Standard Register Company (NYSE:SR-OLD)
Q1 2014 Results Earnings Conference Call
April 25, 2014 10:00 am ET
Carol Merry – Investor & Media Contact
Joseph P. Morgan, Jr. – President, Chief Executive Officer & Director
Robert M. Ginnan – Vice President, Chief Executive Officer & Treasurer
Charles Strauzer – CJS Securities
Welcome to Standard Register’s 2014 first 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.
Welcome to Standard Register’s 2014 first quarter conference call. Earlier today, the company published its first quarter results in a news release that is available on 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 started I’d 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 investor center, or in the company’s Securities & Exchange Commission filings.
In addition, the speakers may make use of financial measures that are not in accordance with generally accepted accounting principles or GAAP. It is managements’ belief that the use of these measures will assist the audience in understanding of our financial position. They are not meant to be in isolation or as a substitution for GAAP and a reconciliation between these measures and the GAAP counterparts can be found in the earnings release that was issued this morning. I also direct your attention to the Safe Harbor and non-GAAP reconciliation slides two and three.
For today’s presentation, Joe Morgan will provide a few opening comments that will be followed by Bob Ginnan’s review of the financials for the quarter and year-to-date. Joe will then discuss the company’s strategy and direction. Following these comments, we’ll open up the call for your questions. Now, I’ll turn the call over to Joe for his opening comments.
Joseph P. Morgan, Jr.
In this conference call following year end reporting I noted that our focus into 2014 would be building on the investments that we’ve made thus far and the achievements that were vast in 2013 and I stated that there would be three priorities this year in the spirit of keeping things simple for our company so that we could execute in a very robust way. First was selling our entire portfolio of solutions into our large customer base which I mentioned when we made the acquisition of WorkflowOne there was very little overlap between the two companies driving the integration results from the acquisition which is a must and the categories where that matters most are in the sales organization which is done which is in the back end which has been the IT environment and in manufacturing which are robustly underway.
Creating highly efficient operations and making investments to advance our strategy and this is the destination of the first two things, that we now have a business that we can operate that’s in the new world that we’ve created for ourselves through the strategy. We’ve made progress on all of these priorities in the first quarter but, as you can see, the overall financial results for the quarter are not yet where we want them to be.
The primary reason for that, and we have an understanding of it, is that the demand for some of our printed documents continues to decline at an accelerated rate more so than some of the technology enhanced and growth solution sales are increasing. For example, in healthcare this quarter our patient information solutions continued double digit growth however, this was offset by declines in our printed forms, patient labels, and administrative documents. Along with the adoption of electronic healthcare records, organizations are going digital wherever possible to reduce their expenses and improve the quality of care. Anyone that pays attention to healthcare knows the pressure on that system. Providers are being forced to look at things that they previously hadn’t and accelerating activities as transparency has really hit the healthcare system very, very hard.
In first quarter we were further impacted by regulatory changes. Printed notifications in some cases are no longer required and directories that were formally printed and mailed to plan participants are being converted to web based directories. Again, focusing on the content presentment that had some impact on us in a few states where those regulatory changes took place. As we’ve discussed in earlier calls, our healthcare unit is transitioning to add value in the hybrid electronic and printed environment with services and solutions that empower people with information and care communications.
A key point here is that the former WorkflowOne customers that of course, now are part of the overall Standard Register business, for the most part did not have exposure to some of the technology that Standard Register has and the pipeline for those clients has robustly grown and we’re excited about the future of that technology set in those customers that previously did not have access to the technology that Standard Register brought to that relationship.
In our business solution business we also saw double digit revenue growth in our Mexico label operations. As you heard from us previously, we made investments there. We do a few other things in the two facilities we have in Mexico but it’s primarily focused on labels. It was however overshadowed by the higher rates of decline in demand for some of our more traditionally printed materials that are used in the operational environments of our customers. As in healthcare, business organizations continue to look for ways to incorporate electronic communication in a manner that optimizes the operational environment.
We have transformed our business solutions unit to support more of our customer’s marketing programs with both printed and electronic communication solutions and services. In the operational environment, things tend to be more annuitized, you get an opportunity and it flows into future quarters. In the marketing services area, it’s very different than that and we’re seeing large programs being very common in that space and it’s exciting because some of the things people are doing with [RAND] right now are squarely in our sweet spot.
Although we’re moving opportunities along a healthy pipeline, long sales cycles and lengthy customized installation times can often delay revenue moving them from one quarter to the next. However, in our two business units it’s important to note that we contracted in the first quarter for more than $2 million in new work over the next three to five years, maintaining a very healthy pipeline for us and obviously that’s vital for our future. The question might be who are they? Most of our customers will not allow us to use their name for obvious reasons due to the nature of the business we provide so I’m just giving you some relative value of those contracts. We’re working on some very big things.
I’ve described a mixture of things that we can control and others that we can’t control. We’re confident in our strategy for growth and understand that it won’t be linear. This is a very interesting and challenging time as we work to grow a new portfolio, integrate a very large acquisition, and ensure that the operations of our business for the future are streamlined and very efficient but also adding the value that our customers demand of us. I’m excited about the simplicity of that but it also creates a lot of really meaningful work for our company which we’re executing against very well.
The acquisition we made last year is contributing to our results in both business units. The integration process is proceeding smoothly, it’s on track, and in some cases even ahead of schedule. For example, our Dayton workforce has been consolidated to the Albany Street location which has traditionally been Standard Register’s headquarters and we were able to release the former WorkflowOne space at a substantial savings to us ahead of plan.
At this point I’m going to turn the call over to Bob Ginnan for his commentary on the first quarter financial results and after that I’ll spend a little more time with you talking about the business.
Robert M. Ginnan
As Joe mentioned, we continue to see traction from our growth solutions however, the decline in the legacy printed documents continued to outpace that for the quarter. We are seeing that the acquisition is contributing to both the results and offerings. The net synergies are just beginning, they will continue to ramp throughout the year. As an example, we were able to completely consolidate headquarter facilities within the quarter and we’ve actually been able to transfer that lease so we’ll start seeing the benefits of that in the second quarter.
So, from a revenue perspective $228.5 million was about 10% down on a proforma basis. Margin at 27.3% was as we expected and the SG&A came in as we expected in terms of achieving the synergies that were in the plan for the first quarter. Again, it’s on track and it will continue to ramp throughout the year.
Restructuring of $5.9 million was what we expected there. We’re on our pace to do about that same throughout the course of the year. Interest at $4.8 million leaving [inaudible] at $6.9 million. Remember back to the fourth quarter, with the income we had the vacation accrual reversal there, that will bring that pretty consistent and then add to that the revenue change from the first quarter so the plans are on track other than the soft revenue as Joe mentioned.
At a segment level, healthcare came in at $64.8 million, about 12% down on a proforma basis and business solutions about 9% down so pretty consistent with what we see in the declining documents there.
At the balance sheet, really if you go back to the fourth quarter, not a lot has changed since the fourth quarter when we had the full integrated accounting completed. You’ll see a change in the net debt as we had negative cash flows as planned. I’m going to talk about that in a minute and you’ll also see an improvement in pension liability as we’ve made contributions there. But other than that, it’s very consistent with yearend.
On a cash flow basis, we were -$6 million which was right on track with our plan. We did continue to invest in our capital spending about $4 million. We funded the pension for about $6 million and then we had restructuring payments [inaudible] $6 million. On the pension front, you’ll see the contribution in the first quarter. We’re still expecting to contribute about $42 million in the year. This ramps up through the year with the third quarter being the biggest quarter from the contribution perspective.
A couple of years ago when MAP-21 was put in place, we saw benefits with reduced pension contributions. Unfortunately, those benefits narrow over time based on how the legislation is put in. The good news is there’s some net relief in the proposal phase right now. It’s currently attached to the senate unemployment bill. It would have some pretty dramatic impacts on pension contributions over the next five years so we are anxiously watching that.
Those are the quarterly resulted and with that I will turn it back to Joe.
Joseph P. Morgan, Jr.
I’m just going to make a few comments about the business along the lines of the three areas I had mentioned previously. First, in 2014 we’re building on the achievements and in investments that we made last year. We’re still transforming the company. As much as we would like the turnaround to happen overnight, we know that we’re making progress and moving at a good pace. We are seeing the strategy come to life with our customers which is extremely exciting for the company.
As I look at our pipeline, the vast majority of the opportunities that we’re working on are in the future not in the past which is very exciting for the future prospects of the business. Among the many benefits of our acquisition is the larger more diversified customer base with entry points for the entire portfolio. Our analysis shows that our typical customer buys one or two solutions or services from Standard Register. Our marketing teams are cross referencing the whitespace and we’re selling into it.
The advancement of our content, one example would be we recently co-authored a whitepaper with the National Safety Foundation in Healthcare and it gives you a good example of the type of insight that we’re cleaning in the marketplace. That would not have happened previously in the old structure so it’s really exciting, the insight that we’re getting within in key focus market areas.
Promotional products, as an example and services around them, is one example of how Standard Register is taking a WorkflowOne more developed solution to market to a very large existing customer base that we have. Another example is technology and enhanced healthcare information solutions which I previously mentioned. Where WorkflowOne did not actually have a solution like iMedConsent which is the software company that we bought in Atlanta just a few years ago and we’re more aggressively marketing to customer who are not using a solution and seeing great traction.
WorkflowOne’s healthcare customers were typically smaller than the Standard Register legacy accounts. That means that the electronic healthcare adoption will take longer for our company as a whole as these small organizations adopt it. Translated, that for us, when we’re working with the larger institutions they adopted EMR earlier and we saw the decline in clinical documents. Some of the smaller hospitals are now just getting to that so we have a really good control over how that goes down but you’ll see some degradation in that part of the portfolio as we go forward. But, the technology is put in place to begin to offset that.
There are many such opportunities to sell our entire portfolio of solutions into this very large customer base and it’s not a fixed set of solutions, it’s evolving daily with mobile applications and new workflow solutions, our content is getting more robust, there are many, many things that we are doing that we’re learning about each day with the interactions with our customers. We’re not focusing only on existing customers, we’re also very actively selling to new customers and bringing innovative solutions to market with our investments in software development and, as I mentioned, mobile technology.
One area that I’m very excited about is the high speed inkjet investment that we made last year. While in some ways it’s obviously a printing technology, what it also is, is a major workflow, content, and data solution that without we would not have been in a position to have many of the conversations we have today. We have an incredible amount of new customers and existing customers visiting our Sacramento and Columbus facilities. We were very purposeful with those investments to make sure we could cover both west and east parts of the country. One small example is we had a customer recently join us for a visit and within seven days we were able to close a pretty substantial opportunity with them that’s included in the $200 million that I mentioned.
The second priority of the business is of course, the integration. I mentioned for 2014 it’s very important that we execute in order to drive results. I’ve already mentioned some of the benefits from our expanded customer base and the stronger market position that we have. We’ve also achieved cost savings and, as we’ve said, we’ve identified $40 million in annual savings when the integration is complete at the end of 2015 and we’re on track to achieve that.
In the first quarter we did make great progress on integrating our systems and data centers, our customer service, and our sales force. We have put a lot of effort into assuring that our customers are not impacted by the changes that we make and we spent a lot of time ensuring that that does in fact occur. We have reduced headcount and we’ve closed three production facilities already and in addition to that three warehouse facilities, and as we said earlier, both Bob and I, we have consolidated the headquarters already. We will not be announcing our full plan, but we will provide updates from time-to-time. We’re very sensitive to the customers, we’re very sensitive to our fantastic employees, and we want to make sure that we don’t disrupt anything outside of our plan.
We’re also not providing quarterly updates on our savings. We are achieving savings however, and we are proceeding with the integration in a very thoughtful manner taking into consideration the business needs, not just how much we can save by closing facilities. So savings from one closure may be spent making another more efficient to respond to the market. In the first quarter, for example, we completed the build out of a digital center in our Houston distribution center. We closed one facility in that part of Texas and we consolidated operations into an existing other Houston based facility and then expanded the capability with digital printing. That will better serve the customers in that area of the country.
Then finally, on an operations basis, we’re doing great things on the portfolio, we’re integrating the two companies, and then at the end of that process we will have strong operations that will be able to support the growth of our company and great a highly efficient operation and making investments that will advance our strategies is really, really critical. In 2013 we invested in the areas where we see growth and where our customers have told us they intend to spend. The high speed inkjet presses are examples and so are the investments in healthcare software, mobile technology, we are doing some really cool and interesting things on the SMARTworks platform that are really advancing our position with our customers.
I see that as a breakthrough in how we think about software and services. I hired a guy to lead that business for us at the start of this year so that we could think very differently about how to translate the new learnings that we have in the market from our focus over the last few years and create new and better software for our clients and that’s starting to really work in an exciting way. We’re operationalizing our strategy through centers of excellence, as I mentioned, where we employee innovation and best practices to develop market leading capability and solutions. Examples being, high speed inkjet technology where we merge black and white and the data and the ability to actually market with customers. We also had digital labels which is really a great new technology that we’re deploying. The Mexico operation is doing great and then as I also mentioned, customer facing technology which will change how our customers interact with us going forward.
This is our full focus for 2014. We have a very focused plan. We know what we need to do. We’re keeping it as simple as we can. Our customers continue to have high expectations of us, we’re responding to that in a very favorable and positive way. We will not let the challenges however overshadow the opportunities that are before us and I can see the momentum growing and it’s reflected in the pipeline and the types of conversations we’re now having with our customers.
With that, I’d like to turn it over if there are any questions. Bob, and I, and our team appreciate the fact that you took the time to be with us today.
(Operator Instructions) Your first question comes from Charles Strauzer – CJS Securities.
Charles Strauzer – CJS Securities
I know you don’t want to get into too many details on the integration but just give me a sense of how many plants you have and how many plants that WorkflowOne has and just kind of the general game plans in terms of your maximized utilization going forward?
Joseph P. Morgan, Jr.
Just kind of rough numbers, you go into this relationship with roughly 70 facilities that we need to look at that and not all of those manufacturing, some percentage of those are warehouses. I’m not going to give specific numbers but you look at what the future outcome of all of that will be. As we have invested in high speed inkjet in a couple places, that is going to be a destination for our manufacturing. We have what we call product marketing and labeling which includes more traditional label printing but also digital so that’s another destination. We also have the Mexico facility which is similar to what I described in the other two categories but in a different location.
Warehousing we put in Jeffersonville last year which was part of our recognition of the transformation of the industry so now that’s a high velocity kitting and distribution location where we’re seeing the relationship that we have with UPS that we talked about previously, will be another destination. If you think about the center of excellence model, you’ve got high speed inkjet technology that splits the country, you’ve got Mexico and what we call product marketing and labeling and so you’ve got domestic and [inaudible] border, you’ve got the center of excellence in Jeffersonville.
We will be sizing some of our facilities that are in the digital printing space according to the market needs which are different geographically, and then our traditional printing which is more the form stuff, that is quite honestly overtime, probably going to transition to the more high speed inkjet technology as we go forward. We see the future and our plan is to create the destination which is why these investments have been made. Then overtime, integrate and close facilities and consolidate at the appropriate pace.
The key issue for us is that at times the pace of change that we would like to do, just purely on cost, is inconsistent with the needs of the customer at that moment and so we have to be very sensitive and make sure that we don’t disrupt longstanding relationships. So there would be the difficulty which I know, with your experience, you’ve seen this before. The difference I think for us is we created the destination and we’re building all of our strategy towards the destination that we see in the future which was very important for our strategy last year which is, I think, a key point for everybody to think about.
One other thing I would say is that the SMARTworks investment that I referenced stands in front of all of the things I just referenced as well, so that is a key component of the plan. We will, over time, form a complete picture of that transition but we won’t do that in advance of the actual announcements because we need to make sure our customers and our employees are taken care of as we go through that process.
Charles Strauzer – CJS Securities
When you’re going through this full evaluation have you found that this may be a potential for some assets dispositions as well that maybe could help you pay down some of the debt more rapidly?
Joseph P. Morgan, Jr.
That’s one of the filters. The issue with that whole thing is that the more seasoned assets are probably of less interest to the market than they were a decade or so ago. On the digital side that technology is so good that we don’t really have to worry so much about that issue. We have been able to move some of our assets into other parts of the world. I shouldn’t say the world, to consolidate some of those in Mexico which has really advanced the position. But I think there’s a possibility there but I would be honest with you, I don’t think that’s going to be a big factor in the process as we go forward but that is something that we’re looking for because when you look at the pension obligation, particularly this year, and then the capital we have available to spend, we’re very interested in accelerating the strategy so we’re always looking for ways to be able to move more and more of our assets towards the future as opposed to the past.
(Operator Instructions) There are no further questions at this time.
Thank you for joining us today. If you have additional questions, please let us know. In the meantime this will conclude our call.
Ladies and gentlemen this concludes today’s conference call. Thank you all for joining, you may now disconnect.
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