Spire Inc.
Q2 2008 Earnings Call Transcript

Published: 24 Oct 2008

[Operator:]

Good day, everyone, and welcome to Standard Register’s third quarter conference call. Today’s conference call 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 know turn the conference over to Bob Cestelli, Vice President of Investor Relations.

[Bob Cestelli:]

Good morning and welcome to our third quarter earnings conference call. Joining me this morning are Joe Morgan, Acting Chief Executive Officer and Craig Brown, Chief Financial Officer. Before we begin please let me remind you that this conference call contains 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 Home Page of the Investor Center on the company’s website. Joe has a few opening comments regarding the quarter, followed by a review of some key issues for the company. This will then be followed by Craig’s review of our financials, then we will address any questions. Now let me turn the call over to Joe.

[Joe Morgan:]

Thank you, Bob. I’ll be commenting on a few things during my time on the call. First, the third quarter results, second, a few highlights, third major focus areas for the coming periods, then an outlook. First let’s talk about the third quarter. Revenue was down primarily due to the sluggish economy, however, our gross margin as a percentage of revenue was solid and the SG&A was lower than prior period, both of which are an indication of the cost controlling efforts that we put in place. Our operating profit was down slightly due to the controls as I mentioned we put in place and are putting us in a position for the earnings that we.... The balance sheet continues to be strong. Our net cash flow is positive on a year-to-date basis. Craig will share more of that in the financials. We are focused on a few things which gives me some encouragement going forward. We’re very focused on being proactive with our customers, focusing on retention, and a I mentioned, in the gross margin and SG&A results, we’re very focused on aggressive cost management. As we look in the marketplace, our healthcare market which is our largest market is slightly down, which is positive given the environment we’re in. Our manufacturing market is up in the high single digits which is encouraging as we’re seeing some of the business that we’ve reported in the past now come through. Our financial market was down as is true for many companies in this time. We have been monitoring the M&A activity. At this point it’s had minimal impact on our company and there are as many positives as negatives at this point in terms of impacted on our business, so at the moment we’re very encouraged but we will be keeping close tabs on that situation. One thing that is very encouraging to me, we’ve been, as I mentioned, very focused on retention of key customers, but we’ve also been very aggressive in the selling effort and we’ve got tremendous activity taking place right now. In fact, we have 55 wins of over $100,000 in the third quarter, which is typically not our strongest quarter for this type of activity, and that was over 50% of what we’d achieved in the first two quarters of the year, so the sales activity is very high and customers are very encouraged by the document management story that we’re telling and the new solutions that we’re bringing forward, so that’s a very positive thing for us. Quarterly highlights – one of the things that I bring to the position that I’m in right now is a very unique perspective. I’ve been associated with Standard Register as a supplier and then I’ve had numerous roles with the company in the 7 years that I’ve been in the organization. I started as a CEO of a software business that we had or technology business that we had spun out, General Manager of our print on demand business and our document systems business which is primarily a technology business that focuses in health care and in financial services, and then of course as Chief Technology Officer and in April I was made Chief Operating Officer of the company. In those different roles I’ve had different perspectives on our customers and I’ve also had a different perspective on Standard Register as a company, and that gives me great confidence in many of the things that we’re doing now around refining our strategy and preparing ourselves for growth potential in the future. I’ve spent a lot of time over the course of the last four or five months very specifically with key customers and prospects that have a significant impact on our performance as a company, and I’m encouraged each time I do that that we’re seeing an increasing need for the approach that Standard Register has in the marketplace and it gives me confidence that as we continue to refine our strategy and get more focused as an organization. As I’ve said publicly before, our portfolio at times is too wide and as we narrow that and get concentrated, I think the potential is there certainly for enhanced performance. These are challenging times; however, for me personally, I have tremendous conviction for what we’re doing. We’re putting a lot of energy... Our leadership team is one we’re convicted towards the approach we’re taking in the market and we have a very focused organization in this very challenging time that we find, not only that we exist in at the moment, but we foresee in the coming months. However, in order for us to be successful as we look forward into 2009, we need to continue to take bold actions to achieve and stabilize our profit objectives, and we will be doing that on a regular basis. The three key areas that I focus on myself, the relentless focus on cost reduction, the second is increasing our coverage in key areas. We are very good at certain things in key markets, and those markets are under served and we can by putting more energy there, enhance our market share, and we’re going to be doing that, and then enhancing client satisfaction. In this very difficult time, there’s a lot of stress on a lot of companies and we need to stay in touch with our clients. I’ve asked our leadership team to make sure that they do that and we’re seeing positive results efforts. So my approach is very straightforward, as I said. Those are the three themes and then the urgency in the pace of business, we must keep it simple, and we have to intensify our activity in the marketplace, and we’re doing that. Going forward, we are working on our strategy alignment. I’ve mentioned this previously. There will be more details coming in the coming quarters, but we have achieved many good things underneath the larger business over the course of the last 18 to 24 months and we’ll be concentrating on [inaudible]. As part of that, it’s to identify those areas that have the greatest revenue growth potential for the company and ensuring that we have the proper investments there. Cost management will continue to be a focus. Also continue our field optimization process which was really around customer support which had given us an annualized savings of approximately $13 million. All of that had been done in preparation for some of the strategic work we’re doing that I alluded to. That’s a focus of our business of course and our coverage rather in key focus always, always focused on client satisfaction. I’m actually very enthused with the level of activity that we have right now, even in a difficult climate. I’m very confident in our ability to control our costs and manage our costs and our strategy work that’s been going on underneath all of the other effort we’ll be talking about in the coming quarters. Those are my comments in terms of the first few points that I wanted to make. Yesterday the Board did declare a dividend of $0.23 to be paid on December 5 to shareholders of record as of November 21. I’d like to talk for a moment about outlook. Our past guidance called for second half revenue to slightly exceed that for the first half of the year. [inaudible] the recent third quarter results and our expectation that there will be no significant change. We expect the second half revenue to trail that for the first half. Past earnings guidance was for the total year 2008 adjusted operating earnings before restructuring, impairment, pension, amortization, and pension settlement to come in above the prior year. Notwithstanding ongoing expense reduction initiatives, a lower revenue result for the fourth quarter increases the likelihood that the adjusted operating income will come in below that for 2007. I’m going to turn the call over now to Craig.

[Craig Brown:]

Thanks, Joe. Good morning, everybody. I have a few comments on the P&L. We’ll walk through the quarter then I’ll give the year-to-date and we’ll talk about cash flow and debt and take any questions you may have. Revenue in the quarter was $189 million, down $19 million from last year’s $208 million, down about 9.3%. The results of our attribution analysis appearing this quarter to last year indicates that about two-third of that decrease or about $13 million relates to economic climate we’re in today. The balance of the change reflects the natural decline in some of our more traditional product lines offset by increases in new business that we’ve achieved. If we look at the segments, document management was $101.8 million in the quarter, that’s off nearly $15 million from last year, down 12.8%. That was the sharpest decline among our segments and reflected both the economy and the technology impact. Labels, $25.5 million was relatively flat with last year’s, result almost the same, just down a tick. Document systems was up 3.7%, $5 million. Our print on demand services business, $55.8 million in the quarter, was off 6.6%. [Path forward] was $1 million down from last year’s $1.4 million. At the gross margin level, we had $66.3 million which was 35.1% of revenue and that was down $4 million from last year’s $70.6 million, however, the percentage gross margin improved from last year’s 33.9% to 35.1%, so that’s a 1.2 percentage point improvement, so on a $19 million decrease our gross margin was down just $4 million, and that reflects the cost savings initiative that we began last year in July and continued last year and into this year, so costs have helped keep our earnings up in the face of declining revenue. If we look at some of the segments in terms of gross margin, document management, $32.4 million of gross margin, had a 31.8% gross margin. That was the same percentage margin we had in the second quarter and is a full 1.3 percentage points above where we were a year ago for the third quarter, so we continue to see good cost progress in our manufacturing and document management. Labels, $8.5 million of gross margin, 33.4%. Again, that’s almost exactly the same gross margin we’ve had for the last three quarters. It was below last year’s third quarter; however, because we had a particularly strong quarter in that period, but the label business continued to roll along at about a 33% margin clip. Document systems, $2.3 million in gross margin, 45.6% of revenue, good gross margin and continues to produce good results in that regard. POD services, $22.7 million at a 40.7% gross margin, up from last year’s 39.6%, again, reflecting lower costs despite the drop in revenue. [Path forward] was at a break even compared to about the same result in the prior year. Coming to the balance of the P&L, SG&A expense in the quarter was $47.5 million. That’s down from last year’s $50.4 million and that reduction of nearly $3 million reflects lower commissions with lower revenue, also some lower incentive accruals and also improved health care and the lower pension from the pension freeze that we announced the last quarter. Depreciation was essentially unchanged from last year which brings us to our operating income of before pension loss and restructuring. $12.2 million this year compared to $13.7 million last year, so the effect of the lower revenue slightly overshadowed the advantage from the lower cost structure. Our pension loss amortization in this quarter was $4.8 million compared to $5.5 million last year and $5.2 million in the preceding two quarters in this year and that reflects the freeze that we instituted in our pension plan effective July 1. We expect the pension loss amortization this year to be at approximately $20 million for the full year. ‘ Interest expense, we’ll point out, was $0.5 million in this quarter compared to $1.1 million last year. We have generated a significant amount of cash flow this year and have paid down our net debt and that has allowed us to cut our interest expense in this quarter by more than half to a very low number. If we look at EPS, overall $0.07 this year compared to $0.07 last year. Our net on operations is up slightly from $2.2 million this year compared to $2 million last year. If you exclude restructuring and impairment in both periods, exclude the pension loss amortization, we had $0.23 per share this year compared to $0.26 last year. If we turn to year-to-date, we had $595 million in revenue which was off $52 million from last year’s $647 million. That’s down about 8%. Here again our attribution analysis indicates that the economy both a combination of unit demand and pricing results were the majority of that change. We’re estimated at just over 60% of that reduction or about $31 million. By segment, our document management business, $324.2 million in revenue, off 8.9%. Labels $77.9 million, off 9.5%. Document systems off 3.2% at $16 million. POD was 5.7% lower, $173.4 million. Our [path forward] was off slightly from last year, it was $3.6 million in the current period. The gross margin story is not unlike the quarter actually. Our gross margin was $203 million total, 34.1% of revenue, up $1.1% from last year, so despite a $52 million drop in revenue, our gross margin declined by just over $10 million and again that reflects the significant cost reductions that we have made over the last several quarters. Looking at it by segment, we saw significant improvement in document management. We are up by 1.8 percentage points over last year, 34.1% compared to 29.6% a year ago. Labels, 33.2% compared to 32.7% last year. Again, better cost performance there despite the lower revenue. Document systems about the same as last year at 46.1%. Last year it was 47.3%. Our POD business was down slightly in percentage terms, 38.8% this year compared to 39.5% last year. Couldn’t quite overcome the effect of the lower revenue in that segment. Our [path forward] at break even this year compared to a slight positive gross margin last year. Turning to the balance of the P&L, SG&A lower this year by $15 million. We came in at $152.3 million. That again reflects the cost reduction initiatives taken last year and continuing through this year and so that brings our operating profit on adjusted basis to $30.7 million this year compared to $26.4 million last year, so despite the $52 million decrease in revenue, our adjusted operating income is up $4.3 million. Moving down, just a couple other comments on the P&L. Interest expense $1.8 million compared to $2.7 million last year reflecting lower debt, and EPS on continuing operations positive $0.21 this year compared to a negative $0.12 last year, significant improvement on that measure. Excluding restructuring and impairment in both years and excluding the pension loss amortization, we are $0.59 per share this year compared to $0.51 last year, so despite the lower revenue, as Joe pointed out, we have been managing costs very closely and will continue to do so. On the balance sheet, we have had positive cash flow through the first nine months of this year. We look at our investment in terms of working capital and capital assets. Our working capital excluding cash and debt, our operating working capital, $102 million at the end of September and we measure that in terms of its relationship to revenue so it had a 7.9 turnover at the end of September. That is an improvement compared to the 7.2 times in September last year and about a tick or two better than it was at the beginning of the year, so we continue to manage our working capital very carefully. Our capital assets, we have seen CapEx this year. The modest $10.4 million compared to last year’s $17.2 million and the year will probably come in somewhere in the $13 million to $14 million range. Our depreciation this year through nine months was $19.4 million and we expect the year to come in around $26 million. Our turnover of both working capital and capital assets continues to improve as we continue to emphasize an asset lighter strategy and a aggressive management of our working capital. Pension liability at the end of September $118.3 million compared to $133.6 million at the outset of the year. The freeze of our pension plan effective in July reduced our liability significantly, that and the change of interest rates, and so that has put is in a little bit less [inaudible] position than we were at the end of the year. Cash flow as I indicated has been positive this year, $10.9 million through nine months. That’s after the pension funding of $20 million, our CapEx, and after paying the dividend. So we ended the quarter with net debt of $40.4 million, 27% of total capital structure, and indicating a continually strong balance sheet going forward. Those are my prepared remarks. We’ll turn it over to the Operator for questions.

[Operator:]

(Operator Instructions) Your first question comes from Charlie Strauzer with CJS Securities.

[Charles Strauzer:]

Craig, just pick me up on the pension again. I see that the market’s kind of in a lot of turmoil. If the markets continue to weaken, talk about the exposure in the pension to equities. I think you moved them a while back but just remind us again of the status of the current pension investments.

[Craig Brown:]

Obviously the market has reduced the value of the pension assets and so we looked at our pension assets sort of mid-October most recently and we have tried to project our assets and liabilities forward going to the end of the year. The outlook at this point is that if the market were to say pretty much where it was in mid-October and estimating continuing panic payments, we’ve made all our contributions for this year. We would estimate that our unfunded position would not be substantially different than it was at the beginning of the year and that’s because primarily a couple things. One is that our liabilities have come down significantly from the beginning of the year as we froze the plan and that changed significantly the liability and we’ve also made a lot of pension payments this year and funded the plan as well, and so as we look at our contributions, which is what is the most critical thing for us, we’ve been funding the plan at about $20 million per year. We’ve completed our funding as I said for ’08. As we look at today’s valuation we expect that our funding in ’09 might be a bit higher but not substantially different than it has been. We have not determined yet what our ’09 funding will be and we probably won’t make that decision until the end of the year when we see how the market shakes out. We also have some decisions to make, actuarial assumptions, around the yield curve and other things that relate to how much that funding will be, but under the Pension Protection Act we fully expect to have our required contribution and we expect that funding will be not dramatically different than where we have been.

[Charles Strauzer:]

So we just kind of continue the same course of action you’ve been taking for the last couple years now.

[Craig Brown:]

Yes, that obviously is subject to what happens the rest of the year and it’s hard to predict what that’s going to be but taken the most recent data and projecting things forward, we do not see the cause of the smoothing effect of basically seven years to catch up any deficit. We do not see a significant huge burden on the company in that regard.

[Charles Strauzer:]

Just on the cost front, obviously the economy has gotten noticeably tougher in the last few weeks of this month. What other additional steps can you take kind of going forward to right size costs to match revenues if revenues continue to decline at the same levels?

[Joe Morgan:]

The thing that we need to do is we need to really at this point focus on the strategy work that we’ve been doing and make sure that the cost and the sizing is in synch with that activity, so we’ve done a lot of work with regard to policies and we’re now evaluating everything as you can imagine and we need to do that very purposefully, so over the course of the next few months, few weeks, we’ll be pretty much turning over every rock and making sure that we know where we can make adjustments without losing the ability to have the client relationship and as I said take advantage of the opportunities around increasing coverage in key areas.

[Operator:]

Your next question comes from David [Woodiak] with [Healy] Asset Management.

[David [Woodiak]:]

The restructuring charges, was that all a bookkeeping entry or was there some cash involved there, and related to that, could you summarize for us over the next year or so what cash needs you see outside of operating expenses, in other words, capital expenditures, pensions, things like that?

[Craig Brown:]

We couldn’t hear you very well so we’ve got our volume turned up as much as it will go, so if you could get closer to the mic and please repeat the question.

[David [Woodiak]:]

Restructuring charges, how much of that was cash, how much was just the bookkeeping entry, and also, going forward over the next year, what meaningful uses of cash do you have outside of operating expenses?

[Craig Brown:]

I actually don’t have a precise answer. I can tell you generally and we’ll get back to you on the specifics of the accrual versus the cash, but the cash outlay for restructuring during the... Let me see if I can put it together for you. I think the cash outlay for the quarter will be less than the accrual, and we do expect a little bit more restructuring to come from the restructuring that we just announced and put in the P&L, so we’ll see a little bit more on the order of $1 million or $2 million, fairly modest in that regard. Was that your question about restructuring?

[David [Woodiak]:]

How much of what was taken in the third quarter, how much was cash, and how much was just bookkeeping entry? Just roughly.

[Craig Brown:]

I’ll give you a rough idea here. Restructuring spending in the third quarter was $0.5 million.

[David [Woodiak]:]

Cash?

[Craig Brown:]

In cash. The accrual was, I think I recall, 2.7, so there will be some more so obviously the balance of that will come out as cash going forward here. A good portion of that accrual is rent on facilities that are going to be vacated so that rent goes out through 2009 and through 2010 so at this point we would continue to pay the cash to the Landlord for that rent as we go forward unless we can negotiate a better deal with them and so there is not a significant amount of cash coming out of there real quickly.

[David [Woodiak]:]

For the coming year or so, roughly how much will there be in non-operating expense cash outlays like capital expenditures and contributions to pension and so on?

[Craig Brown:]

We have not given guidance in our CapEx to this point and so in the absence of that, I think you could conclude that our attitude about capital has been to be very frugal in this time to make sure that the CapEx spending that we’re undertaking is in relation to items which are going to have a good strong payback for us and so if you look at the record of our capital spending you’ll see that it has been a little bit lower this year than it has in the past and I think that we will continue to take that perspective going forward. We do have some capital spending plans but we don’t expect a significant change from the recent rate that you’ve seen.

[David [Woodiak]:]

I guess just to finish up, is it fair to say that at this point in time you don’t see any needs for cash out of the ordinary over the next year or so?

[Craig Brown:]

Based on everything that we have announced to date, that is correct.

[Operator:]

I’m going to turn the call back over to Bob Cestelli for closing remarks.

[Bob Cestelli:]

That concludes our call for today. We’d like to thank you for your participation and we look forward to reviewing our fourth quarter and full year 2008 results in February.

[Operator:]

This concludes your conference call for today. You may now disconnect.