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The Standard Register Company (NYSE:SR)

Q2 2014 Earnings Conference Call

July 25, 2014 10:00 ET

Executives

Carol Merry - Investor Relations

Joe Morgan - President and Chief Executive Officer

Bob Ginnan - Executive Vice President and Chief Financial Officer

Analysts

Charlie Strauzer - CJS Securities

Operator

Good morning, everyone and welcome to Standard Register’s 2014 Second Quarter Results Conference Call. Today’s call is being recorded. As a reminder, the presentation slides for today’s conference are available by accessing the Investor Relations section of the Standard Register website at www.standardregister.com/investorcenter.

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

Carol Merry

Thank you, Brent. Good morning, everyone and welcome to the Standard Register’s 2014 second quarter conference call. Earlier today, Standard Register published the second quarter results in a news release that’s available at the company’s website. During our conference call, President and CEO, Joe Morgan and Executive Vice President and CFO, Bob Ginnan will discuss the company’s performance and results.

Before we get 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 statements that can be found either in the earnings release Standard Register issued this morning, on webcast slides that accompany this presentation, by accessing the company website under Investor Relations, 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 used in isolation or as a substitution for GAAP and a reconciliation between these measures and their GAAP counterparts can be found in the earnings release that was issued this morning. I also direct your attention to the Safe Harbor and non-GAAP reconciliation Slides #2 and #3.

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. And following his comments, we will open up for your questions.

Now, I will turn the call over to Joe for his opening comments.

Joe Morgan

Thank you, Carol. Good morning, everyone and thank you for joining us on the call this morning. As we near the one year anniversary of the acquisition of WorkflowOne, we are accelerating our business as we start to realize more benefits from the acquisition, which are in the categories of cost efficiency and also the customer, which is honestly in the long run the most important part of the acquisition.

It’s worth repeating that we are only about halfway through the integration and not yet at a point where we are achieving organic revenue growth from our solutions that is sufficient to outpace the decline in demand for traditional business forms and labels. But we are making stronger progress and you can see more of it in the second quarter performance. EBITDA and gross margin increased over the prior quarter. Our investments are producing stronger pipelines across the portfolio, which is the first step in addressing the revenue challenge and we continue to invest in the growth solutions at the appropriate rate.

The primary takeaway from the second quarter is that SG&A management and synergies primarily in the category of gross margin from the integration along with sales growth in the solution categories related to recent investments produced an increased EBITDA and gross margin over the last quarter. Within the overall numbers, there are significant numbers of customers that are acquiring the new solutions from us, which gives us confidence in the future.

At this point, I am going to turn the call over to Bob for his commentary on the specifics of the financial for second quarter results. And then after Bob talks with you, I will give an update on our strategic priorities for the balance of the year.

Bob Ginnan

Thank you, Joe and good morning. Our revenue for the quarter came in at $225.3 million and compared to last year, obviously a significant growth with the acquisition on a pro forma basis, down about 9.1%, gross margin improving to 28.2% and SG&A at $57.1 million give us a non-GAAP operating profit of $6.3 million versus $3.7 million in the prior year. With all the changes in the pro forma compared to last year with the revenue change in the constant migration of integration leading to synergy savings. I actually find it more helpful to actually just go back one quarter and look.

And when you look at the second quarter versus the first quarter, 9.1% revenue decline versus 10% in the first quarter; EBITDA in the second quarter of $15.5 million versus $13.2 million in the second quarter; gross margin 28.2% versus 27.3%, so almost a full point improvement; in SG&A going from $58.7 million down to $57.1 million leading to all four of those headed in the right trend here from a trend perspective as we integrate the companies. On a business unit perspective, healthcare $64.4 million and business solutions $160.9 million roughly following the overall 9% decline on a pro forma basis and improved margins in both business units versus the first quarter as well.

Turning to the cash flow for the quarter, as we planned for the year between pension and integration-related payments net negative cash flow of $7.8 million, $13.9 million on the year, so roughly pretty consistent with the first quarter as we moved through the integration. We will remind you that right now we are projecting towards $42 million on pensions obviously the third quarter is a big pension contribution quarter. On the positive side there we have been tracking the Highway Bill as it includes pensions moving very closely. And we go pretty optimistic that is heading the right direction. Once that passes and that is the case we will issue a press release that will quantify the actual impact in both 2014 and 2015 as we go through that.

And finally we issued a press release a little bit earlier regarding the New York Stock Exchange compliance issue with $50 million market capital, so we will be submitting that plan a little bit later in August. And if you look at currently where we ended last time, we are above that today, but we will be doing that plan in August.

So with that I will turn it back to Joe.

Joe Morgan

Okay. Thanks Bob. One of the key strategy elements of our business is to spend time with our customers so that we can understand where they are going to be spending money in the future as the dynamics around traditional documents continued to change with the advancement of new technologies. And that insight provides clarity on how we should spend money going forward in our company and how we should execute in our go to market strategies. So, our discussions with our expanded customer base continues to give us even more insight into what we need to do to execute our demand based strategy successfully which is the key. In all of the markets we serve we are finding that our customers need help in integrating their data which is both from a security standpoint, but also just in terms of driving better outcomes for their company. We are seeing a major shift in the dialogue with our customers from operational improvement to revenue generation helping them enhance their company which is exactly what we are focused on as an entity as well.

Content, we will live in a world of content that continues to flow freely and it’s extracting the proper content to drive the outcomes. And then workflow, workflow in the spirit of taking into our company the data and the content that our customers have and then helping produce an output that allows them to drive the proper connection with the ultimate consumer and that happens through a variety of media channels printed, signage, electronic communication, social and mobile. So we participate in a more agnostic way than ever with our focus in workflow content and analytics. And they need to then accurately measure, monitor the implementation and then measure the return on investment and therefore report results. So that is the workflow content and analytics focus of Standard Register now, a critical communications based company in key vertical markets.

So that’s where we need marketing and communication solutions and services, that’s where they are assigning budget dollars and that’s where we are focusing our go to market efforts across the company in this specific area. And then nimbleness and agility that we bring forward now has to find its way to balance the need for print which continues to be very important to what we do, but also we find ourselves in different conversations than we ever have done before.

We talked about the trends affecting the printing industries – printing industry rather as customers move to electronic record keeping transactional management and customer communications. This changing environment is a challenge, but it is also an opportunity to gain better insight, mostly due to speed, make better assumptions and we are adjusting our operations accordingly a couple of examples would be the Jeffersonville operation continues to perform well and actually is growing in terms of daily transactions. We are excited about that, that’s Jeffersonville, Indiana end of runway with our partnership with UPS.

The consolidation plan been embarking on since the WorkflowOne acquisition is continuing to give us the ability to execute again within the centers of excellence, structure that we had from the past. As we transformed our company to embrace these multiple channels of communication, we are also working with our customers to make the channels work together reinforcing each other and produce results, for example, in patient engagement and in marketing or in customer communications.

I attribute our strengthening pipelines to our efforts to prove to our customers that we can be their source for this expertise. We are introducing innovative and valuable solutions and services. And what’s interesting as well is without this perspective in this expertise, in this consultative approach, the traditional business becomes more questionable, because our customers see the transition taking place and the transformation taking place and they want Standard Register’s consistent execution skill to be a part of the future. And so the combination of the new insight that we have gleaned and the expertise we are bringing in this broader communication set in combination with our more traditional business gives a much better position for us and a comfort for our customers.

Our focus on selling our entire portfolio into our large customer base is the result of that and therefore prudent investments to support these revenue generating activities. Partnering is increasingly important as we go forward. As you know, the technology landscape is so broad and vast. We do not have an intention of making everything ourselves. So, we have an increasing partnership group that we are working with, that’s helping us accelerate our position in the business.

So, what are we expecting for the second half of ‘14? As we have talked many times, we don’t provide revenue or earnings guidance, but there are some points that I can’t share with you related to our expectations for the rest of the year. The four primary markets for our company, healthcare, financial services, manufacturing, retail remains stable or are growing as the global economy stabilizes. We will be challenged by continuing adoption of electronic recordkeeping and transactions, as we call it the electronification of the workplace. And much of our historic business has been focused in the operational side of the businesses, which is where this effect has its greatest impact.

And if you look at healthcare and financial services as insurance enrollment and medical prescription transmission to begin to move online are couple examples. What is comforting though is we have modeled this and we understand what the implications can have as the adoption takes place of electronification. So, we manage our operations accordingly. Because of the customization and scope of our solutions, our sales cycle and customer implementation cycles can be quite lengthy, because we operate at the enterprise level primarily and it can be as much as 6 to 12 months.

In the second half of the year, we expect more of our recent contract wins to move through the process and begin to produce revenue. We have a very robust implementation process that’s connected with our customers. We have identified specific customers who can benefit by using more of our solutions and we are actively cross-selling, leveraging our expertise and relationship. And this is a key metric in our company as the number of solutions that our customers purchase from us is the key indicator of the long-term sustainability of the relationship we have with our customers as well as the expected success.

And I can tell you that we expect continued growth in our label operations in Mexico and we are making continued investments there. And we monitor that very closely as many of our large customers continued to ask us to provide them with similar capabilities that we provide in the United States, in the Mexico marketplace. We are expecting more revenue from our customer communications that is produced with the connection of new workflow that we have placed at the front end of what we invested in last year and announced the high speed web inkjet presses, both of which by the way are operational, one here in the State of Ohio near Columbus/Grove City and the other in California in Sacramento.

The SMARTworks platform continues to be invested in with upgrades in the second quarter to improve configuration options for our growing promotional market, promotional marketing products business. And one comment there is with the WorkflowOne acquisition, we are very excited about the fact that we actually have now instead of a product offering, we actually have a business that we can move forward with in the promotional marketing space and that continues to be advanced with great leadership and insight. And we will be announcing more significant upgrades to be launched later this year as we – if you connected that with SMARTworks back to my earlier comment about marketing, that’s where you will see our future investments being made.

The upgrades not only improved the user experience, their design to make it easy for our customers to use more of our solutions and services. You will hear me going forward Standard Register does a lot of work with very large enterprise customers. That’s where our sweet spot has historically been. They have very high expectations of us and they should. We provide very secured critical communication solutions to them. We also have opportunities to move down market with some of the same solutions in a more simplified way and you will see more of that coming from us as we go forward.

A new application marketplace is planned for later this year to allow customers to browse and select from a variety of market-specific productivity tools. Again, this is in the spirit of not making everything, but enabling access. So, we are an applications engineering oriented company. We are not really an R&D organization. We listen in timely to our customers, we translate quickly and then we access the markets, so that we can bring those solutions back to them. We need to do this now in the space of mobility.

Some innovation – innovative new solutions are in our – in or approaching pilot stage and we expect to launch them in the second half as well. We also expect to announce new partnerships to complement our offerings and we will take our solutions to a larger audience and new customers again pace, now that we have clarity on the – more clarity on the portfolio, it’s about getting into the market faster.

We are looking at our business in terms of the markets we serve and organizing around the best opportunities for growth. Through the WorkflowOne acquisition, we have an expanded customer base, we are optimizing our operations aggressively and then we are enhancing the precision in regards to our messaging with customers, but now it’s down to – it’s really all about sequencing, how we take full advantage of the things that we know need to be done. We have initiated new marketing campaigns and approaches that will support our sales efforts in the second half. We expect to continue on schedule with the integration and to drive savings inefficiency from the integration. We also expect to be able to meet our pension funding obligations, which there maybe questions about and Bob is prepared to answer and other financial obligations that we have. We do not expect however for 2014 to be the breakout year. However, we do expect to continue the pace of your integration aggressively and accelerate the pace of our sales based on leveraging recent investments. We have an intense focus on gross margin improvement. We have an intense focus on pipeline improvement around the insides we have gleaned, which are completely aligned with the investments we have made. And we know that partnerships especially in the mobile world are very important to our companies, so those are the things that we are focused on.

Overall, the progress we have made in some areas in the second quarter is showing improvement, especially given the circumstances of declining demand for our more traditional document business. The trends in EBITDA and gross margin are encouraging, but we need to increase revenue while continuing to aggressively integrate, execute with discipline and manage cost. We are doing really good things on the….

(Technical Difficulty)

Operator

Ladies and gentlemen, we are experiencing a technical delay at this time. Please remain on the line. Your lines will again be placed on music hold. Again, we are experiencing a technical delay at this time. Your lines will be on music hold until the call resumes.

Joe Morgan

Okay. We had a little bit of a technical challenge there. I apologize for that. I was actually just about done with my comments. This is again Joe Morgan. I will just repeat the summary here. The trends in EBITDA and gross margin are encouraging, but we need to increase revenue as I mentioned that’s the key thing and that’s where our focus will be. This is the priority for the remainder of 2014. I am confident in our ability to deliver on it and I look forward to reporting on our progress next quarter.

And with that, we will open up to questions. And Bob and I will be happy to answer any that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Charlie Strauzer with CJS Securities. Please go ahead with your questions.

Charlie Strauzer - CJS Securities

Hi good morning.

Joe Morgan

Hi, Charles.

Bob Ginnan

Hi, Charles.

Charlie Strauzer - CJS Securities

If you can – with the quick discussion if we can about, Joe, give us a little bit more color if you can about some of the things that you are seeing success is not in terms of the top line versus things that are still kind of declining, maybe you can even break it out percentage wise of revenue of products that are growing versus declining? And then when do you think that inflection point starts to get clear?

Joe Morgan

So, the things that – categories that we have talked about are our Mexico operation in the labeling space is an example of that, our healthcare technology, the software portfolio continues to be there in our marketing services, part of the business especially in the new solutions that is also moving there in the right direction. Our promotional marketing segment is moving forward well. The in-mold labeling, which is part of our product marketing and labeling business is starting to really pickup some steam. So, those are the areas that we chose critical – customer communications has not – the growth hasn’t been achieved yet, but the pipeline focus is indicative of where we will see growth in the future. So, the areas that we have chosen to invest in are the ones that I just described and those are starting to – many of them are already growing and the pipeline that supports them would indicate that, that will continue to be the case. And in the future, we will see enhanced performance there.

In terms of the inflection point, as I mentioned, we are halfway through the integration. The next 18 months, actually now 17 months are kind of this critical time for us as we complete the integration. So, during that period of time, we expect to see the full impact of the integration, which is kind of the operational performance, but also the stabilization of many of the customer situations that we are in as we transition. So, while I can’t give you an exact date as to when I see that happening. If we execute properly, we will be in a position hopefully in the not too distant future to talk more specifically about the guidance.

Charlie Strauzer - CJS Securities

And that kind of leads into our next question with the integration and the cost saves you have realized so far versus where your goal has kind of been, are you seeing any additional potential areas of cost savings that have maybe come about since you have begun the integration process?

Bob Ginnan

I think as any project like this, we start to go through, you find both opportunities and you find additional challenges and I’d say it’s been no different there. However, I would say that the opportunities are at a minimum (indiscernible) with – on pace with our original goal of $40 million. And we haven’t seen anything to change that at all. We are seeing as Joe mentioned a couple of product lines into good traction there. So, that’s on top of that process too.

Charlie Strauzer - CJS Securities

Got it. And then I know you talked about that are you confident being able to support your funding needs etcetera, you can maybe expand a little more color on that so?

Bob Ginnan

Yes, I think, obviously the two big challenges on funding is it’s really two things, it’s pension and it’s the implementation – the cash required to achieve the synergies. And I think from both of those, obviously we have built plans to meet the pension obligation, although this pending legislation, which will be nice too. But in terms of the restructuring, we tend to build restructuring plans that have quick as possible paybacks, so that will ultimately get that turnaround as we go through. And however, there is still work left to do throughout 2015 as well. Those are the two challenges there.

Charlie Strauzer - CJS Securities

And then when you look at the kind of the performance of the overall stock market and everything and has that had a benefit also too on the pension?

Bob Ginnan

We have our portfolio designed. Number one, our big concern on portfolio is we have got to really protect against downtime. We can’t lose capital in the pension trust as that’s the way to design. So, while we have had pretty good margins there, they may not – or improvement, they may not match if you were 100% invested in the equities over the last 18 months, obviously we are not going to have that kind of return, because we do have some downside protection. However, they are meaning objectives. And that’s we have a public return of 8%. And last year when you look at it, it was pretty much close to that, but it’s keeping us where we need to be without jeopardizing our capital there.

Charlie Strauzer - CJS Securities

Great, thank you very much.

Bob Ginnan

Thanks, Charlie.

Operator

(Operator Instructions) And sir, we have no further questions in the queue at this time.

Carol Merry

Alright. Then we will thank everyone for their attention and look forward to speaking with you again next quarter. You may now disconnect.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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