finance the purchase price that had been agreed
upon. We were not willing to provide the additional financing
the prospective buyer requested, nor were we willing to
reduce our asking price. Accordingly, we came to the
conclusion that the proceeds we would obtain from such a
transaction could not justify our selling this business.
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With the approval of our board's special committee we will
therefore keep PrintXcel and integrate it with our other
operations. On a full year basis this will increase
Mail-Well's EBITDA by some $20 to $25 million on $210 million
of sales. This is obviously a very attractive business that
we would only have sold at a price that made sense for our
shareholders.
When we announce our final results for Q2 next week we will
include PrintXcel's results with those of Print and Envelope
segments both on a historical and forecast basis.
3. OUTLOOK FOR Q3 AND FULL YEAR 2002
Given the reduced results of Q2 and using the assumption our
present expectations that there will be no recovery in sales
in either our Print or Envelope Segments in Q3 and Q4 of
2002, the drop of $9 million in EBITDA in the second quarter
will carry through in the next two quarters. Our best EBITDA
estimate therefore for our Print and Envelope Segments is
that it will be in a range of $105 to $115 million. This
would represent approximately the same results that were
achieved in 2001, while the 2002 sales will be almost $200
million lower than in 2001.
If we take PrintXcel into account, the range of results will
be $125 million to $140 million EBITDA for the full year.
4. NEW BANK DEAL
This morning we also announced that we have renegotiated our
bank credit facility with a reduced number of banks. In
summary it is an Asset Based
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Lending arrangement. The total facility is $300 million. All
outstanding amounts under the former bank agreement were
repaid on June 28, 2002. This in effect completes our
refinancing that we announced last year. It will give us the
flexibility to operate in the present environment without the
constraints of Total Debt to EBITDA leverage ratios. Our
financing will now be supported by the quality of our assets,
which is the position you want to be in when business is
unpredictable. We should point out that retaining PrintXcel
improves our fixed charge coverage ratio under this new bank
agreement.
IN SUMMARY
o Earnings are disappointing - however in this down market
management is continuing to reduce costs.
o There is some good news
o We have completed our balance sheet restructuring thus
allowing for significant financial flexibility.
o Our strategic initiatives are progressing as planned.
o All of the above point to a stronger company when our markets
return.
This concludes the remarks I wanted to make today.
Open the call to questions.
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Additional information disclosed in question-and-answer session of
conference call:
We currently have $135 million drawn on our new credit facility. We
expect net proceeds from our planned dispositions of approximately $50
million, resulting in approximately $85 million in post-divestiture draw on
the new facility. We have $650 million of additional term debt (net of
approximately $140 million in second quarter end cash), resulting in
approximately $735 million in post-divestiture net debt. We expect $25 - 30
million in free cash flows during the second half of the year, resulting in
approximately $705 - 710 million in net debt expected at the end of 2002.
The current interest rate on the new credit facility is
approximately 6% per annum, and we currently have $280 million of total
borrowing base. The credit facility has a 3-year maturity, and requires that
we maintain a ratio of EBITDA to fixed charges of 1.05 to 1.00
We have engaged in cost-cutting measures beyond those announced in
the strategic plan, including additional layoffs in the Commercial Print
segment.
We are reducing our planned capital expenditures to approximately
$5 million in each of the third and fourth quarters of 2002.
We anticipate third quarter 2002 EBITDA of approximately $16 - 17
million in our Envelope and Commercial Print segments, plus approximately $4
- 6 million of EBITDA in our PrintXcel segment. The $16 - 17 million consists
of approximately $24 million EBITDA in the Envelope segment, no EBITDA in
the Commercial Print segment and approximately $7 million in corporate
expenses.
During the third and fourth quarters of 2001, our EBITDA totals
were $22 million and $27 million, respectively, in the Envelope segment, $10
million and $9 million, respectively, in the Commercial Print segment and $5
million and $7 million, respectively, of corporate expenses.
Our PrintXcel division provides up to $2 million of net income per
quarter, calculated as follows: $6 million of EBITDA, less $1 million of
depreciation expense, less $1.8 million of imputed interest expense, less
$1.2 million of income tax expense, equals $2.0 million. These are
approximated numbers.
Some customers and industry groups in the Envelope business have
indicated that they expect the second half of 2002 to be stronger than the
first half, but we at Mail-Well have not seen evidence supporting these
indications.
We have experienced a $40 - 50 million decline in telecom-related
revenues, and the contribution of the telecom industry to our revenue base
is now nearly zero.
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