Spire Inc.
Q1 2010 Earnings Call Transcript

Published: 30 Apr 2010

[Operator:]

Welcome to The Standard Register’s first quarter 2010 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 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. Before we begin, I would like to remind you that this conference call may contain forward-looking statements including language concerning future projections. These projections should be considered in the 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. 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 as a substitution for GAAP. The use of these measures is meant to enhance our audience’s understanding of the company’s performance. For today’s call, Joe has a few key highlights that he wishes to discuss. This will be followed by Bob’s review of our financial statement. After Bob’s report, we’ll open it up for questions, so please let me turn it over to Joe for his opening remarks.

[Joseph Morgan:]

Thanks, Shaun. Good morning. As Shaun said, I want to go through a few key highlights from the quarter and then I’d like to just talk about some things that we’re observing in the market. From a financial perspective, as the information that we provide will show, our revenue was down by approximately 4%, which is again, as we’ve seen over the previous quarters, the decline has slowed. Our units are starting to stabilize, but we’re seeing some price and mix change that’s obviously impacting our bottom line. Gross margin was slightly up on a percentage basis in great part due to the effort that we’ve put forward through the MyC3 process that in previous calls. Our SG&A as you’ll note is up by $2.3 million primarily due to planned investments that we’re making to transform the portfolio and the company now that we’ve moved to a market focus. Bob will describe that in a little bit more detail. We are feeling good though about the unit stabilization. That isn’t an accident. That has a lot to do with the work we’re doing in the front end of the market. There has been some mix shift that has affected the price of the products that are in the performance of the business, but unfortunately, that combined with the SG&A has resulted in a loss for the quarter. We did however, manage cash differently than we had planned, and we had a positive quarter of $1.9 million as Bob will probably describe in a little greater detail for the business. We did spend a good deal of capital in the quarter in terms of some strategic investments that we’re making. In terms of highlights, in terms of those investments, one of the things that we’ve talked about on previous call is what role does Standard Register want to play in the transformation in the print industry, and there’s a lot of great information out available in the public on that, not the least of which, is as the economy rebounds, it’s expected that the print space will not rebound at the same pace. However, there are some shifts taking place. There’s an acceleration towards digital and our investment in the quarter on our investment in the digital framework transformation has basically refreshed the entire steadfast network device and workflow connected to the web, and that is our play in print. We expect to be a leader in print-on-demand within the market segments we’ve chosen, and that’s how we’re addressing at this moment, our print portfolio. From a material sciences perspective, we’ve advanced our investments as well. We talked about research and development and applied engineering in the last call. We’ve continued to progress there with in-mode labeling being an example. We are advancing our patient identification and safety, specifically around wristbands, new technologies there, and our security features on traditional documents continue to advance with our investments in marketing and product management. The MyC3 initiative that we’ve spoken about is on track as we’ve talked about previously. On an annualized basis, we expect to achieve $30 million to $40 million. That’s substantially being achieved in 2010. We at this point, are ahead of schedule. We have completed the upgrade that I mentioned in terms of investment. Those devices and workflow are in place and we’re taking orders and we’re running product through that new capability. And another big event for us is the credit facility was finalized. Bob will go over the highlights of that. So we feel like in the quarter, units have stabilized in great part. We’re making progress at each of the segments. We did make planned investments in SG&A, which is a great reason why that number is larger, managed our cash really well from a positive cash flow standpoint. We’re not satisfied with a loss for the quarter. Obviously, we’re accelerating some things to reverse that. MyC3, which is our strategic earnings improvement initiative, is on track. In fact, at this very moment, a little bit ahead of schedule, and we’re executing on the investments that we said we would make. Now let me talk for a couple of minutes regarding the market segments, and each of the segments are a little different, but one of the things that is very interesting that is occurring, within each segment there is a growth engine being creating. Our marketing solutions within commercial, double-digit growth. Within health care, our sales grew in technology by about 54% and our patient identification solutions, which is around wristband and related products, is growing. The industrial business was up 32% and our in mold revenue although be it small, pipeline is growing dramatically and we’ve got 80% growth there. What that means is that within each one of the segments, the things that we’re investing in are starting to show signs of growth. Within health care specifically, the Novation contract as we’ve talked, we signed that at the later part of 2009. We have signed 30 new customers and we have 38 renewals. We haven’t lost any of the customers that we had been doing business with that were under the Novation contract. The health care reform is a concern, but we are starting that with our clients. We recently hired a Vice President of health care strategy for our business that comes from the industry, and one of his charters is to make sure that we take full advantage of what is coming in terms of health care reform. That also is an issue for our company, and we’re studying that closely, but at this point, we don’t see an immediate impact on the business. In terms of industrial, we are seeing our industrial customers cautiously optimistic about the future. Many of them are actually giving guidance they’re expecting growth and we’re seeing that with units and the acquisition of new customers. In the quarter also, each one of the segments has moved forward with their channel work. We are getting better access to the market as we’ve talked previously through partnerships. We will announce some things in the future I’m sure more specifically, but they won’t be horizontal; they will be very market specific. We feel good about the credit facility negotiation and the fact that MyC3is providing flexibility in terms of earnings improvement. We will be using that flexibility as we go forward. The market insight that we’re gleaning over the course of the last couple of quarters is really giving us more precision on how we’re going to place our bets in the future. In conclusion, before I hand it over to Bob, I’d like to just make these few comments. One is, units are stabilizing. We’ve got new customers in each of the segments. We’re retaining a much higher percentage of our existing base of business. The portfolio is in transformation within each market segment. Digital print underneath that platform is very, very important to us. We continue to augment our own capability with partners outside our business and our Tele-sales transition, we’ve talked about this before, we’ve previously been a very direct sales oriented organization, and we continue to invest there. However, we are moving a very large portion of our clients into a Tele-sales and web based service model and its showing success. By the end of this next quarter, we’ll have over 3,000 customers being supported through Tele-sales and the web. So we’re making some big changes. We’re not satisfied with the current performance. We are absolutely seeing progress and we’re going to continue to drive aggressively toward a better outcome in subsequent quarters. So with that, I’ll pass it over to Bob and then he can provide more details on the financials.

[Robert Ginnan:]

Thank you, Joe. As Joe mentioned, revenues came in at $167.4 million, down 4.1%. This represents a continued trend in our improved quarter over quarter decline rate. As you recall, last year we were at 15.7% decline, end of the year at 5.7%. We back off the extra week, we were at 10.3% so at 4.1%, that represents a significant improvement there. The highlight in the revenue on the segments was a 32% growth in our industrial business unit. On the gross margin side, we actually improved gross margin by 9/10 of a percent to 32%. However, underneath this gross margin, there is really three stories. One is improved factory costs. We’ve improved our factory costs. We did have a favorable LIFO adjustment of $1.7 million, but these were offset by continued price pressure as Joe mentioned at the start of his discussion. It’s most evident when you turn to segments, you’ll see that margins improved in every segment except for emerging, which is where we saw the majority of the price pressure. On the SG&A front, we actually increased our SG&A by $2.3 million in the quarter, and this was primarily as we continued to make investments in our IT infrastructure, our customer platform and also the investments in marketing and material science. The total investments were actually offset by some cost savings, but we were still left with a $2.3 million investment in our SG&A. We do believe that this SG&A level will continue to step down throughout the year, and that we’ll start to see the cost savings come through there. Down below SG&A, if you recall last year, we had a $19.7 million pension settlement charge in the first quarter that dramatically changed the earnings of the first quarter last year. So if you look pre-tax income without the pension settlement, we were actually at $1.5 million last year versus $1.4 million loss this year. So $0.03 versus $0.38 on GAAP basis. $0.08 income on an operating basis versus $0.14 last year. The difference being the $7.2 million revenue decline and then the SG&A investment. Turning to the balance sheet, you’ll see it on the balance sheet, we actually increased our capital assets for the first time in quite some time as we made significant investments in capital for the quarter at $86 million. We also improved our pension liability. Our net debt went down, reflecting $1.9 million positive cash flow. You’ll see a couple of new items on our balance sheet in terms of a loan payable and capital lease obligation as the equipment associated with the digital transformation, we actually purchased through a lease option that became a capitalized lease on our balance sheet. Another important part on the balance sheet as you’ll see, we actually improved equity in the quarter from $42.2 million at the end of the year to $44 million. Again on a cash flow basis, $1.9 million favorable. We actually increased our pension funding for the first quarter versus last year $7 million on track for the entire year there. Our capital expenditures less the least items was $2 million and we also had the $1.5 million dividend compared to the full dividend last year in the first quarter. Finally, on the revolving credit facility, we’re very happy we were able to get this in place at end of quarter and pleased that we were actually able to get a four-year deal right now. It’s still a very difficult market, but we were able to get a four-year deal and we actually increased our capacity for the balance, $75 million to $100 million as we brought inventory into the collateral. We’re also very excited to bring Wells Fargo as part of our bank group and we believe we have the best bank in EVL market in our group and we’re very proud of that. With that, let’s turn it over for questions for Joe and myself.

[Operator:]

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

[Charles Strauzer:]

If we can talk about the higher SG&A spend in the quarter, you explained some of that was IT related, smart works and others, how much of that was more one time in nature versus recurring, and if I look at the last couple of years, the cost savings you’ve been taking it seems like when you take out costs, it seems like you plow them back in through new spending and net net, you talk about a step down over the year. What kind of magnitude should we expect in the SG&A line?

[Robert Ginnan:]

I think you’re right on in that in the past, we’ve taken out cost but now we have to reinvest that savings here. While a lot of the stuff in the quarter I would say was one time, the reality is, that’s going to be replaced by other planned investments that we have throughout the year, so in total I think the investment will stay pretty close there. We’re going to continue to see savings that will kick in. They will actually then start to step it down. I don’t think at this point we’re prepared to really talk about how much that’s going to step down, but we still believe that between SG&A and gross margin, that we’re on track to exit the year at this $30 million to $40 million savings from the MyC3 initiatives.

[Charles Strauzer:]

Is that a net savings now or is that just the gross savings.

[Robert Ginnan:]

That’s the net savings.

[Charles Strauzer:]

There’s some language in the press release if you look at it about the dividend and kind of funding dividend through surplus earnings etc. Can you expand a little bit more on what you’re trying to get at there?

[Robert Ginnan:]

When you look at our equity, you look at the components of equity being the stated capital, retained earnings and then you have the comprehensive loss in there, and obviously the pension accounting is driving the other comprehensive loss pretty significantly. And over time that number will change based on as we re-measure pensions and also that we recognize the amortization. But on a net equity basis, obviously it’s driven the equity down and so right now, you have your stated capital, which is roughly the $28 million to $29 million, and then the excess of that represents the surplus. Once you get to what’s called the earned surplus, which is really the net retained earnings, that’s typically what the dividend comes out. However, under Ohio law, we just have to have surplus to pay dividends. So due to the pension fund, we’re kind of in that position right now where we’re actually dipping into that surplus. As you noticed on the balance sheet, we actually increased our equity in the quarter so we feel like we’re on the right track there.

[Charles Strauzer:]

If we could go back to SG&A for one second, obviously you had the year over year jump in Q1 in SG&A and again, I know you don’t want to get into the details of the step down, but is it safe to assume that we’re going to see year over year declines going forward in this SG&A or is it going to be more flattish from last year?

[Robert Ginnan:]

I would say that, I don’t really expect declines until the fourth quarter.

[Charles Strauzer:]

If you look at the bigger picture right now, obviously I’m hearing across the industry signs of life again and it sounds like customers are coming back and cautiously spending a little bit more in various areas. What are you seeing from your clients and what areas in particular are seeing strength versus continued weakness?

[Joseph Morgan:]

It really, with our market segmentation, the story varies depending on which segment you’re talking about, so I’ll give you perspective because I spend a lot of time in the field with customers. I would say the health care business, it’s an interesting discussion because health care reform is both a good thing and a bad thing depending upon how it actually rolls out as we go forward. So there is some opportunity that will likely be created, but there’s also some cautious optimism in terms of how investment should be made around EMR, electronic medical record and some other technologies that will facilitate the flow of information in hospitals. So I think we’re seeing more stabilization there, but if you look at our portfolio, clinical documentation, if you’re in the print space is a big part of what goes on with an acute care institution. So that is affected more than anything as it relates to health care reform. However, there’s a period of time that we’re seeing where the status quo continues. So that would be my response on the health care side specifically around acute care health. If we look at the financial services, while the economy is maybe feeling a little better, there’s still a lot of uncertainty in the financial services space, so we’ve taken some pretty sizable retail banks in our portfolio over the course of the last 12 months. But there’s been a softening in terms of spend in that portfolio. I think caution is how I would describe it, but we continue to make good progress. We had in the first quarter organized our go-to-market effort around that financial segment because it turns out we’re really good at that. So it’s a bit of a mixed bag there. In the industrial segment, many of the industrial companies, it’s kind of interesting. We’re seeing more manufacturing coming back to the United States, which is kind of I, think is a good thing, because we’re focused domestically. Our Mexico operation is doing well which is primarily focused in the industrial space as well. That one’s growing very, probably ahead of market I would say based on what we see, maybe 10 points higher. It’s a relatively small part of our business, but it’s growing. The one that’s an interesting one is our emerging segment, which has things ranging from government to retail to transportation. That’s a very traditional type of a forms supply business and that one is very, very price competitive and many of those clients are really pushing electronicification of what they do. So it depends on which one you’re talking about. I will say though, what we’re seeing is that companies that are focused on print, are very, very price centric. Companies that are focused on technology are seeing more life because I think there’s more capital spending taking place around technology. We’re seeing a hybrid opportunity for us in a lot of key application areas where we’re helping guide our clients from the print infrastructure to a different place. That’s candidly why we invested in this quarter in the digital transformation in more of our web-based technologies. So I hope that gives you some perspective.

[Charles Strauzer:]

If you look at the, you had a little bit revenue performance. You’re seeing sequential improvement off of Q1 in the rate of decline. Can we expect to see that kind of continuation as we progress through the year in terms of rate of decline kind of ebbing as we go through Q2 through Q4?

[Joseph Morgan:]

I think we share your desire for that outcome, but as Bob said before, we’re still not in a position to give guidance in that area, but we share the desire for that enthusiastic outcome for sure.

[Charles Strauzer:]

At least if you look in Q2, you already have basically April under your belt here and you’re kind of going into the balance of the quarter. What is the sales force telling you. What are the kind of early scans you’re getting. Are you seeing the same type of progress there?

[Joseph Morgan:]

It’s kind of hard to answer that question. I know why you’re asking it, but I’ll give you a couple of perspectives on that. Our activity in the market, our pipeline is up. We’re seeing more action there, which is a good thing. I think we’re seeing a higher level of enthusiasm about the hybrid discussion that I just mentioned to you. We’re in clay right now, which is really a change for our company. We’re participating in the growth parts of the industry at a higher level than we have before, so I can’t tell you exactly how that’s going to turn out, but there are certainly some encouraging signs in terms of how data register is being perceived in the market and the actions we’re taking.

[Charles Strauzer:]

Just a quick question on the credit facility, what was the new rate on that?

[Robert Ginnan:]

We went from a spread of 150 basis points to 325 basis points.

[Charles Strauzer:]

Over LIBOR?

[Robert Ginnan:]

Over LIBOR, yes.

[Charles Strauzer:]

Is there a LIBOR four on that?

[Robert Ginnan:]

No.

[Charles Strauzer:]

And then just talk a little bit about, obviously this year is going to be a tough year for cash flow given that the pension funding and investments you’re making, but ultimately if you had your preference, would you start thinking about making some acquisitions again?

[Joseph Morgan:]

I think we will. We always consider acquisitions. I think that we’re much clearer on the strategy so it’s easier to evaluate those. I think there’s some out there and open to us.

[Operator:]

There are no further questions at this time.

[Joseph Morgan:]

It doesn’t look like anyone else has any questions so that concludes today’s conference call and we’d like to thank you for your participation and we look forward to reviewing our second quarter results in late July.