Spire Inc.
Q2 2010 Earnings Call Transcript

Published: 30 Jul 2010

[Operator:]

Good day everyone and welcome to Standard Register's Second Quarter 2010 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 now turn the conference over to Mr. Shaun Smith. Please go ahead.

[Shaun Smith:]

Thank you, Angie. Welcome to the company’s second quarter 2010 earnings conference call. Joining me today are Joe Morgan, President and Chief Executive Officer and Bob Ginnan, Chief Financial Officer. Before we start, 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 of 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 some highlights to discuss. This will be followed by Bob’s review of our financial statement. After Bob’s report, he will open it up for questions, that both Joe and him will answer. Now let me turn the call over to Joe for his remarks.

[Joe Morgan:]

Good morning, thanks for joining us on this investor call. We’re pleased that the foundation we’re building is making progress as is evident in this first half. From a revenue standpoint we had a 3.7% decline which continues to trend favorably, that’s the fifth quarter in a row where we have been able to step down our decline. Obviously our intent ultimately is growth, but we’re moving in that direction. As we analyze our performance for the first half, it’s very evident that we have areas that are growing, which I’ll talk about in a minute. And then we have the core declining component of our business, but we have separated those things so that we can in fact take appropriate actions at the portfolio level. Form a gross margin standpoint Bob will talk in detail about our MyC3 activities that we’ve talked about previously. But we continue to work very hard there and our gross margin being maintained at approximately the same percentage is a good indicator of that. In the quarter we also spent several million dollars on investments that followed the SG&A line, again this is to advance the portfolio and continue to build out technology capabilities. As I mentioned MyC3 is on track, last year we mentioned the range of expectations was between $30 million and $40 million of savings once fully implemented, we are seeing that that performance within the business. And Bob as I said will describe that in more detail. For the quarter our earnings were breakeven, which were in line with our internal expectations. From a capital standpoint we’ve mentioned in the first quarter that we were making a significant investment in our digital network, upgrading equipment in workflow so that we could take advantage of the transition that’s taking place in the print space toward a more digital delivery. That upgrade is now complete in the second quarter and what that is allowing us to do is to increase our capacity where growth exists where it matters, which is in the digital space. We’ve created super regional centers as a result of this, which is enhancing our ability to serve our customers going forward but also allowing us to bounce our go-to-market effort which will have direct sales but also you will see more and more rep capability from Standard Register as we go forward. And it really is allowing us to additionally optimize our network with no customer that being negative impact. Thus far this year we’ve announced three facility closures, we have actually closed one, the other two will be closed as the year progresses. Our focus on the markets is enabling us to identify growth, separate growth from the declining categories and that insight is providing us with significant optimism for the future. I want to make a few comments here about each of the markets and again reinforcing that our market focus is transitioning our company from internal operational focus to everyone in the company moving toward the market so that we can understand where the trends are and then act upon them and our operations are being build so that we can respond quickly. So from a commercial standpoint, some key points here, revenue trends are improving across commercial in the emerging segment, we have 4% growth for the quarter. It’s been a while since we can state that, that’s a good indication of where the focus is helping us. The financial segment as everyone is aware with the regulatory environment and many of the changes that are happening there is a little unclear however we have stabilized the revenue and improved the profit in the quarter. We did sign 16 new customers through the first half and that continues to ramp and what’s also interesting is our portfolio on the print side shifts, our marketing solutions is taking advantage of some of the new investments that are taking place in this segment and we had double digit growth again 4% in emerging but one very significant part of the digital communications, digital print growth is marketing solutions and we are playing in that space at double digit growth. Lets talk about healthcare for a minute, we talked last year about Novation, through the first half we’ve signed 67 deals, 25 new which is very important and that we retain, 42 existing customers, 32% growth in our technology sector again I mentioned that we have significant growth parts of everyone of our businesses. We tended to talk in past a lot about the declining forms business which is true but we are now reinvesting some of our dollars in things that are growing for us. We have 16 new installs in Acute Care in the healthcare space. We also announced yesterday a relationship with Precision Dynamics around patient identification; this will further enhance our abilities to take advantage of that growth opportunity that exists in healthcare, wrist bands and other patient identification and safety opportunities. Industrial is a great story for us. One of the things that we did through market focus is put ourselves in a position to take advantage of the economy rebound, but also growth opportunities. As we look at the industrial sector the compounded annual growth rate in the labels business is in excess of 4% based on industry data. Our Q2 revenue grew 19% versus prior year and 25 year-to-date. We have 11 new customers in the quarter as we mentioned we were going to be giving evidence of our advancement in our markets; we acquired the assets at Fusion Graphics. Previously, we had a partnership with them. We’ve now acquired the business. Why we did that is we were able to validate the importance of the intellectual property through customer growth and once that was done, we were fortunate to be able to strike a deal and close that within the quarter. Since last, since we first began talking about In-Mold labeling, we have actually now advanced our position from a small number of customers at our pilot phase to now have 15 customers that have actually purchased In-Mold solutions from us. One key point as we transitioned to the next part of this discussion is that innovation is a key tenant for our future. We have a number of patents that this company has been built on in our 98 years and that continues to be a critical component for our future. I want to point out a couple of things that have occurred just in this last quarter. Through the acquisition of Fusion Graphics, we have acquired three patents in the US and we have four pending applications. Those patents support the whole material science component of our business that we talked about before it gives the strategic advantage going forward. That capability is one of the foundational pieces for the industrial business but quite honestly extends within our other spaces as well. Yes, over the last few days, we have received notice from the patent office of two other patents that will be issued or have been issued to us. One is around compliance labeling and healthcare and the other one is in regards to patient identification and safety. Again, very consistent with the strategy and the transformation of the business. We believe that these, this innovation and this intellectual property will continue to help us differentiate ourselves and extract higher value in the markets we care about. I’ll also make a point that we do not always patent, intellectual property is something that we control very closely and where patenting makes sense strategically we’ll do it, where it doesn’t we don’t necessarily proceed with that. A couple of other key points I wanted to make as indicators of the change that’s taking place within our business. As I mentioned we announced our relationship with Precision Dynamics Corporation yesterday in a press release, we are again focused working with them as a leader in the industry around patient identification and labeling, combining. Not combining in a physical way but joining together from a go-to-market perspective to take advantage of our unique intellect so that we can enhance our position within our clients through this relationship, our focus first in healthcare, but there’s many other opportunities as we see things advancing in the future. Fusion Graphics I mentioned we purchased in cash $2.5 million, primarily focused around intellectual properties and working capital and other assets. And we're able to now put ourselves in a position where we have a very unique technical position to allow future growth which is shown with the industrial business performance, to date. Again in the industrial business there are two primary things that we do, one is around industrial labeling, which we call [MPS] manufacturing part solutions and the other is advancing our position to our In-Mold labeling capability. The thing that excites me though is through this acquisition as we bring in some incredible talent to the business it enhances our R&D capability, again a raw material science. Another item that I did want to mention to you, we’ve talked over the years about SMARTworks. SMARTworks continues to be our platform by which we interact with our customers over the internet. We have been growing in that area in fact most of our new acquisition clients are immediately placed on the platform. Today, 80% of our volume is connected or is transacted through the platform and we have moving toward a million users today by 800,000. When I was see CIO, CTO number of years ago we struck a relationship with Hewlett Packard which has continued and we are now in the midst of a seven year relationship that we are taking to another level around hosting our technology for the SMARTworks platform. This is a key indicator that we see the internet playing a very significant role in not only the past of our business but in the future. SMARTwork's historically has been focused on operational documents to help improve the performance of our clients in the traditional work flow that goes on within businesses. But we are quickly advancing ourselves to take advantage of opportunities where clients are focusing on revenue growth in their marketing of their products and services. You can see some growth that I referenced before, so we will continue to invest in the SMARTwork's platform. We are doing that for a couple reasons, one is that it’s a requirement of our customers; we need to reduce the cost of transactions it’s a way to do that over the internet. We take compliance security of data and overall performance in business continuity very seriously. These investments that we are making with Hewlett Packard position us to do that. And quite candidly Hewlett Packard has the most advanced technology that we can see in the market around data center hosting and server technology in workflow related to both of those things and through our partnership we are able to take full advantage of that and bring that support and stability to our clients. So with that I would like to turn it over to Bob for more in-depth review of other financials fro the quarter.

[Bob Ginnan:]

Thank you, Joe. I will start with the operating statement first, revenue came in $164.7 million down 3.7% as Joe described its a straight quarter of decline, two of our four segments actually had growth in the quarter now I will talk more about the segment in a minute here. If you look at the margin 31.4% versus 31.7% last year we had favorable LIFO versus this year take out the impact of LIFO and the margins were flat at about 31.3%. Underneath that margin you got a combination of lower volume of $6 million plus price as we talked about and mix of less margin products. And that accounts for about 3 points on the margin. So what that really implies is that it's about $5 million of cost savings in the margin in the quarter. On an SG&A basis $2.2 million over the prior year. Again broken down but we have $1.7 million of investments in technology you will find in market expertise Joe described that in his discussions. We also have no incentive competition in the base period for this $1.1 million difference there in the quarter and we also $1.1 million more pension amortization. This is the non-cash portion of the pension amortization. So those things add up to about $4 million of increase in the year that, were offset by cost savings. We did have $1 million of restructuring primarily leases and you will see our interest in expense is up, pretty dramatically versus last year partly because of higher debt balance but most importantly because of the higher interest rates with our new credit facility. On the tax line just point out one note there did you see a some what favorable tax rate as we made money in Mexico we’re able to release some tax reserves there so, that's a favorable tax report. Ending at a break even earnings per share of zero versus last year of $0.11. Similar story on the year, down $13.5 million, 3.9%, if you recall, we’re down 4.1% in the first quarter. Margin again, you backdrop LIFO only it's reversed more favorable of 2010 and 2009 leaves us at a flat margin performance in terms of percent of revenue. SG&A, similar story. Investments continue throughout the year $3.7 million on the year. $1.1 more in pension amortization and $1.6 million more in incentive compensation for an increase of about $6 million. So without those items, we are actually down in our SG&A. Dropping always down to the bottom line, $0.19, versus. I am sorry $0.03 loss versus $0.27 loss. First quarter of last year, we had the large pension settlement that obviously impacted the earnings per share last year. Turning to the segment, as I mentioned, two of the four segments, the emerging segment and the industrial segment actually had growth in the quarter. And we saw improvement in the financial services. On an operating profit basis, we actually have, are making money in both the commercial and healthcare for the quarter and we got some work to do in industrial. On year-to-date basis, you can see the growth in industrial 24.7%, almost breakeven in emerging and the decline in healthcare and financial services. Turning to the balance sheet, we did use a significant amount of cash in the quarter. Primarily in working capital increases in the Fusion Graphics acquisition, we believe the working capital increase which is combination on accounts receivable and [liable] payable is pretty much a timing issue. Actually, to this point, we’ve already brought back about five million of that, in terms of cash flow through July. So again, working capital up almost $10 million for the year, which was driving negative cash flow at this point, we expect that to come back in line. We did make a change on the balance sheet for this quarter. We’ve talked a lot in the past about how the pension impacts our overall capital structure in terms of being very similar to debt. So we pull them out of the operating side and put that down into the capital structure section here. But one of the differences about the pension is that on the balance sheet it is shown pre-tax and if you think of it like debt, which would be an after tax number, we converted the pension liability to active tax, because we will get the tax reduction as we make those contributions. So that is a change on the balance sheet. And you can see another quarter of improved equity at $45.2 million versus the start of the year at $42.2 million. On the cash flow Joe talked a lot about capital expenditures between capital and leases we spent about $10 million this year, in addition we made a $2.5 million acquisition, and we’ve also contributed about $13.5 million into the pension plan. So right now on a non-GAAP basis we are showing lease of cash of $11 million and we expect that to start to turn around here as we move forward. With that that completes the financial review, Angie we’d like to turn it back to you for questions.

[Operator:]

(Operator Instructions) First question comes from Charlie Strauzer from CJS Securities. Your line is open.

[Charlie Strauzer:]

When I look at the segments and the performance of the segments both in top line and operating profits by segment, you saw pretty good numbers in terms of revenue growth from emerging and industrial, you saw the margin kind of coming back towards breakeven but industrial was still negative and can you talk a little bit more about industrial why those margins weren’t in the positive in this quarter?

[Bob Gannin:]

I think Charlie, first of all we would agree that’s where our challenge is, I think it’s a combination of really two things as we evolve that business and really get more in term with the customers it’s about getting the value for the work we are doing there but also in In-Mold we are still experiencing some start up there and so there is some fixed cost coverage that we need to improve. Obviously that could generate more margin in that right there, we did have a couple of one time costs in the quarter associated with both the Fusion Graphics acquisition and some inventory adjustments there probably of about $400,000 but that’s where our challenge is.

[Charlie Strauzer:]

I see you are basically breakeven in the loss if you kind of backup for the one time stuff and then if you look at kind of some of the startup cost from In-Mold you probably would have been profitable if you take all this our of the equations.

[Joe Morgan:]

That’s equally right.

[Charlie Strauzer:]

And I think you have the margin progression you’ve seen actually is very good on the other segments if you look at your healthcare financial services, you know they're a little bit low from what I was expecting on a top line perspective you are actually look better onto the margin side, I guess that’s spending from the cost cutting emphasis underway right?

[Joe Morgan:]

Yeah and I would also add to that the market focus, the intensity that presidents have on driving profit in there businesses is part of that reward as well. There is a lot of understanding of the details around each of those businesses so that’s where you are starting to see that progress but I think you are very correct in your observation, we’re extremely close to being profitable in the quarter and few usual things dragged it back.

[Charlie Strauzer:]

And do you see anything getting in the way in kind of back half of the year of either emerging into our industrial turning to profitability as the next couple of quarters pan out?

[Bob Gannin:]

I think that’s absolutely the direction of number one we need to but we also see that turning there as well.

[Charlie Strauzer:]

Got it and then when we look at the cash flows for the year, you talked about being negative in the quarter in the first two quarters there for the year, but also when you look at the second fee, you expect to see that trend reverse. You expect to see potentially the full year being cash flow positive from a cash flow from operations perspective?

[Joe Morgan:]

I think that well first of all you’ve got the acquisition there and that you have to account for but we definitely see the second half being on a different trajectory in the first half, I think we started off the year as same we'd be roughly breakeven that was before acquisition so its going to be probably slightly negative.

[Charlie Strauzer:]

Okay got it and then let’s look at just kind of housekeeping and things like taxes and interest what are the expectations for the full year in both of those lines?

[Bob Gannin:]

I think on the inertest side, if you kind of look at the year-to-date there that pretty much follows what we described as the change in the credit agreement when you look at interest rates about doubled so assuming the cash that behaves as expected I think the year-to-date really kind of describes what’s happening with interest and taxes that’s probably more of a function of the level of profitability than anything else just because tax rate, kind of loud as we approach breakeven.

[Charlie Strauzer:]

And then also, success on the G&A, what are your expectations for G&A for the back half of the year?

[Bob Gannin:]

I have not really looked at that. Our capital spending as we've discussed is up from last year. So beyond that, I don’t have an outlook for it.

[Charlie Strauzer:]

You have roughly $6.2 million in Q2. Is that a decent number at least to use, kind of a base number?

[Bob Gannin:]

I think our number is pretty consistent. We got a little more capital expenditure going on year-to-date.

[Charlie Strauzer:]

And then, Joe, if you could talk a little bit about kind of the some of the areas that have been driving the growth. I know you’ve seen there somebody else has been lagging. If you like at financial services and healthcare, are you seeing any impact from some of the recent legislations like healthcare reform, financial regulations. Are you seeing any banks or healthcare companies saying, I want to kind of hold tight on re-ordering before I get a better sense of work kind of new documents I might need?

[Joe Morgan:]

I would say is that it’s interesting by being market focused in general regulation in the two categories you mentioned has people concerned because this, the magnitude of the change is I wouldn’t call it unprecedented but certainly in recent times, unprecedented which creates both opportunity and risk, kind of at the same time. If you look at the financial services business, particularly where we’re focused in insurance and in retail banking, insurance is actually pretty strong. Retail banking is a little bit concerning them is I'm sure you are aware there have been a number, higher percentage than last year of that, the middle market that has gone out of business. That really hasn’t affected us quite honestly because we don’t have a large position in the middle market. But it does with [Reg-E] and some other things in the financial services space with the banks losing revenue, their having to do things that would continue to pop up their profit which would be around costs and some other things. So with the growth for us though is to help them drive revenue, so that’s where you are seeing some advancement from our company around marketing solutions. So while the operational document tells you described might be going down. We are seeing some growth on the other side and our credibility because of what we’ve done in the operational side of the business is putting us in a pretty strong position there. So the financial services discussion is a bit of a two headed monster at least from our perspective. On the healthcare side what we see is again the regulation is there seems to be a slowing in investment in some cases. So for example if you look at our technology revenue one of the things that we did that was very strong strategically is we changed our delivery of our software solutions from being an event, meaning you buy it, it’s a one time delivery to balancing out the subscription so that it can be spread over time, which also kind of gives us more predictability, because we’ll have an annuity based on our technology revenue. So there are multiple things happening, but I would say overall the regulatory environment does create some concern. But I think we are getting I think on some level we are getting little bit of a benefit from that in terms of not eliminating some things that might have been eliminated previously. But I would also suggest that the consumption is probably a little bit down, specifically in financial. I hope I answered that question.

[Charlie Strauzer:]

I think actually Joe now that you kind of mentioned it potentially there is opportunity where you could actually see an increased need for documentation, especially as some of these rates kind of roll out from both sectors really, I mean, if you think about reform and the changes that are going on in healthcare reform that you would think there would probably be [hopefully] new documents that would be required for these hospitals and healthcare providers to have I mean is there an opportunity there to see an increased usage?

[Joe Morgan:]

I think there is definitely a potential, I mean, this whole transition to electronic, there is a need for a hybrid moment where you still in a paper environment bridging to an electronic environment and it’s not all or nothing in either category so I think we are in a pretty unique spot and if you sit back and look at our market focus too, we have a government focus which is state in federal a little heavier emphasis on the state and local side. But then we also have a healthcare business and we have a financial services business it’s connecting all of those dots is a pretty interesting opportunity for us. So we are monitoring that very closely, we are not going to declare anything quite yet but I think your thoughts are in the right place, we are seeing the potential for that too.

[Charlie Strauzer:]

Lastly if you can talk a little bit more about your future emphasis for additional acquisition looks like so as Fusion, what are the things would you like to kind of add to portfolio and kind of what’s your kind of near term versus longer term emphasis?

[Joe Morgan:]

Well, I think the I wont talk magnitude, I’ll just talk about kind of the types of things we are interested in, as we have become more market focused the insight that we have in terms of where our clients are interested in spending money obviously it’s going to drive how we advance the business. We can something's organically because of our technology base as well as our material science capability but there will be some things for example in healthcare where we look at applications or workflow solutions that help advance our position around patient identification in safety and advancing the document management lifecycle within health care, we are looking at opportunities there as we look at the industrial it is definitely more around in material science as is Fusion Graphics. Fusion Graphics is definitely more of an intellectual property investment versus a process investment and then in the other part of business around emerging and financial services, a little less developed at this point quite honestly in terms of where we would invest but I would tell you that probably as we think about advancing our position it's around the marketing solutions area but that may or may not be an acquisition that could be organic development because we have a lot of capabilities. So patient identification and safety advancing the document lifecycle and healthcare, material science and industrial and probably more around the marketing solutions area and the financial services and commercial.

[Charlie Strauzer:]

Great and just one last relative, the CapEx for the second half of the year, expectations there?

[Bob Gannin:]

Yeah I think we talked about that for the year I think we are still projecting in that $17 to $19 million range of that don’t forget about $6 million of that was actually pure capital lease, so on a cash basis for probably looking at the $11 to $30 million range.

[Operator:]

At this time I am showing no other questions (Operator Instructions).

[Joe Morgan:]

Okay Angie, it doesn’t appear that we are getting any additional questions. So let’s wrap it up today. So that concludes our call for today and we thank you for you participation and look forward to reviewing our third quarter results in October.

[Bob Gannin:]

Thank you.

[Operator:]

Thank you. That does conclude today’s conference. Thank you for you participation. You may now disconnect from the audio portion.