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Executives

Joseph P. Morgan Jr. - President, Chief Executive Officer, Director

Robert J. Cestelli – Investor Relations

Craig J. Brown – Chief Financial Officer

Analysts

Jamie Clement - Sidoti

Charles Strauzer - CJS Securities

Robert Nicholson - Pine Cobble Capital LLC

Kevin Sonich - R.K. Capital Management

The Standard Register Company (SR) Q4 2008 Earnings Call February 20, 2009 11:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to The Standard Register’s Fourth Quarter and Full year 2008 Conference Call. (Operator Instructions) 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 Bob Cestelli, Vice President of Investor Relations. Please go ahead.

Bob Cestelli

Good morning and welcome to our Fourth Quarter and Full Year 2008 Earnings Conference Call. Joining me are Joe Morgan, President and Chief Executive Officer and Craig Brown, Chief Financial Officer. Please let me remind you that this conference call contains forward-looking statements including language concerning future projections. These projections should be considered in conjunction with the Safe Harbor Statement contained in our earnings news release as well as the Safe Harbor Statement that can be found by accessing the home page of the Investor Center on the company’s website.

Joe has a few opening comments regarding the quarter and the year, followed by a review of some key issues for the company. This will be followed by Craig’s review of our financials. We will then address your questions.

Now let me turn the call over to Joe.

Joe Morgan

Good morning and thank you for joining us today. I have a few things to share with you in terms of the structure of what I am going to say. I will make a brief comment, as Bob said, about ’08; I am going to talk briefly about the strategy focus and update on activities that we’ve been driving here in the company and then thirdly talk about some very specific things that are referenced in our earnings release that came out this morning regarding some board actions that took place.

In regards to 2008 financials, in Q4 we began the process of our strategic transformation for the company and we’re pretty satisfied with the progress we’ve made around cost and alignment within the organization. You can see that our net profit versus 2007 in the same period was positive and I would say, as we approach this challenging economic time, we really held our own. We did a lot of things differently in the company, not just cost cutting, but managing a transition of our business from a very product focused organization to a more market focused organization. We began that process and executed quite well and the actions that we took helped us take more of a preemptive approach to the business.

As we look at the total year, we’re not satisfied with the revenue situation. In fact that is our central focus now that we have changed our strategic focus to more market orientation. It was down 8.6%, but you can see the cost management activities that started in ’07 and continued through ’08 served us well. We had a positive net profit of $6.8 million versus a loss of $7.6 million in the prior year. Our cash flow remains strong at approximately $61 million. That is an emphasis of our organization. Our leadership team focuses very much on cash management and that theme will flow through the next few comments that I make.

We believe as we left ’08 and now into the, probably, mid-point of the first quarter of ’09 our cost management approach and focus on cash is having the desired impact on the company.

So, as we talk about strategy, when I first spoke to you I was made Chief Operating Officer of the company back in April of ’08 and shortly there after established a strategic framework for the company. The premise of that strategic work was that we have vertical markets that we have tremendous expertise in that we’ve generated over the years and that we have knowledge about very specific solutions that support those markets. We also have an insight in terms of the overall industry. When we bring those three elements together we felt confident that by focusing on the vertical markets and the solutions that support those we would ultimately lead to growth in revenue and earnings.

That was the premise that we went into our strategic planning process with and we came out of that with three business units that we focused on. One would healthcare, one is industrial products, and the third is our commercial business which is dominated by financial, but has many other customers that we do business with in various smaller market segments.

We put a plan together, which we called the five points of change, which ranged from an organizational transformation. We changed our go to market strategy again, lining up underneath the vertical markets. A very specific and aggressive cost reduction plan, which we’re proud to say, the things that we put into our cost reduction plan, which we had announced last year of approximately $30 million, those things are moving forward and, we feel, on track as planned.

We put in place a CapEx, capital expenditure, governance process where we are really managing our cash expenditure very tightly in this very challenging time. But, as importantly, to be prepared as we go through our strategy process that we are going to identify areas that will require a more precise investment and we want to be in a position to do that, put flexibility into our model.

Then finally, around metrics and measurement to be in a place where we’re far more predictive to see how things are changing in our business so that we can not be in a reactive mode, but actually be proactive in how we address those changing activities or actions in our markets.

We put a plan together and we’re in the execution mode. Honestly, we had planned to complete this transformation by the end of the first quarter and we’re actually pretty much done with that transformation at this point. Our measurement systems are in place. Our organization is in place. The new model, our go to market transformation, is in place. And, as I mentioned, the cost reduction activities that we had taken in ’09 have not completely been achieved because, of course, they take place through out the year, but they are on track and we’re moving.

When we take into consideration all the hard work that our company’s done over the last few quarters around strategy, we look at the economic condition and then some unique conditions of our business. We’ve had several board discussions to take that into consideration and yesterday we had our board meeting. We talked about the condition of the business, the condition of the economy, and made some decisions that I think will be more clearly understood as Craig goes through his part of the presentation here.

The first thing we discussed is we are in fact embarking on a new strategic focus for the company, but the good news is that we’re not changing to a completely different direction. What we’re doing is aggregating our expertise and capabilities in a more focused way that we believe, once done, will yield, as I said, a higher potential for growth revenue and the related earnings.

Our cost management actions are serving us well, but we must have prudent cost management at this time. We have a pension plan obligation that we face. We have potential new strategic investments that will come from our strategic work and the changes that we’re making. We also have this very uncertain economic time. When we take all of those things into consideration, cash preservation is a key priority for our organization and our capital expenditure process, which I mentioned around governance, is another contributor there.

After we reviewed all of these inputs to the process, our board met yesterday and stated their intent that for the second quarter dividend payment we would reduce the payment level from $0.23 to $0.05 and every quarter there after the board will evaluate the performance conditions of the company and the economy according to normal practices and make decisions as to what the level of dividend will be paid.

We’re excited about the decisions we’ve made. We’ve got tremendous alignment in the company from the board through the operations of the organization. There is a challenging economic environment, but we feel as though we’ve been preemptive in some of the decisions we’ve made that have put us in a position to potentially take advantage of that situation.

Before I turn it over to Craig, what I would like to do is thank him for his contribution to the company. He has, of course, announced his retirement, which will be next Friday will be his last day with our organization after a 33 year career and I can say that the contributions that he has made are almost impossible to summarize in short words. I can tell you that the dedication to the company, his guidance in good and bad times has been stellar. His reference point for many of the people that work in the company has always been there, because he has had a steady hand and a passion for our organization and a true knowledge of our customer and what is required in our industry for success. On a personal level, I have come to work with Craig now for eight years and I’ve really learned a tremendous amount and it has helped guide me in my new role as CEO of the company.

With that, I would like to turn it over to Craig and he will give a more detailed explanation of our financials.

Craig Brown

Thank you, Joe. Thank you very much. That means a lot. I appreciate your comments.

This morning I will walk through the P&L and also comment on cash flow and a few balance sheet items. I also want to introduce Bob Ginnan who will be the CFO, that has been announced previously. I think this company is very fortunate to have Bob in the role he is going to play. He has got a wealth of experience in the company; he has been with us for 17 years. He has had experience at all of the operating levels of this company, beginning at a plant level, working through divisional roles, eventually in corporate roles. He also has had a hand in managing the treasury operations and our financing, so he has a well-rounded experience. I think you will be very pleased with Bob in this role going forward. So, welcome to the hot seat Bob.

Okay, let’s do some numbers. Revenue for the quarter $196 million, that was down $22.5 million or a little over 10%. Our attribution analysis of the decline in revenue indicated that about $16 or so million of this was related to economic issues, either lower unit sales, that could be arguably related to the lower demand in the economy or pricing pressures that flowed from that pressure from the economy.

Technology and other external factors that have been in our industry for some time were judged to be about $6 million in the quarter, down about 2.7%; so about 70% of the decline in revenue for the quarter is attributed to economic conditions, in our opinion.

As we look at our segments, our traditional business and our software business were the weakest in the quarter, again, reflecting much to do with the economy. Our Document Management business was off 11.5% and our Document Systems business was down 16%. Other business units faired somewhat better. Labels were off 2.8%, but we did also have a drop in our print on demand services of about 9%.

I want to just mention at this point that, as Joe has indicated, we’re moving to a market focused strategy and our reporting will follow that move; so at the end of the first quarter we will be changing the format of our reporting by segment to reflect our performance in our various key segments that he outlined.

Gross margin, we were down just over $10 million in gross margin on the $22 million revenue drop. That’s a normal relationship, so the change in gross margin from year-to-year is primarily related to revenue.

SG&A expense, excluding pension amortization, was $48.5 million for the quarter, compared to $51.2 million in the prior year. We see an improvement there of about $3 million that was related to the restructuring. As we look at our SG&A expense over the last eight quarters, we can see a clear trend downward. In the early half of 2007 we were operating our SG&A in the low to mid $60 million range. We did a restructuring in July of ’07 and the SG&A dropped to the mid $50s and with the latest round of expense reductions we are in the high $40s at this point with more to come as we move forward, related to the actions already taken late in the year.

I also want to mention parenthetically here that we have changed our reporting format, you will note, to we used to report depreciation and amortization as a separate line item on our P&L and we have changed to incorporate the depreciation and amortization into the respective accounts of cost of sales and SG&A expense. This conforms with the preferred FASB methodology and also makes our internal and external reporting consistent.

Pension amortization for the quarter was lower, $4.8 million versus $6.4 and we did not have pension settlement charge this year as we had in last years fourth quarter, which last year we had a $17.7 million charge, again, no charge this year.

Restructuring was $2.9 in the quarter, this relates to some of the down sizing efforts that Joe mentioned and also some of the POD consolidations that were undertaken.

Interest expense was $400,000.00 for the quarter compared to $1 million last year. This reflects good cash flow this year and our lower debt balances and some lower interest rates as well, which brings us to a net income overall of $800,000.00 compared to a net loss from continuing operations last year of $4 million. So on an EPS basis a + $0.03 this year versus a loss last year of $0.24 and certainly we know that the pension settlement charge last year played a big role in the loss last year.

If we look at the year, revenue was $791 million, down $74 million or 8.6% compared to the prior year number. We attributed that decline of about 6.5% to economic factors, about 3% to technology and other factors external to the company. All other gains and losses netted out to a net positive of about $8 million. Again, the economy is the major factor in the decline, as we evaluate it.

On the gross margin front, our gross margin was 31.7% this year, compared to 31.5% last year, so we had an improved percentage margin. In dollar terms our gross margin was down $21 million on the $74 million decrease which clearly illustrates the cost reductions that we were able to achieve despite the significant lower revenue.

Moving along to SG&A for the year, again lower, $208 million this year, compared to $227 million last year. That is a decrease of nearly $19 million over the prior year. In fact, the SG&A decrease was almost enough to erase the $21 million drop in gross margin.

Moving down to pension amortization, it was lower, $20 million versus $26 million and we had no settlement charge this year, compared to last years $21 million.

Restructuring this year $5.6 million, compared to $8 million a year earlier, so we had some decrease in restructuring charges. We expect the $5.6 million to probably translate into about another $1 million in 2009 as we complete work on the restructuring. It has already been accomplished, but that will save us approximately $20 million annually on an annualized basis going forward.

That leaves us with an operating income for the year of $16.7 million, compared to a net loss last year of $9.2 million, so a significant swing, again helped significantly by the lower pension charges.

Interest was lower, $2.2 million versus $3.8 million last year, again, due to lower debt and as a result of the improved cash flow.

Net income was $8.6 million this year, compared to a loss last year of $7.6 million. In the final analysis, when we look at the year, we see a significant reduction in revenue of $74 million, but the effect on margins was all but erased by operating cost reductions; so on an operating basis we were very close to last years performance and then, of course, we were helped along by lower pension and lower amortization and settlement charges this year; on an EPS basis, overall a + $0.24 versus a - $0.26 in the prior year.

On the balance sheet, I will touch a few items here and comment briefly on cash flow. Our working capital improved significantly this year. Our operating working capital, which is receivables, inventory, and prepaid, less accounts payable and other current liabilities, was $86 million compared to $110 a year earlier. In terms of turn over in relation to revenue, we turned our working capital in excess of 9x this year, compared to 7.8 last year. So, when we get to the cash flow we will see that a significant amount of our improvement in cash flow originated from improved working capital management.

Our capital assets were lower at the end of this year than a year earlier, $102 million versus $111 million and that reflected our capital spending of $17 million compared to depreciation of just under $26 million.

In 2009 we expect our capital spending to be below the level that we had in 2008 and we have a current forecast for our depreciation of $24 million for 2009.

Our pension liability increased significantly in this year, up $100 million from where it was at the end of the prior year. The present value of the future benefits of the plan exceeds the market value of our assets that are in the trust and the significant decline in the stock market in the fourth quarter is the factor that created the reduction in the value of those assets and corresponding increase in the pension liability.

Our actual return on our assets in our trust was a -28% in the year, which was better than the S&Ps performance of 37, but nonetheless, it was a decline and it did increase the liability. Our contributions to this plan have been running at about $20 million per year. We have set aside $25 million in 2009 to fund the plan and expect in years there after that it will be modestly higher. We have a long-term horizon to fund the plan and we will continue to fund it as needed.

On a cash flow basis for the company, our net debt improved from $51 million at the beginning of the year to $33.7, so that implies a positive cash flow of $17.6 million for the year after funding our CapEx dividend and our pension funding.

That completes my report and we will turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jamie Clement with Sidoti.

Jamie Clement – Sidoti

Joe, can you talk a little bit more about the focus on the three verticals and what the sales force looked like before in terms of how it was structured and has there been a change in your structure of the sales force? Can you just give us a little more color on that?

Joe Morgan

Sure. Our sales organization prior to the change was what I would call more of a centralized, functional based, zip code based sales organization. Based on the zip code there was probably a concentration of customers. For example you might have a sales person that has a dominance of health care. What we’ve changed now, instead of having a centralized sales organization for the company, we’re distributed the sales organization by business unit, in the spirit of concentrating our sales team on selling within those markets. For example, in health care we’ve got a leader of health care. It is still geographic, primarily focused in the United States of course, but it’s now within one organization.

I am acting general manager of the commercial business, in this transition period. I actually have distributed the country in half. I’ve got two leaders that work for me that have reagents under them that are supporting the commercial business. We have actually carved out the financial business a little separately due to the nature of that and we’ve got a sales organization that’s solely focused on financial as part of the commercial business. Then industrial is a more technical sale, but they also have a sales organization that sits underneath, Tom Fury, who is the General Manager of the industrial business.

The key point there is instead of a centralized sales organization that has more of an ubiquitous approach, we distributed based on market expertise and then we sell within those markets.

Jamie Clement – Sidoti

Okay, from a manufacturing standpoint, has work been shifted around the country to have certain plants focus on this kind of end market, or are you still producing all of the things that you used to produce at each particular plant?

Joe Morgan

What we did on the operations side is we created more of a share services. Not an organization, there’s nobody sitting on top of that, but we aggregated all of our manufacturing warehouse and distribution organization under one leadership structure. So, our traditional rotary organization, as well as our print on demand organizations facilities, as well as our warehouses across the country are now under one unit.

What we’re doing is exactly what you just said, is evaluating where products should be produced in the most effective way. I will also tell you that over time, which I think is pretty natural, we make some things and we source some other things. What we also have is a supply chain organization that’s working very closely with our manufacturing team evaluating make versus buy in a more comprehensive way, so yes. But, the biggest change there is one manufacturing organization whereas previously we were organized as a company based on product produced.

Jamie Clement – Sidoti

Okay, thank you. Craig, if I could ask you some nuts and bolts questions with respect to the dividend and the pension and the Ohio state law that you mentioned in the press release. From a mark-to-market measurement of the assets in your pension plan, is that required to be done quarterly for the purposes of evaluating whether something needs to run through shareholders equity, ultimately leading to a change in the surplus that you discuss in there? Or does the mark-to-market only have to be done at the end of a fiscal year?

Craig Brown

It happens once a year, annually, at the end of the year, unless there is a significant event that would cause us to need to do that. For example, we’ve measured in 2008 when we froze the benefits under the plan, that triggered a revaluation, but under normal conditions we would do this once a year.

Jamie Clement – Sidoti

In other words just normal market movements, that is not something that would require revaluation until this earnings release next year, right?

Craig Brown

That’s correct.

Jamie Clement – Sidoti

Okay, thank you very much for your time.

Operator

Your next question comes from Charles Strauzer with CJS Securities.

Charles Strauzer - CJS Securities

Could you talk a little bit about the competitive environment? We are hearing anecdotally the number of competitors that are having trouble. We are hearing stories of imprinters being chain shot by the banks and being taken over that way. Your workflow, your neighbors down the street had visible discussions with their banks about their indentures etc…Talk about the competitive environment. Talk about what you’re seeing in terms of pricing. Are you seeing any stabilization there yet? Are you seeing enough competitors starting to go away that it might make the capacity issue start to contract a little bit more on an accelerated fashion?

Joe Morgan

I will talk about price, talk about capacity and then I’ll just give you some experiences that we’re having just so you have a sense of what is going on.

What we’re seeing is that, of course price continues to be challenging in this space, probably not unlike a lot of businesses, due to the fact that units overall are down in many places. In order to make that up people are doing things around price. One thing that is interesting is I think most companies are focused on cash; so I think some of the extremes that we might have seen in the past are not being seen as often today. I think that’s a good thing, because we’re seeing a settling in terms of business models seem to be getting more rational, which I think is a good thing.

There is still over capacity and even with, as you stated, some competitors may be being in more trouble than others and some leaving the market, there is still a lot of capacity available in terms of the commercial printing, but even in our business, in some cases, I do see a couple of things happening. The requests’ by our customers for participation in business that has a supplier, that maybe they’re concerned about, is increasing. We’re seeing more RR fees coming our way, more requests for information coming our way from customers that traditionally had been controlled by other competitors. That’s not anecdotal, that’s actually some factual statistics on that that we’re seeing.

I do believe that as the year progresses we’re going to see more of that. That is one of the things that contributed to the decisions we’ve made about our company, because we do believe that our market focus and our current strength financially puts us in a position, maybe uniquely from others, to take advantage of some of those changes that you note. But, I think we’re still early in the year. I believe within the next quarter or so we’ll probably see more definitively what’s going to happen in the competitive landscape.

Concluding it, I would say still price pressure, but more traditional business approach versus some of the craziness we’ve experienced over the last number of years.

There still is over capacity, there is no question, but I do agree with you that there are more competitors leaving the market, maybe, than we’ve seen recently and then we are seeing an increased activity from customers that we had traditionally not done business with.

One other point too that we’re seeing, which we’re a very contract oriented industry too and we’re seeing customers more willing to do business with people at a transactional level; so that is something that we’re staying close to.

I hope that answers your question.

Charles Strauzer - CJS Securities

Yes it certainly does Joe, thank you.

One of the things that Dennis had talked about a couple of years ago was going more towards the C level executive offices of your companies that you’re trying to win business from and trying to explain to them the value proposition of working with you as kind of your mean or sole vendor. Are you seeing more willingness from some of those executives that were reticent to move down this path before to say, hey you know what, you may be able to save us some costs? Are you seeing any traction at all there?

Joe Morgan

We are. Our value proposition around optimizing the environment where documents are used with end clients resonates very well right now in the economic climate. I would also tell you our market focus makes the relevance of the conversation at the C level much higher. Brad Cates runs our health care business. He is on the road right now having C level conversations with our top 10-25 customers and it’s about strategy, it’s about sustainability, it’s about future road map of capabilities. It’s a very different conservation than we’ve had previously, because they know we’re concentrated in that area and intending to increase our coverage, so yes, very much so.

I do a lot of that myself actually and the conversations are actually quite easy to have, because of the nature of our focus now.

Charles Strauzer - CJS Securities

What are the customers saying to you in terms of they are just trying to dial back as much of their spend as possible, I’m sure, across the board. Are they saying that we’re just going to, kind of, bare minimum in terms of what we need to buy and basically not keeping any inventory, just going to an adjusted time model? Or are they just saying, you know what, we’re just trying to find ways to save money near term and we think that will come back once the economy turns. What are those discussions?

Joe Morgan

The first one would be to help us minimize the need for the things that we currently purchase and to do that in the most cost effective way. That’s part of our value proposition, so we do that all day long. The other one that I am seeing is that people are moving up the return on investment expectation to a more current term versus a longer term, so they are having those conversations. We do see people spending less money on capital, but that really doesn’t affect our business that much, but we are in that conversation.

On our software business we’re seeing a little bit of a change from software as a purchase that’s more of an enterprise to subscription type activities, which are more of a pay as you go, which actually fits our model quite well. We’re seeing some of those things take place, which I don’t think any of those are unique to our business.

The thing that is interesting about what we do is that people need our core business to run their business. The question is when they have fewer employees do they need as much of it, and that is probably one of the key drivers that we see.

Charles Strauzer - CJS Securities

I got it. Then Joe, if you think about the stimulus package, there is a big focus on providing states and healthcare related boosts in terms of the dollars being allocated there. Are you seeing anything from your healthcare customers that could potentially give them some relief that they could translate into more dollars for you as well?

Joe Morgan

Not as yet, but with the focus that we have on that market segment we’re paying attention to what the effect might be from the stimulus package. I don’t think there is any clear understanding of how that is going to roll through the system at this point though. I will say our healthcare business, of all the businesses that we’re in, seems to be the most stable in hanging on of what we have. I would say financial, actually, even though that might be contrary to what you read, is true of us as well. I think that’s due to the types of relationships and consistency of offering that we have within the customers we do support in financial.

Craig Brown

But we’re staying real close to that.

Charles Strauzer - CJS Securities

I got it. Then Craig or Robert, I don’t know if you gave this or not, I might have missed it, but the actual of the D&A in the quarter, what was that number?

Craig Brown

Depreciation and amortization, I have the year’s number of $26.5. Of the quarter, I don’t recall off hand. We will have to have Bob call you on that.

Charles Strauzer - CJS Securities

Okay and then if it’s possible, I know that you’re changing your presentation of rolling the D&A now into SG&A and comps. Is it possible to get a look back now on a quarterly basis for the last few years so I can adjust my model accordingly? I know a lot of companies that are going through that transition right now, they have kind of put out an 8-K with a look back. If you could do something like that it would be greatly appreciated.

Craig Brown

We’ll do it. I’ve got it right in front of me here, so we’ll get it to Bob and he can get it to you.

Charles Strauzer - CJS Securities

That’s fantastic, thank you so much.

Operator

Your next question comes from Bob Nicholson - Pine Cobble Capital.

Bob Nicholson - Pine Cobble Capital LLC

I appreciate the color on the new go to market focus. I think that it is very constructive. I have a question for you, not being particularly well informed on how the pension accounting and true ups work. Obviously there has been a very big increase in the liability this quarter. Can you refresh our memory, assuming the market doesn’t move up or down and the liability is what it is, how does the company fund that gap and what is the actual cash flow that’s required over the next couple of years?

Craig Brown

Well there is funding in the plan of, off the top of my head, I’m saying it is $225 million or so of assets in the plan. I’m looking for the number now while I’m talking to you. We will continue to fund the plan. As I indicated earlier, our plan for 2009 is to put $25 million more in the plan and assuming that our actuarial assumptions are met, which is 8 ¾% yields on our investments, that will continue to increase. We will probably step up our level of funding in 2010 and beyond, but we do not think it’s going to be a significant increase. It’s a long-term process to fund a plan. Under the pension protection act we have, I think, seven or eight years in front of us here to move it back in that direction. Of course it will depend on what happens with the market from this point forward.

Interest rates also play a very significant role in this. Late in the year of ’08 the interest rates dropped about 1 ½ % points on the ten-year bond and that increased the liability significantly. The 1% point movement in the interest rate is worth close to $50 million in the liability. So, if interest rates were to raise to a higher level, if the market recovers, so on and so forth, that plays a big role. While we are at sort of a low ebb at this point, given the market and given where the yield curve is, one would expect over the next five or six years to see some normalization of those things, which will help us. In addition, we will continue to fund the plan. But, we think we have the cash flow generating, the wherewithal to continue to do that.

Bob Nicholson - Pine Cobble Capital LLC

Okay and there has been a change to the rules. Isn’t there some requirement that you have to get immediately up to 90% or has that been now deferred?

Craig Brown

No, there is not a rule that you need to get there immediately. That is a longer-term proposition.

Bob Nicholson - Pine Cobble Capital LLC

Okay, terrific, thank you very much.

Operator

Your next question comes from Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities

Craig, just picking up on that one gentleman’s question on the pension, have the funds been moved away from equity related investments into mostly fixed income now, or can you even do something like that where you have the ability to kind of get away from the big market swings, where you can get into something that’s a little bit more stable like CDs or something of that nature?

Craig Brown

Of course the market has taken care of part of that for us, but aside from that, we had moved, in the last three years or so, away from what was a pretty high equity position to one that was more moderate, but it still has more equities than debt in it. That’s the reason that we had a significant decline.

Charles Strauzer - CJS Securities

Can you get any kind of relief in terms of the metric, or anything that you’re judged upon, versus the interest rates? I mean is there a way to adjust that within the pension to get you some relief going forward as well?

Craig Brown

You mean is there a way to adjust the assumption about earnings on the plan?

Charles Strauzer - CJS Securities

Right, I mean is there a way to have the actuaries judged upon via the metric or something where it’s not so volatile?

Craig Brown

Well, there are a couple of things. Our current actuarial assumption is 8 ¾%, which is consistent with our asset allocations to equities, fixed income, real estate, and so forth. So, our current actuarial consumption is consistent with our policy as it now stands.

If we were to change our asset allocation to be more debt, then we would lower our expected return commensurate with that change. Of course that would then translate into lower expense offsets in the P&L; so, as you know, the expected return on the pension plan plays into the P&L on a current basis. At this point, however, we have not changed our asset allocation mix. We didn’t want to lock in the losses that we have, in many cases, and so we are holding our position at the moment. There is really nothing else that we can do, actuarially, in that regard.

I would add that, when we look at our funding requirements in 2010 and beyond then it will depend to some degree on what election we make. Whether we elect to mark-to-market at the end of the year on an actual market basis or whether we employ a smoothing methodology. Either is allowed. We haven’t elected what to do there yet and that is something that we will be working with our actuaries on and you will get to ask Bob that question in one of the future meetings.

Charles Strauzer - CJS Securities

Great, thank you very much.

Operator

Your next question comes from Kevin Sonich with R.K. Capital.

Kevin Sonich - R.K. Capital Management

I joined late, so if you’ve answered this, or addressed this, just let me know and I’ll catch it in the transcript, but can you comment a little bit on what we’ve seen recently and maybe your outlook for changes in industry capacity? What kind of excess capacity we have out there. If some of that capacity is coming off line. Maybe what parts of your business do you think are a little bit more insulated from excess capacity because the services are less commoditized in nature? Thank you.

Craig Brown

I will take a stab at that. I think that our, I don’t know what our 10-K says in terms of capacity utilization, but I would guess that it’s somewhere in the 60s in terms of utilization overall. We have not seen a significant change in industry capacity. There have been some changes. Where there have been capacity changes has been in the paper industry, where they have been taking significant capacity out and that is they are trying to prop up the price of the paper, despite the weakening demand.

In our industry from our manufacturing standpoint, we have not seen significant decreases. We have downsized the operation over the last, say, ten years plus. We take out a modest amount of capacity as we go along, but most companies when they eliminate a plant will attempt to preserve the capacity in other facilities and just move equipment from one to the other and try to save the overhead. There is some decrease in capacity when that happens, but not significant.

The other thing that happens in our industry, and it’s true for us, is that every company strives to improve its productivity. Our plants have done a particularly good job of getting more through put with the same amount of equipment and the same amount of people and that doesn’t help the overall situation, but it is something that we’re all attempting to do. The short answer is there still is excess capacity.

Now, the other part of your question dealt with products. A goodly number of our products, there is not a significant price elasticity issues, if you will. We have a lot of proprietary products, security features. A lot of what we sell is packaged with services in such a way that it forms an integrated solution and so it isn’t so much about the commodity of the ink on paper, as it is the overall solution and the value that the customer sees in that. We’re strongest where we sell into that mindset. We have a lot of customers who appreciate what we do for them in that regard, and so we see some price insulation there, if you will, because we deliver the dramatic savings to them through these solutions. Not everything that we sell has that same sort of capacity model influence.

Kevin Sonich - R.K. Capital Management

Okay, thank you.

Operator

I show no further questions at this time. I will turn the call back to Mr. Bob Cestelli.

Bob Cestelli

That concludes our call for today. Thank you for your participation. We look forward to reviewing our first quarter in late April.

Operator

This concludes today’s conference. Thank you for joining us.

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