Spire Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good day, everyone, and welcome to Standard Register's Second 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 that Standard Register website at www.standardregister.com/investorcenter. I will now turn the conference over to Carol Merry. Please go ahead.

[Carol Merry:]

Thank you. Good morning, and welcome to the Standard Register 2013 Second Quarter Conference Call. Speakers for the call today are Joe Morgan, President and CEO and Bob Ginnan, Chief Financial Officer. Before we get started, I would like to remind you that today's presentation may contain forward-looking language and projections. These types of comments need to be taken into consideration with the Safe Harbor statement that can be found either in the earnings release that Standard Register issued this morning, on the webcast slides that accompany this presentation, by accessing the company website under Investor Center, or in the company's Securities and Exchange Commission filings. In addition, we will make use of financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP. It is management's belief that the use of these measures will assist our audience's understanding of our financial position. They are not meant to be used in isolation or as a substitute for GAAP, and a reconciliation between these measures and their GAAP counterparts can be found in the earnings release that was issued this morning. For today's presentation, Joe will provide a few opening comments that will be followed by Bob's review of the financials for the quarter and year-to-date. Joe will then discuss the company's strategy, direction and the other announcement that was made this morning. Following his comments, we'll open up the call for your questions. And now, I'll turn the call over to Joe for his opening comments.

[Joseph P. Morgan:]

Thank you, Carol. Good morning. This is a very exciting day for Standard Register and I'm looking forward to sharing more of the content with you. We published 2 releases -- news releases this morning. One, talking about our second quarter results and the other announcing the acquisition of WorkflowOne and the early renewal and increase in our credit facility. It's a very exciting time for us to contemplate the opportunities this will open up to the company. I'm particularly proud of the talent we're adding to our team through this acquisition and I want to welcome all of the WorkflowOne employees to Standard Register. First, I'll start with a review of the quarter and then I'll devote the remainder of our comments to the value this transaction contributes to our strategy. In the second quarter, we saw the continuation of trends and drivers that have been affecting our business both positively and negatively. Although the declines in clinical and administrative forms as well as transactional documents continue, we expect that rate of decline to decrease as we proceed through 2013. Those declines, to a degree, actually overshadow the progress being made in our market demand solutions. We've added new logos, that is new customers, in every growth solution category. During the quarter, we introduced new market-driven solutions such as brand audit consulting for healthcare organizations involved in the industry-wide consolidation trend. That trend is physician practices being acquired by acute care institutions. This complements our forms audit surface for hospitals that we put in place a while ago. Both services can lead to additional business as we help health care organize and optimize in this new landscape. We also introduced an online health care community, EngagingPatients.org, that aggregates news, information and thought leadership among professionals and patients, as well as advancing our leading role in health care communication. I think this is one of the greatest examples of how our expertise in health care is going to be leveraged to drive growth as we go forward. We upgraded our SMARTworks platform during the quarter, with more focus on the user experience and analytics, analytics being defined not only as measuring cost performance but also, now, impact of communications. We're also moving some of our new solutions in analytics, digital publishing and augmented reality closer to commercialization, which is having a very positive response in the market. Along with producing positive cash flow, the early renewal and expansion of our credit facility is a very significant achievement, 5 years, $125 million, which Bob will speak in more detail about. With more stability and financial flexibility from increased revenue from the acquisition and the credit line, we're in a much better position to manage our pension obligation and invest in market demand areas where we're seeing opportunities for continued growth. As I think you can tell, I'm very excited, there's a lot of great synergies that are going to come from this acquisition. And now, I'll turn it over to Bob for some details on the financial performance.

[Robert M. Ginnan:]

Thank you, Joe. Let's start with the operating statement. First of all, revenue, $136.8 million, down 11.8%, down 11% on the year. So a little bit different than the first quarter but basically, kind of right in line with where we've been for the year here. Operating gross margin came in at 28.5% versus last year at 30% and on year-to-date, we're at 29%. So given the revenue decline, now we're very pleased with the gross margin performance. SG&A, we continue to see the benefits of the actions we took last year, as SG&A came in at $35.9 million, down a little over $4 million from last year and on a year-to-date basis, $71.6 million versus $84 million. Leaving it to the non-GAAP operating profit of $3.1 million versus last year of $7 million, $9.3 million in the year versus $10.8 million last year. So when you look at the P&L, the costs are well under control. We just need to restore the top line and turn to growth there to have a good platform of cost basis here. At the segment level, Healthcare, down 12% versus 12.6% on a year-to-date basis as we continue to see the erosion in the clinical documents here that we've talked about many times in the past. Business Solutions, down 11.7%, a little bit of an uptick versus the first quarter there at 10.1%. Margin performance in both business remains good considering the volume decline, and on an operating profit basis, both businesses are at a profit level and you'll see Business Solutions, a little bit of an increase over the prior year, $3.8 million versus $3.3 million, and Healthcare, down $3.9 million versus $6.3 million as a result of the clinical document erosion there. On the balance sheet, just a couple of things to point out. You'll see that net working capital remains very strong and high. Our net debt decreased from the beginning -- both in the quarter and for the year-to-date, $41.4 million versus $42.6 million, as we continue to generate positive cash flow. You also see the pension liability going down at $252.7 million versus $239.4 million as we made contributions throughout the year. We are encouraged by the rise in long-term rates over the year and we anticipate if that holds up, that will be some positive news as we finish out the year there. Again, cash flow, positive trends. We are investing more this year than we did last year. On a year-to-date basis, $6.3 million versus $1.2 million last year. So we have ramped up the capital investments there. So, to summarize, positive cash flow, expenses are well under control, now we need to focus on the top line. So I'll talk a little bit about the credit facility and as Joe mentioned, we completed an amendment, an extension to our current facility. We added 5 years to our facility that was about to expire in March of 2014. Very strong facility here. We were able to actually increase our capacity to $125 million. If you recall, our current facility was at $100 million however, our borrowing capacity was a little under $80 million. So this actually represents about a 50% increase in our capacity. So we're very excited about that. And we think that will set us up for the future as we continue to invest and expand the business. In terms of the acquisition, we believe that we will improve our EBITDA in 2013. The combined companies, right now, on a combination basis, are in excess of $1 billion. It doubles our size, enhances our portfolio of all products and solutions, it doubles our customer base. We expect to net $40 million in annual savings from synergies once fully implemented and obviously, the increase debt capacity and the buying earnings improvement will provide financial stability and flexibility. So, again, to kind of wrap up the key investment highlights, our key operating ratios remain very strong. We're continuing to see the benefits in technology-enabled solutions, positive cash flow, long-term interest rates are headed in the right direction, finally. The cost-saving efforts are showing up in the cost and now, we get to turn to the benefits provided by the WorkflowOne acquisition. So with that, I'll turn it back to Joe.

[Joseph P. Morgan:]

Thank you, Bob. What I'd like to do now is spend the balance of my comments on the acquisition of Workflow and how we see that impacting the company. It's going to impact Standard Register -- the value of Standard Register on so many levels but I think of it, really, as an accelerator of our strategy. It's immediately accretive to the EBITDA of the company. It almost doubles our expected annual revenue to be, now at the $1 billion mark. Our portfolio is enhanced at the product and solution level. It increases our market position in areas such as retail, manufacturing and promotions, financial services and health care, and gives us a strong business on the wholesale printing side as we look at channels. It effectively doubles our customer base and provides cross-purchasing opportunities for our customers and cross-selling opportunities for our salesforce. I view this as being a very big motivator for our entire go-to-market effort, marketing, sales and our customer service organizations. It's entirely complimentary to our workflow of communications and analytics business premise that I've talked about previously. And as Bob noted, the synergies that we expect will improve our cost structure and make us more competitive with expanded capabilities. We expect that we will find more synergies and efficiencies as we implement the integration. I'm very excited about the talent, I mentioned that before. We have some people in our combined company that are going to be unleashed as a result of this acquisition. We're more competitive. Being more competitive with enhanced capability is going to position us very well with our largest customers. And it also should alleviate concerns about our ability to manage our pension obligation. Combined with the expanded credit facility, it also gives us the opportunity to continue to execute our strategy in a more accelerated way. This acquisition is going to help us in the marketplace in terms of positioning, it gives us a broader market access in the segments that we have the most expertise. It leads to being able to be in a stronger position where we've identified growth opportunities as we've outlined in our solution categories and we can more fully utilize our Center of Excellence strategy, a strategic concept. Our new digital printing and distribution center of excellence in Jeffersonville, Indiana, as an example, is now operational and that was planned actually with this integration or acquisition in mind. Over the past 2 years, we've been positioning our business for the future. We first needed to frankly assess our market position and capabilities, assess the state of the industry and how printing is evolving into communications and then structure the company for a market focus that incorporates deep industry experience and innovations to help customers meet regulatory requirements and drive their organizations forward. The next step was to invest, to drive our business forward and make us more competitive in an industry that is both evolving and consolidating. Neither Standard Register nor WorkflowOne were in a position to be able to invest as much as either company would like. This combination of our business, as this is, puts us in a much better position for long-term success. And as a result, our strategic focus, as we integrate the companies, is to ensure that we gain the greatest return from our combined print assets and to accelerate cross-selling of solutions with our customers that are, today, not served by all of our capabilities. For example, in Healthcare Software and Services, promotional products and via multiple communication channels, and another example is our position in Mexico. We have a labeling facility with distribution there, but WorkflowOne does not. However they have customers that can access that and will be able to help us continue to grow that tremendously successful investment. This is not a speculative move under any condition. It's very deliberate as an acquisition that aligns with our strategy and we're confident that we can advance the combined business and be a bigger, stronger and more sustainable player in our industry. We're good at the integration part because we know the business and we anticipate rapid process of integration with no disruptions to our 12,000 customers. That's another one of the benefits of acquiring a company in our industry with a similar footprint and actually, in the same community that our headquarters is located. We'll be reporting on a consolidated company starting next quarter -- as a consolidated company starting next quarter. This is a really exciting time for our company. The realities of our industry are already defined and this acquisition puts us in a more competitive position and provides the platform for the next stage of growth. Our companies are engaged. We're reaching out to all of our customers, that process has already begun and we're educating them and engaging with them about the benefits of this important move by our company. We're also reaching out to all of our partners and suppliers, of which, there are also opportunities to grow their businesses in conjunction with this announcement. Our management team is energized. We're all very confident of the value creation from these opportunities. And I'm personally looking forward to being engaged with our customers to help them understand how this is going to alleviate concerns that they may have had from some of the challenges that have faced our company. And now, I'm excited to see us take full advantage of the tremendous capabilities which are expertise, assets and energy of the organizations. So from a highlight standpoint, from an investment highlight perspective, just let me summarize. The key ratios of our financial health continue to be very strong, Bob pointed that out. Technology-enabled solutions continue to drive sales. We have a combined capability between our companies instead of doing things twice, we get to do it once by leveraging unbelievable expertise in technology, software and services. We have positive cash flow, the rise in long-term interest rates, has positive impact on pension obligations as things progress this year. Our cost savings efforts continue to contribute positively and the WorkflowOne acquisition is an accelerator of our investments for growth. Now, I'd be happy to take any questions as would Bob.

[Operator:]

[Operator Instructions] Your first question comes from the line of Charlie Strauzer with CJS Securities.

[Charles Strauzer:]

First of all, congratulations to you and the Workflow folks for finally getting this together. It's been a long time coming, I'm sure and congrats on getting it done. If we could get -- Joe, maybe we can get a little more detail on Workflow as I'm sure there's some public filings that we're going to see soon, that gives you a little bit more financials here. Give us some sense of what the sales and EBITDA at Workflow for the trailing 12 months, if you have that.

[Robert M. Ginnan:]

Yes, we can -- I think we can give you an idea. We will be filing the pro forma here in the next couple of months as we get through that process but basically they are about $460 million of revenue and about $35 million of EBITDA on a -- that's where they exited last year.

[Charles Strauzer:]

That's for 2012, got it. Okay. And can you give us a sense, too, of the footprint of Workflow versus Register in terms of number of plants and potential geographic overlap.

[Joseph P. Morgan:]

Yes. I mean, I won't focus on the exact number but I will tell you that the geographic overlap is very, very high. So we have a really good opportunity here to optimize the network pretty quickly, as well as leverage some of the investments that we've made like Jeffersonville. So, I think, that's going to be a very rapid process for us as we evaluate where best to maintain our facilities and operations but it's very similar, actually, to what we have. There are some ZIP codes that are a little different but general geographies are very similar.

[Charles Strauzer:]

And also a comparison of the FTEs between the 2 companies?

[Joseph P. Morgan:]

We -- the combined is about 4,000. We have about 2,100, they have about approximately 1,900.

[Charles Strauzer:]

Got it. And then also, do they have any pension liability that you're going to be assuming?

[Robert M. Ginnan:]

No.

[Charles Strauzer:]

They don't, okay. And is there any effect on your pension with the combination or any triggers out of the changes in the Pension Act, anything like that?

[Robert M. Ginnan:]

No.

[Charles Strauzer:]

And then, kind of CapEx needs kind of going forward, just a general sense there of what you're thinking for the combined entity?

[Robert M. Ginnan:]

I think that's one of the exciting things here is that we both have a fair amount of required investment, and now we get to do it once. So I see it as, obviously, more than what we've both been spending over the last few years because it's been honestly somewhat minimal but it's not like it's dramatic either. And I think we'll be able to leverage those investments quite substantially as we go forward.

[Charles Strauzer:]

Got it. And, Joe, when you look at the combined entity, what does Workflow bring to the table that Standard Register didn't have? I mean, obviously, there's some ephemeral overlap in the forms and labels side, but on the service side, et cetera, what are some of the areas there that they bring to the table that you're most excited about?

[Joseph P. Morgan:]

Well, they have a promotional products business that -- we have a solution that we bring to market that pales in comparison to what they have. I'm excited about that because that's a very nice cross-selling opportunity for the company. The customer base is, quite honestly, the thing that excites me the most because we really don't co-habitate all that much and so, we get to be additive to each other and then spend our time and energy competing, not against each other but against other people and going and acquiring more business. So I'm very excited about the capacity we get in selling, that's really important. I also know a lot about their technical capabilities, having worked with some of the folks that are over there. And I know that 1 plus 1 is -- this is 1 of those real situations where 1 plus 1 equals a far better number than 2, and I'm so very excited about the pace of acceleration that we can bring on our customer-facing technology. That's really big. I've already interacted with some of the talent there and the things that they do in the kitting world and in the retail space are things that we can really take advantage of. So -- and that's at the level we are right now. And I can only imagine as we get into this a little deeper, how much more we're going to find. It's very exciting -- and the marketing organization that both companies have. I think that's going to be one of the things that will be unleashed here that will be very, very powerful in positioning the new products and solutions.

[Charles Strauzer:]

And then you talked about the $40 million of cost savings. Is that something more of kind of the initial dive when you kind of combine your overlap of corporate expenses and things like that? Or is this what you think is kind of the majority of the synergies?

[Robert M. Ginnan:]

I think, obviously, what the former said this is looking at the overlapping opportunity however, as Joe has pointed out, the market opportunities are something else. And that's where we have to focus more of our effort.

[Charles Strauzer:]

Got it. And what general time frame do you expect to realize the $40 million?

[Robert M. Ginnan:]

Some will start immediately and it will probably take 24 to 36 months to recognize the full run rate but, obviously, the faster the better.

[Charles Strauzer:]

Got it. And then when do you expect to close the transaction?

[Joseph P. Morgan:]

It's closed.

[Operator:]

Your next question comes from the line of Joe Perdue with Wells Fargo Advisors.

[Joseph Perdue:]

I was wondering, as far as the pension for WorkflowOne, are they dependent on interest rates like half of your pension is, or is that a different structure?

[Robert M. Ginnan:]

There is no pension liability there.

[Joseph Perdue:]

Now, is there any kind of pension surplus there or is their pension just -- is there just no picture of their pension?

[Robert M. Ginnan:]

There's no pension, yes.

[Joseph Perdue:]

Oh, there's no pension. Okay. I thought there was maybe a gain that could offset some of your liability.

[Robert M. Ginnan:]

Unfortunately, no.

[Joseph Perdue:]

Okay. All right. And then there's no -- I guess, we've talked about this for quite a while that without your liability of your pension, Standard Register would be in this wildly better shape. That really seemed to be the downturn of Standard Register, isn't that correct?

[Robert M. Ginnan:]

The pension liability is from, my perspective, from a balance sheet valuation and cash flow perspective, the #1 issue.

[Joseph Perdue:]

Yes, I think it was the #1 issue then led to the dividend cut and everything else. But this is certainly very pleasing. So, I guess, that's basically it. We'll wait to use that $35 million when Charlie asked if EBITDA for WorkflowOne for 2012.

[Robert M. Ginnan:]

Yes.

[Joseph Perdue:]

All right well, I guess, when it's all put together, this is a pretty exciting picture for a company with 5.92 million shares outstanding.

[Operator:]

[Operator Instructions] Your next question comes from the line of William Martin with Raging Capital.

[William Charles Martin:]

Could you just articulate how the warrants work?

[Robert M. Ginnan:]

Yes. Do you want me to...

[Joseph P. Morgan:]

Yes.

[William Charles Martin:]

Or how many shares underlying the warrants there are or...

[Robert M. Ginnan:]

Well, when it's all said and done, it will be about 30% of the equity. So when the warrants are ultimately exercised upon shareholder approval, which will occur in the next 90 days or so, and then those will be converted into shares and it will result in about 30% of the total shares.

[William Charles Martin:]

Do you have an estimated cost of the debt you're assuming?

[Robert M. Ginnan:]

In terms of interest rates?

[William Charles Martin:]

Yes.

[Robert M. Ginnan:]

We will have that. That is part of the final documents that will be published with the 8-K but if you could just maybe stay tuned on that here and we'll get that out shortly.

[William Charles Martin:]

Got it. And then does this transaction trigger any change in control issues associated with the NOLs?

[Robert M. Ginnan:]

No.

[William Charles Martin:]

And then just final question, I know the family had kind of special voting rights and shares associated with Standard Register. How does the new warrants -- how does that impact things?

[Robert M. Ginnan:]

Just in terms of dilution.

[William Charles Martin:]

Just dilution?

[Robert M. Ginnan:]

But not in terms of the special voting rights on the Class A shares still are in effect, and the warrants are not for Class A shares.

[Operator:]

At this time, there are no further questions. I would now like to turn the call over to Carol Merry for closing remarks.

[Carol Merry:]

Thank you very much for joining us today, and we look forward to talking to you next quarter. If you have any questions in the meantime, please let us know. Thank you. This concludes our call.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect.