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Executives

Carol Merry

Joseph P. Morgan - Chief Executive Officer, President, Director and Member of Executive Committee

Robert M. Ginnan - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Charles Strauzer - CJS Securities, Inc.

The Standard Register (SR) Q3 2013 Earnings Call October 25, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Standard Register's Third 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 the Standard Register website at www.standardregister.com/investor.

I will now turn the call conference call over to Carol Merry. Carol, please go ahead.

Carol Merry

Thank you, Tia, Good morning, everyone, and welcome to the Standard Register 2013 Third Quarter Conference Call. Our speakers today will be Joe Morgan, President and CEO; and Bob Ginnan, who is the 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 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 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 in understanding the financial position. They're not meant to be used in isolation or as a substitution for GAAP, and the 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. And Joe will then discuss the company's strategy and direction. Following his comments we will 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, and good morning. We've been really busy over the last few months since we last spoke. We've been engaging with our top customers both in legacy WorkflowOne and legacy Standard Register. Of course, now we're going to talk about Standard Register as a combined entity going forward. We've been executing the integration plan as a critical step in our transformation, and also as you've seen throughout the quarter, making key investments that we know will spark our future growth in the key areas of our strategy.

However, management is not satisfied with the results, but we're not surprised. This is a reflection of where we are in the transformation of our business under the marketing -- under the current marketing -- excuse me, the current market conditions.

Declining trends are continuing in some printed and transactional forms. We understand those trends. We understand those product categories. We're engaged with our customers in conversations about them. And we're spending a lot of time optimizing that category from a cost perspective, but also transforming the relationship that we have with those customers that had previously been buying those products from us.

We're also experiencing continued growth in our technology-enhanced solutions, particularly in the patient identification area on the healthcare side of our business. However, that's just one example. We are continuing to execute our strategy and making pretty good progress with expansion and wins in each of the new categories. The most significant step we've taken for the long-term health of the company is the acquisition of WorkflowOne, which we accomplished in the quarter as you know.

There are numerous benefits to the acquisition, most notably, as you can see on Slide #5 in the deck, the portfolio of capabilities, products and solutions is expanded both from a depth perspective and also breadth. We have a much larger customer base to leverage and we're doing that already. The company is more stable and has more resources to invest in the areas that will generate additional revenue. And we are happy with the prospect for savings that will be achieved through the synergy for the integration project -- program that we have in the way.

Following the acquisition, our immediate focus was with customers and employees. Very important that we have the customer relationships intact and that we understand where -- they understand where we're going and we also have a sense of what their expectations are of the new entity. And then from a cultural standpoint, it's very important that we integrated the companies as rapidly as we can to take advantage of the tremendous experience that we have, but also adjust where needed.

We've also engaged with our suppliers and partners and we're moving very rapidly in all of those categories. Two months from the announcement, we're deep in the integration. Plans are place. We're executing against them. AlixPartners has been working very closely with management and helping us make sure that we're identifying the areas that we need to focus. We are moving forward with strategic investments. As I mentioned, we have made numerous announcements. I will have more to say on all of these topics after Bob's review.

And with that, I'm going to turn it over to Bob for more details on the financials.

Robert M. Ginnan

Thank you, Joe. Some of the highlights to look out for in the financial statements, first of all, 2 months of WorkflowOne are included in the results that you'll see here, so keep that in mind as we talk about the financials. And then, in a couple of weeks, in the 10-Q, we'll give a little more detail on the comparable periods from an all-in perspective.

Remind you that we did renew our credit facility in the quarter, so that the revolving facility debt is back to long term in these financial statements. Little bit later, I am going to talk about a accounting change we made in terms of adopting mark-to-market for pension accounting, and I'll go through some detail on that a little bit later. And then lastly, we're still encouraged by the rise in interest rates and the potential impact on the pension liability as we go through year end.

So on the P&L, first of all, $199.3 million includes 2 months of WorkflowOne. As we said in our press release, that was about $68 million in that number. Margin to 26.9%, slight decline over the past few quarters and that was primarily 2 things: One, we are continuing to ramp up our production in our Jeffersonville facility as announced earlier in the year, which right now is having a negative impact on the margin; and then also with the purchase accounting and having to mark the finished goods to fair value, we saw about $1.5 million charge to gross margin that is a result of that fair value. We'll expect another $0.5 million in the fourth quarter and then we'll be done with that. So we do expect the margins to return to more normal.

SG&A of 54.5 versus 37.7, that's all the increase related to WorkflowOne. Actually when you look at the WorkflowOne piece that was added in, SG&A was actually down slightly.

In the restructuring, acquisition, integration cost, $18.6 million. I'll point out there that, first of all, we announced earlier in the month the restructuring that we are undertaking to get these 2 companies integrated. So we're at the first phase of booking expense there, but that also includes about $6.1 million of deal-related cost and $7.8 million deal related-cost on a year-to-date basis.

So with the restructuring and then, obviously, the first 2 months, there's really no synergies in these numbers yet. We have a $23 million loss in the quarter.

On the trend perspective, if you look at the breakdown you'll see with the acquisition, we have growth in each of the 4 categories within healthcare. Most importantly, we continue to have a nice growth in our technology solutions, 7.5% for the quarter, 13% on a year-to-date basis. With the acquisition of Workflow, we actually had growth in the Document Management as well, however, the underlying trends with the clinical documents continue there in that business.

On Business Solution, you'll see a similar, as we brought the 2 companies together, growth in each of the categories as we have good representation on our solution categories across both businesses there. And you can see that on the chart.

On the balance sheet, quite a bit different on the balance sheet going into this quarter. You saw some of the impact of that in the pro forma, but here is the final third quarter ending balance sheet. Couple of things to point out, you'll see the increase in working capital at $104.9 mil versus where we started the year at $85.6 million. You'll see the assets have been written up and, right now, goodwill and intangibles stand at $138.9 million. And just to point out that these are all estimated, but we will not have a final valuation and opening balance sheet numbers done until the fourth quarter, of which we'll release that in our 10-K. But we expect it to be pretty good estimates.

On the debt structure, you'll see that net debt of $49.3 million, so up in the quarter. So negative cash flow on a net debt basis. However, when you factor out the deal cost in the quarter, we're actually positive both for the quarter and for the year-to-date from a net cash flow perspective.

And then finally a pension liability is coming down from year end, and we hope that trend continues with some continued positive improvement on interest rates as we close out the year.

Cash flow, I mentioned, down for the quarter and year-to-date. Primarily, the acquisition-related cash cost driving that. We did make pension contributions of $8 million in the quarter, $18.8 million on the year, and then finished up those contributions in the early October. So a long track with our pension contributions. Capital spending up pretty significantly from $9.1 million versus $2.4 million, primarily in technology and our Jeffersonville facility that's driving that increase.

Now to the change in pension accounting. We have been on mark-to-market on the balance sheet side for quite some time. Liability gets marked each year and we've had some pretty significant adjustments over the last 2 years there, and we've talked about those at quite in depth. But now we're going to move to mark-to-market on the income statement side, and what that means is that we will no longer amortize those losses over time. We'll actually recognize those once a year in the fourth quarter, as we mark the balance sheet asset and liabilities to market.

And so in doing so, we've actually elected the Corridor method, which means that we have a range of plus or minus 10% of a liability, that we won't book anything as long as we stay within that range. But outside that range, we'll start that to take that to the P&L.

We actually provided a chart that kind of shows you how the prior periods have been restated to this new methodology. And what you'll see is that in 2009 and 2010, actually there's more reported income; 2011 and 2012, you'll see actually more of a loss as the losses in the liability associated with the interest rates factored and then rolled through the P&L of $37.7 million and $19.4 million; but in year-to-date '13, actually we have an income pick up of about $13.5 million as we adopt this methodology.

We do show the liability on there and you can see the liability has no change in those periods as we have already been recognizing the balance sheet that way. So I think this will provide much more transparency and take out the confusion of the pension amortization and we'll be able to talk about what exactly happens in the liability and the asset at the end of each year. And I think sets us up going forward to really understand the operations much better as we integrate the 2 companies.

So with that, I'll turn it back to Joe.

Joseph P. Morgan

Thank you, Bob. As Bob described, it's been a very busy quarter, and I'm very proud of the energy of the employees throughout the company -- that they've shown in moving the integration ahead with pace, while continuing to advance the business. But we know that we must improve performance and all of our efforts are geared towards improving in this, not just the bottom line, but also the revenue performance.

I want to highlight a couple initiatives that are putting -- that we put in place from a capabilities standpoint for growth. Let me just start first with the Workflow acquisition, because that's obviously the largest, most visible action we've taken in the quarter. Our initial focus was retaining customers and I've spent a large portion of my own time making sure that, that I'm in front of the largest customers and educating them about the position in the marketplace with our goal of expanding the scope of products and services that they buy from us. I was very impressed actually by the customers that I met with and the opportunity that's before us as we transform the business, very receptive.

I've spend much of my time, since the acquisition, as I mentioned, with customers, but also in the marketplace, talking about the implications which are mostly positive for this transition. I met with, as I said, most of the largest customers of both companies, and their support has been very positive and their expectations for continued expansion together has been really a great outcome for me as we start to build our integration plan.

Our customer base is stable. Our largest customers are comfortable with the acquisition, but there are lots of questions and there's a lots -- a lot of interest in terms of where we're going to take the business now. We've blended teams in leadership and marketing and we put the right people in the right places from a customer service sales and marketing perspective.

Let's be really clear, the #1 issue that we have is the top line of the business. That's where we're putting our emphasis. I'm very confident that we can model the cost and execute against it. But the key opportunity for our company is to ensure that the customers that we have in place continue to buy, in a larger way, the new things that we're investing in and that's where we're putting our time and energy. We have a well-defined integration team that continues to work the plan, and now we're executing on the plan to begin achieving synergies.

At the same time, we're continuing to execute and update our strategy, which hasn't fundamentally changed. We do learn everyday and we make modifications, but the basis of the strategy is the same. We're transforming our company to meet a broader scope of customer needs for communication, to advance their reputations and their customers' reputation, which is a key point. Our customers want us to be more involved in the communication with their customers as we all, in every industry, strive to grow our businesses.

Market focus is enhancing our insight and influencing our portfolio, which is the key point in our strategy: Less of a supply-based strategy, more of a demand-based strategy. As I noted earlier, the acquisition has doubled our customer base and the portfolio. It is proving to be the complementary combination that we expected. We have a number of synergistic opportunities that have risen as a result of the acquisition that have been excellent for the company. There is very little overlap with the customers, in fact, when there is overlap, more often than not, it's complementary, and it gives us a stronger position with those customers. I also mentioned sales training and joint sales calls, we're very pleased to already see tangible results as a result of the cross-training that we've done with the 2 companies.

Let me give you a couple of examples, because I think it's very important to be concrete. Already, with the -- since the acquisition, as I mentioned on the last call, WorkflowOne had a Promotional Products business. We had a Promotional Products product line. They -- since then, we've had 4 wins in the Promotional Products area. As I mentioned, WorkflowOne has brought us a really good, solid business approach, and we're leveraging that across our customer base.

We've also had 13 new opportunities identified, that we can utilize our Mexico operation, which we expanded in the quarter with more distribution. We have a facility that actually manufactures labels and other digital products across the border, and we're seeing growth there. We have 20 accounts added in the healthcare space that are workflow legacy accounts, that are interested in our technology that we mentioned that's growing. And then Wilmer [ph] which is this -- a business that sells to the trade, that customer base has seen a strong growth in pipeline and we're often [ph] go.

So in a relatively short period of time, we're seeing new sales in some of the growth areas, and we're also seeing operational improvements where we expected we would. We're capitalizing on these opportunities and, honestly, we're finding more each day.

As part of the integration, we're not only bringing the 2 companies together, but we're also fundamentally changing and improving the way we do business. Key processes of the company will be addressed and enhanced, which is really around the underlying technology. We continue to invest in areas where we can leverage our go-to-market depth. Our workflow and equipment purchases or announcements in the quarter around inkjet are a good example of that. We have a really good position there and an opportunity to enhance our position with our clients. And we're also going to be simplifying the overall business footprint in our operations, more to come on that topic.

Before we finish the call, I want to give some color on how we're executing on the investments we've made. The partners we're -- the partnerships we're engaging in and some of the innovation that we've been working on. These and others, with revenue growth potential, are among the top priorities as we continue the integration and focus of the evolving opportunities for applying Workflow content and analytics across our customers base in the customer communications area.

In Jeffersonville, Indiana, at this distribution and digital center, which is a center of excellence for us, we continue to invest in the infrastructure including workflow to maximize performance and production efficiency. We're shipping products from that facility today in a very effective way. The center is now operational and at this work is being

[Audio Gap]

we've also reengineered our Kitting solution and we relaunched it at this center of excellence in Jeffersonville. It is a very important solution for the company.

We've also installed our first digital label platform and integrated it into the SMARTworks Technology Platform, where we have thousands of our customers interacting with us on a daily basis. During the quarter we also launched SMARTworks Direct Mail Connector with our partner Exact Target, HubExchange which is part of the salesforce.com network. We're also finalizing a partnership with salesforce.com that will allow SMARTworks users to integrate with the salesforce.com capabilities. I'll actually be speaking at their conference in just a few weeks.

We're in beta testing with our new healthcare technology that we've been developing, somewhat quietly, but it's very exciting and it's based on the demand strategy that we deployed several years ago. John King and his team are doing a fabulous job in getting prepared to bring that forward.

These are just a few of the initiatives, we have continued to execute the strategy. What excites me the most, honestly, is the acquired WorkflowOne in the quarter, we've got, with pace, integration plans well underway. The customer base is stable and excited about the things that we can bring forward. One anecdotal story, we met with a customer not too long ago, and the story was that Standard Register came in #2 to WorkflowOne in an opportunity. And now they get the 2 best, in their opinion, working together, bringing our technology -- this was a healthcare institution, bringing our technology that being Standard Register to what WorkflowOne was doing on their behalf, and now they get the best of the best, which is not uncommon in some of the conversations that I've had. We continue to invest in our enabling -- investing in enabling more customer communication capabilities and customer facing technology, and as we go forward, you'll hear more and more about that.

On a personal level, I'm more confident than I've been at any time in the past few years, because of the highlights on Slide #8. Today, we have more financial stability and flexibility. We have more manageable and transparent pension obligation, as Bob described. We have more visibility into and resources for investments that will generate revenue and improve our market position. We have more cost savings from the acquisition opportunities, and we have more customers and opportunities than we have had in a very, very long time. The probability of long-term success for the company has significantly improved due to the steps we've taken just in the last 90 days. We've righted the ship and it's moving in the right direction. The performance in this quarter was expected, it's not acceptable. We're doing the things that will turn that into a positive going forward.

I look forward to providing more updates on that and more in the integration and our progress next quarter. But now, Bob and I will be happy to take any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] We do have question from Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Joe, obviously this is a big heavy lifting assignment you guys have on your hands with integrating Workflow, and I know you said you've been out there talking to a lot of large customers. What are some of the concerns they have, obviously, with the integration, as my first question? And secondly, what you think some of the biggest hurdles you're facing on the integration side are, so far, that you've kind of identified and what do you think the steps will be to kind of get through those?

Joseph P. Morgan

Sure, can I start with the second half of that and then I'll get to the first half, if that's okay?

Charles Strauzer - CJS Securities, Inc.

Sure.

Joseph P. Morgan

The first one is really around the culture, that's going into this, you obviously have 2 companies that have been around this business for quite a long that, and how will the cultures integrate. And I will say that after just 2.5 months, I don't view that as being a major issue. I'm very pleased with the way that the 2 organizations are working together. We've put in place a blended management team based on the talent that these combined entities have, which is going a long way to help us take the best of the best, which has been our strategy. And then we'll be augmenting that with new talent, based on the strategy of the business. So I'm very pleased with how that has come out. In terms of the challenges before us is, one of the key benefits of making the acquisition is, within reason, the companies of similar size, we all know, at least on the manufacturing side and the operational side as it relates to print, the business is changing dramatically, and some of the traditional printed areas is declining and then there are some new areas on the digital side that require investment to participate. Everybody knows how to spend money, so we know where we need to make those investments on the digital side and in every category we've made them. And now we have a model where we can scale as our business performs appropriately. So that feels good. And we also have a strong understanding of the customer-facing technology in that category. So we've made those moves very well, which is good. So that's moving along as we had hoped it would. So the manufacturing and the technology are kind of 2 big ones. So both of them have been moving in the right direction at a pretty rapid pace. What the customers get worried about or where they might have concerns about is, can they continue to get the level of service that they've always been used to with the new combined company? And if there are changes, how will they be notified or be able to participate in those changes? So that's really the big issue with the customers. But the thing that I tell you, business today, everybody knows that you have to do things during integration to make the benefit of the acquisition actually come to life. So we don't have unrealistic situations, we just have to manage the transition appropriately. And that's the work of the integration team. The good news is both the companies are extremely customer-centric and extremely service-oriented. So we understand that transition. We know how to make the changes on the operational side and that's underway and we also understand how to transition the technology. So I actually think the risk is fairly low and as long as we're fully engaged with the customers, they'll be okay. The big opportunity now is, so when print continues to change, what are you going to do next? And that's the exciting part to have those conversations, which is really where the new ground is for both entities. And quite honestly, in many cases, Standard Register was further along strategically than WorkflowOne, and now we have tools in our kit for both companies that we can leverage.

Charles Strauzer - CJS Securities, Inc.

And then Joe, looking at kind of the legacy print side of the equation, pricing has always been a touchy subject for a lot of the people in your shoes, and I know that, especially on the forms and documents side, it's been quite predatory. Have you seen any sense of price, not so much relief for raising price, but at least -- have prices seemed to have stabilized at all, in your opinion?

Joseph P. Morgan

That's a very broad topic. I would say that supply chain in the upper echelon companies continues to be a real driver.

[Audio Gap]

customers we're dealing with are under pressure and they need to find new ways to improve their cost structure. What's important about our strategy now is that we are not afraid of the inevitable, which is print that doesn't need to be there isn't going to be there, and it needs to be replaced with better solutions around workflow and analytics and content and that's where we're spending our time and energy. So in some ways, yes, you're right, Charlie, there continues to be -- I think, there continues to be price pressure in the printing industry, because even though there's so many printers leaving the industry, there's still a lot of capacity. And so with capacity, our supply -- our customers are pretty smart and savvy, so they know that and they're leveraging as a way to improve their own performance. But I think the shift that's occurred is, we need to help our business grow and we're going to work with partners that understand what's necessary to make that happen, which is really key in our strategy. So our conversations are moving out of traditional places into the CMO and more strategic parts of our clients. So yes, prices continues to be an issue, but people are shifting their investments into new areas because they have to grow and improve their business.

Operator

[Operator Instructions] And at this time, I'm showing no further responses. I will now turn the conference back over to Carol Merry for any closing remarks.

Carol Merry

All right. Thank you very much for joining us today. We look forward to talking to you next quarter. And if you have questions in the meantime, please feel free to reach out to us. Thanks for participating and we'll end the call now.

Operator

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.

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