Spire Inc.
Q3 2009 Earnings Call Transcript

Published: 28 Oct 2009

[Operator:]

Welcome to The Standard Register’s third quarter 2009 conference call. Today’s conference is being recorded. As a reminder, the presentation slides for today’s conference are available by accessing the investor center section of The Standard Register website at www.StandardRegister.com/investorcenter. I will now turn the conference over to Mr. Shaun Smith.

[Shaun C. Smith:]

Welcome to the company’s third quarter 2009 earnings conference call. Joining me today are Joe Morgan, President and Chief Executive Officer and Bob Ginnan, Chief Financial Officer. Please let me remind you that this conference call may contain forward-looking statements including language concerning future projections. These projections should be considered in conjunction with the Safe Harbor statement contained in our earnings news release as well as the Safe Harbor statement that can be found by accessing the homepage of the investor center on the company’s website. In addition, we will make references to financial measures that are not in accordance with generally accepted accounting principles or GAAP. This information is not meant to be considered in isolation or substitution for GAAP. The use of these measures is meant to enhance our audiences understanding of the company’s financial performance. Joe has a few highlights to discuss that will be followed by Bob’s review of our financials. After Bob’s report we’ll open it up for questions. Now, let me turn it over to Joe for his opening remarks.

[Joseph P. Morgan:]

I just have a few comments that I’d like to make prior to Bob discussing our financials for the quarter. We still are participating in a very competitive and a very challenging environment. However, we are seeing progress being made as a result of the focus that we instituted at the start of this year. Actually, it began in the fourth quarter of 2008. We have solid evidence that our market focus is working and we’ve had major wins in the quarter, major wins greater than $1 million in every segment, those segments being healthcare, acute care hospitals, financial, our industrial business focused in the manufacturing sector and actually government as well which is a place we’re spending a lot of time recently as well. We have seen a dramatic improvement in retention of accounts. We know that in this very challenging environment retaining our business is very important regardless of the impact of the decline economically. So, we’ve done a very good job of retaining our core clients. That is a result of our market focus due to the repetitiveness of our capability. In each customer we were able to see more clearly what’s required in order for us to retain those accounts so we’re seeing significant improvement there. We’re also seeing an increase rate of close in deals. Our pipeline is growing quarter-on-quarter and we are starting to see customers start to make decisions. There has been a delay, I think mostly driven by the economy that has caused us not to achieve some of the revenue that we thought might occur but we’re starting to see that free up a lot and that’s encouraging as we go forward because the retention and the wins that we have brought forward are really going to contribute once spending starts to increase. We have seen some unit recovery, some signs of that. There is still price pressure but we are seeing again, which supports my previous comment, the people are starting to procure more. We’re also seeing some hiring take place at some of our clients as well where prior there had been declines and with hiring of course there would be a higher need for the consumable type product that we produce. Our cost structure in the quarter has remained stable. That’s a result of pass work that we’ve done starting in 2007 was further executed in 2008 and executed even more in 2009. I’ll talk in a few moments about further actions that we’re going to be taking that are more of a strategic basis to improve earnings. Also, in the quarter I have been acting as both CEO of the company as well as General Manager and President of the commercial business and we were fortunate in the quarter to hire a gentlemen by the name of [Jerry Vigal]. [Jerry] comes to us with a very solid background. He has experience working at [inaudible], Lexis-Nexis as well as Xerox and several other technology companies in between. He brings great insight to us not only where we are currently as a company but where we need to transition to which is the key question that we are asking ourselves and continue to pursue. I will share a little bit of our initial ideas on how we’re going to transform the company there at the product level. We are seeing some improvement. That improvement is coming from our market focus and in the coming quarters we hope to see more evidence of that in our financial performance. I’m disappointed in the overall quarter performance. However, I am aware of the reasons for that challenge and some of it is the economic condition, some of it is also the condition of our market place. But, we are focused on share and we’re winning. Also, in terms of our approach to business, just from a consistency perspective, back several quarters ago I introduced you to our approach which we call the five points of change. Then, we also talked about C3 which was our mechanism for ensuring that our associates are aligned with the work that we need to do. We continue to use that framework and it is advancing our business so that we have the ability to execute in a more flawless way especially with the challenges that we face not only in the market place but also within our operational structure to continue to improve our profit in such a challenging time. This is the foundation and we continue to do that. I’d like to take this opportunity to share with you a process that we’ve been going through over the last 100 days which came out after our second quarter results. We embarked on a journey starting in July which we coined MyC3. The reason that I put the slide here on five points of change and C3 is I wanted you to see where that’s connected. MyC3 is around cost and its around improving our position through revenue growth. We embarked on a journey with all of our associates in July which was to drive us as a company closer to our customer, to simplify the way business is done with Standard Register recognizing that we have a long legacy. We’ve been a company for 98 years, we’ve built a lot of systems and processes, some are relevant some are not. We have some need for change in talent so that we can in fact advance our business as technology and services have a greater impact on what we do. We have a need to make sure that we’re focusing all of our resources whether that be cash and investment or people in the things that are going to great the greatest return for the business. The process we went through was MyC3. We embarked on this 100 days ago, that 100 days is up. It’s a strategic effort unlike event based restructurings that we might do and we took in to consideration perspective of all of our associates that are closest to the customer and candidly closer to the work of our company. The result of that is we intend to achieve a net cost savings, which means as we enter 2012 we will have achieved $30 to $40 million in annual savings. As a result of the intensive process however we will be changing some things in the company. Our footprint and supply chain and in manufacturing will be modified. The industry is at an over capacity, we as a company are at an over capacity. We have a very keen focus on supply chain management. We have an opportunity to leverage some of the capacity that exists in the marketplace and make sure that it’s strategically aligned with those things that we chose to invest in. We’re moving our business to an on demand based production which is again, we’re very aligned with digital manufacturing which we’re very good at. We’ll be investing more there. Our go to market organization is going to be more and more focused by market in capturing revenue growth. We are an exceptional company at managing relationships and business that we have. We make it better, we expand it, the question now is acquiring more. The market opportunity is substantial for our company, our market focus is demonstrating the value that our clients are sharing with us as a result of that and now it’s time with our new foundation to be in a position to take that on. We are also going to be making some investments on systems that will change the way we do business. We have technology partners today. Those technology partners will likely grow and their influence on our business in a positive way and help us simplify the way business gets done. Then, we will also be, as I mentioned before with our supply chain focus, we have an opportunity for us to become more sophisticated in the entire strategic procurement process as part of our supply chain effort. You’ll see our company changing. We’ll be investing in some things that we had traditionally had as capabilities but we’re going to emphasis them more now. A couple of things that we will be investing in is we have a position today in our healthcare business around patient identification and safety. An example of that would be wristbands. We will continue to advance our position in that space. It’s important to our market, it’s important to our company and we have intellectual property that gives us a unique position there. We have been successful in providing training solutions to our clients in our commercial business. It’s a growing segment of our business. It is very much focused on digital production and work flow. We are investing in that area for growth going forward. In our industrial business you’ve heard us talk about in-mold labeling. We will continue to invest there so that we will see continued expansion. The difference there is it is a bit of a market maker. We have an opportunity to bring a brand new marketing technology to the manufacturing sector and take advantage of our intellectual property that surrounds that product. I did want to feature one example though, and it’s around Novation. We have sent some communication to the market place about this success. It gives an example of what market focus can provide to our company but it also lends evidence to the path that’s to achieve success in our industry. We’ve been working on this for more than two years in preparation for success. We did achieve recently in the last few months, actually it was about a month ago, a multiyear agreement that allows us to provide what we do best around document management and technology to more than 25,000 VHA and UHS which are University HealthSystem Consortium members and Provista members which is another organization with 15,000 members. It basically gives us the opportunity to renew existing relationships that we have that are part of Novation but then allows us to gain access to a large number of companies that we don’t do business with today which is squarely in the sweet spot of our healthcare capability. They are the largest purchasing volume opportunity in the industry. We now have all of the six top GPOs, we’re the only company in our space that can say that and we also have an agreement that covers the portfolio that we bring to market in healthcare in its entirety. We have a great foundation for continued success here. That’s a really good example of the type of work that we’ve been doing with our market focus and in each of our markets we have similar stories to tell. With this, I’d like to turn it over to Bob Ginnan for him to share the financials and then we’ll entertain questions as we go forward. BB On the website you will have the financial statements there to follow along with. Revenue for the third quarter was $163.5 million. This was down about 13.5% as Joe described the reasons earlier. We did see improvements in our commercial and industrial segments in terms of the rate of decline and if you go back to the first quarter we were down 15.7%, second quarter was 14% and third quarter improvement to 13.5%. Gross margins were relatively flat compared to prior year and this is really the result of both the cost actions that were taken last year and carried through this year as well as we had a favorable LIFO adjustment of about $2.3 million in the quarter. This LIFO adjustment was a result of as we managed down our raw material inventory of FIFO. SG&A was down $3.7 million again, primarily cost the cost actions last year and the volume as well which left us with a net loss of $5.5 million or $0.19 per share versus net income of $2.2 million or $0.07 per share in the prior year. In that net loss we did record a restructuring charge of $10.5 million related to the MyC3 program as Joe described or $0.22 per share and we expect this will be total cost of about $18 million as we go through the restructuring process here. In the quarter we also had a pension settlement charge of about $700,000 or $0.01. This represented a charge from our non-qualified plan in the quarter. In addition, pension amortization was worth about $0.07 in the quarter and if you do the math and add that all up that leaves us with about $0.12 from operations excluding the pension amortization, settlement restructuring charges versus the same number last year of about $0.23 on about a $25 million revenue decline. Cash flow for the quarter was about $2.5 million negative and in that quarter we paid about $1.5 million in dividends, $1.1 million of capital spending and $6.1 million of pension contribution. Turning to the year, revenue of $509 million down about 14.4% overall. Again, the story for the quarter really follows in to the year here. Gross margins as a percent of revenue very flat reflecting the cost actions that were taken in the prior year and early in the current year. SG&A you’ll see is down $24.7 million again, associated with both volume and those cost actions. This leaves us with a net loss of $13.3 million or $0.46 per share versus net income of $6 million or $0.07 per share the prior year. We’ve had restructuring charges primarily all of which occurred here in the third quarter, $0.22 per share, pension settlement charge if you will recall back in the first quarter we had a pretty significant pension settlement charge $24.4 million the year $0.45 per share and pension amortization we’ve recognized of $0.25 per share for the year. When you consider earnings per share excluding the pension and restructuring charges at $0.46 versus $0.59 the prior year so a $0.13 decline on an $85 million revenue decline which really shows the cost savings action. Cash flow for the year down about $2 million and in the year we’ve paid $9.6 million in dividends, if you recall, the first quarter was still at the old dividend rate, $6.1 million of capital investments and $20.6 million of pension contribution. At this time we don’t see don’t see any additional pension contributions for the rest of this year and we previously talked about $25 million for the year and at this point those fourth quarter contribution will probably roll in to next year. Turning to the balance sheet, you’ll see that working capital turnover is actually improved in the quarter from last year, 8.6 versus 7.9 last year. There’s been a slight uptick in the accounts receivable but this has been offset by reductions in inventory FIFO. Assets continue to come down as we have really held the line on capital spending still projecting towards about $10 million for the year. You’ll see the pension liability is also down from where we were at the beginning of the year and if you recall the pension liability is a function of both asset performance, interest rate changes and also contributions as well. That leaves us with net debt of $35.9 million. Where you see the $2.5 million cash flow for the year and for the quarter, we saw about $2.5 million overall, about $2 million for the year. That concludes the financial statements the end of our prepared comments and we’d like to open up the lines for questions.

[Operator:]

(Operator Instructions) Your first question comes from Charles Strauzer – CJS Securities.

[Charles Strauzer:]

A couple of questions, if we can talk a little bit more Joe about the Novation deal and maybe shed a little bit more light on the potential kind of long term opportunity there from a revenue standpoint if you can? And also, are there other types of contracts like this out there in your competitors hands that maybe over time you could be successful in kind of garnering this away.

[Joseph P. Morgan:]

The opportunity there is greater than $50 million in overall spend. Candidly it’s a bit of a fishing license, by winning this contract it gives us an opportunity by being on the contract to do what we do so the opportunity is sizeable. To give you an example, in one relatively short time, several days, we were able to contact approximately 2,000 institutions and start to present our capability to them so it is a sizeable opportunity. Projecting it specifically is challenging but just to give you some idea as to the opportunity, it represents the potential of 20% of the current unit in healthcare just as we currently focus on it. In terms of other opportunities, if you look at our market share today in healthcare, acute care health around documents that we provide, we have a market share that’s below 25%. So, by definition there is an opportunity that is pretty sizeable. The best way to approach that is there is one way to do it which would be one hospital at a time, another way would be through organizations that are aggregated. The GPOs are one way, we have all six of those so that’s given us a great opportunity, there’s still a sizeable market that is not part of those contracts and so there are larger buying groups IDMs and all that have many hospitals that we would also be focusing on. I would also tell you that there are tangential opportunities in similar markets but not exactly the same. For example, in managed care and assisted living where we’re also pursuing some opportunities. So, I think the key to focus on honestly would be there is a large opportunity with this largest GPO no question but then also from a relative standpoint our market share is not greater than 50 so we’re less than 25 so there’s a substantial runway for us as we go forward.

[Charles Strauzer:]

Then with all this talk about healthcare reform and various bills being passed back and forth are you cognoscente of any opportunities that might arise from healthcare reform that could be positive for you guys?

[Joseph P. Morgan:]

I think that’s the big question. It’s not clear honestly at this point what specific opportunity is coming from healthcare reform. I will say this thought, it’s certainly accelerating the conversation around creating a paperless environment in certain clinical applications where traditionally there had been a large demand for paper. Given that we’re market focused in healthcare though and that we do actually offer some software and services to certain functions within healthcare for example in admissions, we’re actually embracing that. We have an opportunity to embrace that change because of our market share position. Where we have documents obviously there can be an impact through what I just said but where we don’t have documents we have an opportunity to reposition some of the capabilities we have around technology and services and we’re doing that with partners that are more familiar with exactly what’s going on as it relates to some of those investments you referenced HIS providers and EMR. So, while won’t be in that specific business, it is very likely that our new solutions will be adjacent to those capabilities in the spirit of high valued added applications.

[Charles Strauzer:]

Then shifting gears a little bit if we can, just talk about the investment in more digital platforms, kind of consolidating what sounds like larger facilities and you’re spending roughly I think you said about $10 million this year on cap ex. What are your thoughts on deploying capital next year and are there going to be larger incremental spends on the equipment next year? BB I think if you look at the $10 million we’re spending this year that’s really a historical low and I think you’ll see us return to a more normal range in the $20 million range is where we historically are. I think you’ll see it much more similar to historical levels versus this year.

[Charles Strauzer:]

Then with all the stressed assets that are on the marketplace I would imagine you’re taking advantage of some of those opportunities that are out there to buy relatively new equipment at pretty cheap prices.

[Joseph P. Morgan:]

Where we can, for sure.

[Charles Strauzer:]

Then just talk if you can about specific areas that you’re seeing Joe where you’re really kind of getting a little bit excited about potential for as the economy recovers what are the areas that you think are the ones that are poised to kind of give you a little bit more lift.

[Joseph P. Morgan:]

Well actually it’s interesting, as we went through the MyC3 process, it turns out that there are some core capabilities that we have in place around secured documents and all that still has a lot of legs to it, there’s still an opportunity. Because of some of the investments we’ve made operationally we’re in a pretty good position. So, I think as the economy comes back we’ll be in a position to take advantage of some of that. I would also tell you that in the training area, that gets me very excited because personally that’s something that we’re investing in as well and I see the leading companies spending money there because they’ve got to retain their employees and they’ve got to help them see the new transition that their own business is going through so that’s an areas that we’re investing in. We’re working with some technology partners to help us take advantage of their new technology to help deliver digitally produced documents around that space. With my background coming out of the industrial business I think we’re on to something with in-mold. I really believe in that marking technology. There’s a real potential there because of what it brings to our clients in terms of improvement in their business performance through cost improvement but also the durability capability that exists with that type of a technology is pretty substantial. So, we’re pretty excited about what can happen there. Then I’d probably add, as we go through our consolidation of our operations, we look at what we want to make versus what we want to acquire in the marketplace and there’s a really, really interesting opportunity for us to balance, our supply chain in a way that we haven’t done previously. I’m very excited about some of the things that we’re doing with key suppliers to take advantage of some of their capability through our model. We’ve been successful honestly, with our channel focus over the course of the last six months. That’s just a sampling of some of the things that I see but I will tell you this, it is a very challenging market. Market share at this stage is very important to us. Our market focus has provide us with leverage. Our customers are telling us that being a general provider of products is not of high value to them, being market focused and understanding how their business operates is really of high value so we’re encouraged more holistically about the things that we’re seeing as a result of that.

[Operator:]

At this time I’m showing no further questions.

[Shaun C. Smith:]

This concludes our call today. Thank you for participating in our third quarter call and we look forward to reviewing our fourth quarter and full year results in late February. Thank you and have a good day.

[Operator:]

Thank you for participating on today’s conference. The conference has concluded. You may disconnect at this time.