Spire Inc.
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good morning, everyone, and welcome to Standard Register's 2014 Third Quarter Results Conference Call. Today's call is being recorded. As a reminder, the presentation slides for today's conference are available by accessing the Investor Relations section of the Standard Register website at www.standardregister.com/investorcenter. I will now turn the call over to Carol Merry. Carol, please go ahead.

[Carol Merry:]

Thank you, Brent. Good morning, and welcome to Standard Register's Third Quarter 2014 Conference Call. Earlier this morning, Standard Register published third quarter results in a news release that's available at the company's website. During our conference call, President and CEO, Joe Morgan; and Executive Vice President and CFO, Bob Ginnan will discuss the company's performance and results. Before we get underway, 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 statements that can be found in the earnings release Standard Register issued this morning, on the webcast slides that accompany this presentation by accessing the company website under the Investor Center or in the company's Securities and Exchange Commission filings. In addition, speakers may 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 the audience of 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. I also direct your attention to the Safe Harbor and the non-GAAP reconciliation in Slides 2 and 3. Following Joe and Bob's comments, we will open the call up for your questions. And now I'll turn the call over to Joe for his opening comments.

[Joseph P. Morgan:]

Thanks, Carol. Good morning, everyone, and thank you for joining us today. Our third quarter results reflect our progress as we transform the company and integrate the workflow on acquisition that was made a little over a year ago. Gross margin improved over last year's quarter, remained steady with a narrow improvement over the second quarter of this year, primarily as a result of the synergies from the acquisition. However, we have optimized certain key processes within many of the Centers of Excellence that we've talked about in the past, and that's a contributor as well. Cost savings realized from the integration also contributed to an increase in adjusted EBITDA over the prior year. Both of these metrics are moving in the right direction. Sales of our growth solutions continues to improve although not enough to offset declines in demand for traditional printed products. We had -- we did cut in half the rate of decline versus the first quarter from 10% to 5% and expect that trend to continue and perhaps bottom out in key parts of our business in 2015. We've integrated our customer base across multiple industries, particularly manufacturing, health care, financial services and retail, those are our key 4, and our packaging, our services and solutions to target those industries in particular. We're segmenting our business very precisely, so that we can take full advantage of the market knowledge, which is being well received in the market almost on a daily basis. We're also selling our entire portfolio into more of our large customer base. We've talked about this before. Our expansion opportunity is substantial, and that's a big concentration of the business. I often say, we don't need a lot more customers. We have a broad customer base after the acquisition, and we're leveraging that significantly. To give evidence of that, iMedConsent, our health care automation and form consent solution, our communications enabled by our SMARTworks platform and promotional marketing are perhaps the best examples to date of how we've been able to expand our current base of business into new areas at existing customers. But those are examples, not the only circumstance. Both our business units posted increases in operating profit for the third quarter from the addition of WorkflowOne; the cost savings that I referenced, which are synergistic but also improving the operations of the company; and increase sales to partially offset the declines in traditional print. The portfolio is starting to shift. And with that shift comes an opportunity for higher value, which we're very excited about. And along with many other companies, we benefited from the pension smoothing provisions in the Transportation Funding Act of 2014, which passed in the third quarter. Bob's going to share a little bit more detail about the $33 million cash savings that we expect as a result of this lowered contribution rates in the years of '14, '15 and '16. Those are some of the very positive things that we take away from the third quarter performance, but we also have transitional issues that we need to address in the business. Something of the magnitude that we've been doing can be at times disruptive both internally and with the customers. But I do believe with confidence, as we exit 2014, we're in a much stronger position as a company to execute the plan that we have before us in the coming, coming quarters. The integration is requiring more cash than we originally projected in this time frame. But over the course of the 2-year period, we expected it will be consistent with what we'd originally projected. Our annual savings will be at least $40 million, as we had said previously. Our Jeffersonville distribution Center of Excellence is -- has taken a little longer to contribute at the level we wanted, as has some of our high-speed inkjet equipment in the 2 locations we've talked about before. However, the pace is picking up, and the pipeline attached to those 2 opportunities is significant. We have a very important partner that we work closely with on the Jeffersonville opportunity, and we hope to be able to share more details about that in the coming, coming months. There are growing pains related to transforming our business, but we have plans and resources in place to address the challenges that are before us. But we have to be honest about the dynamics of the marketplace as well as the significant change that's going on within the company. We're confident -- we're very confident that the investments we've made in these and other parts of our business will create long-term value. And as I noticed -- as I noted, we're seeing results both in sales and a significantly stronger pipeline attached to the most important investments we've made around Centers of Excellence. With that, I'm going to turn this over to Bob and then I'll have some final comments, where I'll get into a little bit more depth about some of the market work we're doing at the business unit level. And with that, I'll turn it over to Bob.

[Robert M. Ginnan:]

Thanks, Joe. Few comments before we get started on the financials. First of all, remind everyone that this is really the first quarter that you can start to see the full impact of the acquisition results as 2 of the 3 months from the third quarter also in the prior period. As Joe mentioned, we are starting to see the benefits of the acquisition roll through here. You'll see increased EBITDA. We have achieved $24 million year-to-date towards that $40 million goal. And you can also see that margins have improved not only over last year, but also in the 3 consecutive quarters of this year. Both businesses are now at operating income positive. We did get benefit at the pension. I'll talk about that at the end here. And also, we did receive approval from the NYSE in the quarter for our compliance plan. Turning to the P&L. $219.4 million, 10% up on a reported basis. However, on a pro forma basis, a 5.3% decline, which represented a dramatic improvement from the beginning of the year there. So the best performance of the year. Margin, 28.3% versus 26.9%; SG&A, 55% versus 54% in the prior year. However, when you throw in that extra month on a pro forma basis, that's about a $10 million improvement in SG&A, which translates into an operating profit improvement from a loss last year to $6.6 million operating profit this year. You'll see on the adjusted EBITDA, $15.5 million this year versus $8.4 million last year, so we can start to see the improvement there on an EBITDA basis. Business units

[Joseph P. Morgan:]

Thanks, Bob. I'm going to spend the rest of my time before we get to the questions to give a little more color than I might normally do on what we're focusing on and where we're seeing our 2 businesses being successful. Before I do that, just to step back for a second, as we've gone through this journey over the last few years, we've started talking about documents transitioning to a market focus; then we started talking about Legacy products, which documents are a part of; and then our Core, which we viewed as being growth. And then we also talked about a supply-based company, which was a product-oriented organization moving toward demand-based company, where we would provide value-based solutions in key markets. And with that framework in mind, what I'm going to do is walk through where we see ourselves today in terms of the positioning of the company so that we can take full advantage of the learnings over this transformational period of the company. That is a backdrop. And the conversation that I'm going to have now will be the way we'll frame our discussion as we go forward. So let's first talk about Business Solutions. Business Solutions has customers in a variety of different markets, with the largest concentrations being in financial services, retail banking and insurance, manufacturing and retail. The nature of the business -- the nature of business-to-consumer and business-to-business marketing is shifting from calendar-driven campaigns to more interactive trigger-based communication processes. It's becoming very dynamic, and there are a variety of different roles for the different communication mechanisms. Our value proposition is that we are an integrated communications and marketing services provider that helps companies organize their communication initiatives and puts the customer at the center of their approach, with the total consumer experience being the driver of success. We play a key role in helping our customers manage their online and offline communication processes, as they are transitioned to this approach. This is important because we are demonstrating in this transition that we are both physical product, print and also electronic and digital. We help our customers connect directly to their consumers through their own sales channels, including the retail environment. Our customers are increasingly asking us to -- if you think about it from a product standpoint, historically, we would drop ship a product on behalf of our customers to their end user. Today, it's a digital drop ship. It's the same concept. It's not a physical product in every case. It's content. So we're, in a sense, drop shipping content directly to the consumer with the hope of affecting their buying decisions. We are seeing an embracing market convergence of direct marketing, email marketing and customer communication services with the integration of color and marketing content on statements for example. And that's why we invested in our high-speed inkjet printers and also the marketing and logistics operation in Jeffersonville as high value-added but also necessary solutions, to drive and support our customers' expectations in the market that's evolving. Today, we have over 100 customers who are sourcing direct-marketing services from us, for both direct mail and email marketing. Customers' eyes are being opened to the extra value we offer with our market-specific knowledge and integrated communication expertise. We first learned what the market needed and then we built the communications expertise and it's become a really powerful combination going forward in making the portfolio decisions that we have far simpler. The SMARTworks platform is the standard in integrating and delivering content. We're consolidating WorkflowOne customers onto that system, and we're providing more opportunities for cross-selling and upgrading services. That platform is not static. There will be new releases that will happen that will be substantive in the 2015 time frame that will give evidence of the story that I've just laid out. The key insight we've gained from our customers has allowed us to build a technology that's far more impactful as we look into integrated communications. Very exciting. We have a number of partners that complement our solutions and services. We can't do it all ourselves. We've talked about that. As we become more of a technology company, we have to be able to leverage the ecosystem of technology that exists. We have a leading analytics partner for consumer data, segmentation and strategy services to help our customers measure and enhance their campaigns. I've often talked about workflow content and the analytics. The measurements of the communication has become extremely valuable, and that's a key part of our strategy. We continue to grow our partnerships in the areas of logistics, data and CRM to enhance the velocity of our go-to-market effort. Customers are choosing us for our ability to address their current printing needs, which is the credibility that we bring to the table as well as our technology and distribution infrastructure. In the quarter, a large financial services sale completed that will leverage the SMARTworks technology platform to streamline design collaboration, project management, print sourcing and distribution, and we will be supporting the sales enablement of more than 90,000 sales associates across the United States as well as the outsourcing of print shops and on-demand centers throughout their organization. What will also happen as we go through this is we will be integral to the communication infrastructure of their business, which is really very exciting. I was personally involved in that one, pretty great opportunity. Although product marketing and decoration is reported through Business Solutions, labels are sold through both business units. We're very happy with the growth we're seeing in Mexico. We provide labels to U.S.-based manufacturers with operations in Mexico and have expanded storage and distribution of promotional products as an extension of our capability. We're also starting to sell to customers that just are in Mexico, not customers from the U.S. that have put facilities there. The pipeline in Mexico is very strong, and we're investing to improve capacity and keep pace with new opportunities. I envision us being able to expand into new segments as we go forward. We're also continuing to invest in our innovative material sign solutions that are now in the final stages of development and approval by some very key customers. We're winning and on-boarding new business throughout Business Solutions, but the revenue realized is still not outpacing the decline in demand for our traditional printed products. However, we see that the linkage between our past products and the growing base of solutions provides both a key retention value and a catalyst for growth. It's really the credibility that we have going forward. I'm going to transition now from Business Solutions into the Healthcare strategy. And the Healthcare strategy is to leverage our world-class customer base to create a market-focused software and related services business that's backed by print, promotional marketing and other transactional communication solutions. We've often noted that the health care industry is transitioning to electronic medical forms. It's probably our greatest example of the transition that's taking place in the culture of communication. It formerly was a paper-based regulatory environment and, enrollment materials are being moved to email and web-accessible versions. The industry is moving to a hybrid environment, consisting of paper-based forms and labels and technically -- technology-enhanced patient engagement. We're in the center of that. In fact, now we're driving it with our strategy. The impact to our Healthcare business has been significant, but we've focused on transforming to thrive in the current and future landscape. In September, discussions with our health care advisory council about the future of health care communication validated our strategy to adapt workflow and content to mobile health and customer communication management technology in order to meet the changing communication needs of today's health care consumer, which is interesting because the health care consumer turns out to be the same person that we're communicating with through our Business Solutions customers. It just turns out that sometimes they are patient and sometimes they are consumer of financial products or maybe a manufactures HVAC unit or something like that. So the behaviors of the consumer are in the center of our communication strategy. And it's been a really, really interesting evolution for the business. We're executing the strategy on a number of fronts. We're helping our customers determine the content to be managed and the best way to deliver it. We are leveraging our enterprise Document Management technology, which is our core traditional capability to address hospitals' needs to reduce their expenses by outsourcing things like print centers, again, connect the dots to my previous discussion on the big win we had in financial services. Same concept. It's an area of growth in print management, an opportunity for us to help customers increase their margins, improve operations, manage their costs and focus on their business. We signed 2 large new customer contracts for these services in the third quarter, with a pipeline that is similar going forward. We not only help our customers in this area focus on their core by shutting down these print centers, but also offer them a better way to manage the remaining print that exists within their business. This consultative approach is our differentiator. For example, in the third quarter, we signed a new customer with 11,000 critical documents to manage. We help them reduce the number by 30% by managing -- by migrating those documents to 1 of 2 places. One, that they didn't need them anymore; or the other, to a print-on-demand environment, leveraging the SMARTworks platform. Another tangent market for us is managed care. In this market, for print center management, the good example for us is CareSource, which we announced in the third quarter, supports this important emphasis for us. That's a great partner, customer, and we can see tremendous growth opportunity within that segment. During the quarter, we achieved 2 important firsts. We made the first sale of our SMARTworks effective response solution, which we introduced in March. This cloud-based and mobile-enabled program helps health care providers meet requirements for post-encounter follow-up via web, mobile and social technologies. Our iMedConsent and form consent solution has been driving our patient information management growth since we acquired the technology from Dialog Medical in 2011. In the third quarter, we continued to sign new business and extend existing contracts. But the second first was we made our first sale of iMedConsent to a pediatric hospital, which has strategic value, in addition to the revenue expected. We will be able to leverage our pediatric clinical content library now to the large market of children's hospital. Again, segmenting our business, as I started the conversation. It's not just about hospitals. It's about hospitals and how they specialize. And while we have a lot of acute care hospital relationships, this focus in the children's hospital area is a great opportunity for our business going forward. One last item that is having a significant impact on our Healthcare business unit performance is that we are successfully moving our model away from onetime licenses with software and are growing our subscription-based recurring revenue, which will give a higher level of predictability in the performance of that business going forward. Financial performance in Healthcare continues to be challenged by market forces related to health care reform and the shift to digital technologies, which actually happened faster, in some cases, in '14 than we had previously anticipated. However, we are adjusting our business accordingly. We are focusing on executing on the technology strategy that has proven to be successful, introducing new products and seeing sales from them and identifying niches in the market, where we can find growth. There will be new software introduced in the not-too-distant future that will continue to advance that position. Pace is an important metric for us as we transition our entire company and integrate the WorkflowOne acquisition. The integration, although moving smoothly, can be disruptive and is disruptive at times as we move to common systems for more uniform and consistent processes, improved quality, better analysis of data and balancing work amongst our manufacturing facilities. Our challenge has been to manage the time frame and expense of the integration, while maintaining safety for our people and the quality standards that our customers demand of us. Going into the final year of the integration, we need to move more quickly and efficiently to keep our costs in line as the dynamics of the market change. And equally importantly, we want to take full advantage of the new learnings that we've had in the market. And this integration, the savings that come from that will help fuel some of the investments needed for us to take full advantage of the growth opportunities. Customer service is one key area where we're focusing resources and attention. Every employee in our company is responsible for the customer experience. We call that the 360 view. We must make sure that the customer experience, specific to each of our solutions, is best in class. Multiple work streams are underway to bring the 2 organizations together, while at the same time, reconfiguring the customer service model so that each solution can delivered in an optimum way. We're competing in an industry in transition, and we're integrating a large scale acquisition while transforming our business. There's no escaping the fact, therefore, that this activity stretches our resources. It relies on our partners, both under the business and in front of the business, to work very closely with us. And we can't afford at this time to be complacent in any of those areas. And I have to say, as CEO of the company, the resiliency and focus of our employees is what makes it different. It's exciting for us as a company to see this starting to really come together in the future, looking brighter and brighter each day. Our focus must be now on the strategic priorities for the year, and this will not change as we go into next year. First, it's sell the entire portfolio into the large customer base that we have; second, drive the integration to produce positive results; and thirdly, create an even more efficient operation so that we can make strategic -- more strategic investments that will produce sustainable growth for our company. Speed and execution are critical so that we can realize the gains from these priorities. We continue to invest in areas that will produce long-term revenue growth and profitability with equal shareholder value. It's also -- investments are both in people and in capabilities. We will be gratified when we're able to report enhanced overall results, but we see a path and we're not satisfied with where we now stand. We are making progress quarter-by-quarter. We're increasing sales of our growth solutions and educating our customers on the value we bring beyond what we've traditionally done in the printing space. What we hear our customers saying is, "I didn't know you could do that but we're glad that you do because we respect Standard Register for all that you've done in the execution of our critical capabilities on the operational side in the past. And we know that we need that same attitude, behavior and constant execution as we go forward into the marketing space, as we touch our customers." And it invariably leads to much richer relationships and dual benefits. And we no longer have to train our sales force to talk to the C level because we're now at the C level talking about the critical strategic things that our customers want for their business. It's a process. And while we're always working on increasing the pace of transformation, we are pleased that we're seeing the kind of progress that we are. There's a lot of work to be done going forward. The path is starting to really evolve in a much more clear way, and the portfolio is being proven in the market to be one that has tremendous growth potential. And with the focus that I've mentioned in terms of our priorities, that's how we will execute. Bob and I look forward to reporting more progress to you in the subsequent quarters. And with that, I'll be happy to take any questions that you might have.

[Operator:]

[Operator Instructions] And your first question comes from the line of Gary Hu with Silver Point Capital.

[Gary Hu:]

Just at the beginning, I think I heard you guys say you've achieved $24 million of the $40 million in sort of cost savings that you'd expect. So should we think about that you're sort of -- you're achieving that on a run rate basis? So if you had it all right now, we can think of EBITDA closer to sort of that $19.5 million? And then if that's the case, should we think about the business as -- when it gets to the point where you want, it's kind of a 9% -- 8.5%, 9% EBITDA margin-type business overall?

[Robert M. Ginnan:]

Well, I think, Gary, that first of all, the $24 million is what we achieved in the year. So your concept that it's ramping is correct, and that we've actually achieved that. And so that if you took a point in time now versus January, yes, the run rate would be higher. In terms of the future percentages and where we're going, we don't talk about that in terms of guidance. But the real challenge here becomes then as we start to close the gap on the revenue decline on top of it, those 2 lines start to meet in terms of getting that gap closed and then having the savings all in place, and then we look forward to having improved results there.

[Gary Hu:]

I didn't follow that. Could -- so you're saying you need to close the gap on the revenue decline, which did come down, right? It was sort of closer to...

[Robert M. Ginnan:]

Yes, it's improving. Yes.

[Gary Hu:]

Okay. But it sounds like you see a point in time when that will -- would you see a point in time when revenue will grow?

[Robert M. Ginnan:]

We absolutely see a point when that will happen.

[Gary Hu:]

Okay. Is that sort of a 2015-type event? Or is that later than '15?

[Robert M. Ginnan:]

In terms of revenue forecasting, we don't give guidance on that, so I'm not going to address when, but we absolutely see the path.

[Operator:]

[Operator Instructions] We have no further questions in the queue at this time.

[Carol Merry:]

All right, then we thank, everyone, for joining us today, and we look forward to speaking with you again next quarter. If you have any questions in the meantime, please don't hesitate to contact us. This will conclude our call.

[Operator:]

Thank you and, again, this concludes today's conference call. You may now disconnect.