Standard Register Co. (SR)
Q1 2008 Earnings Call
April 25, 2008 10:00 am ET
Bob Cestelli - VP of IR
Dennis Rediker - President and CEO
Craig Brown - CFO
Jamie Clement – Sidoti & Company
Fred Buonocore – CJS Securities
Good day everyone, and welcome to Standard Register's first quarter conference call. Today’s conference is being recorded. As a reminder, the presentation slides for today's conference are available by accessing the Investor Center's section of the Standard Register website at www.standardregister.com/investorcenter.
Before we begin, a spokesperson from Standard Register will read a brief statement.
This report includes forward-looking statements covered by the Private Securities Litigation Reform Act of 1995. Because such statements deal with the future events, they are subject to various risks and uncertainties, and the actual results for fiscal year 2008 and beyond could differ materially from the Company’s current expectations. Forward-looking statements are identified by words such as anticipates, projects, expects, plans, intends, believes, estimates, targets and other similar expressions that indicate trends and future events.
Factors that could cause the Company’s results to differ materially from those expressed in forward-looking statements include, without limitation, variation in demand and acceptance of the Company’s products and services, the frequency, magnitude and timing of paper and other raw material price changes, general business and economic conditions beyond the Company’s control. Timing and completion and integration of acquisitions, the consequences of competitive factors in the marketplace, cost containment strategies and the Company’s success in attracting and retaining key personnel
Additional information concerning factors that could cause actual results to differ materially from those projected is contained in the Company’s filing with The Securities and Exchange Commission, including its report on Form 10-K for the year ended December 30th, 2007. The Company undertakes no obligation to revise or update forward-looking statements as a result of new information. Since these statements may no longer be accurate or timely.
Thank you, we will now turn the conference call over to Mr. Dennis Rediker, President and Chief Executive Officer of Standard Register. Mr. Rediker, please go ahead.
Thank you, very much and thank you all for joining us here today on the call. With me today here our Craig Brown, CFO and Bob Cestelli, Vice President of Investor Relations, and Joe Morgan, newly appointed Chief Operating Officer of Standard Register. As usual I will make some comments about the quarter followed by Craig’s reporting on the financials and then we will take questions.
Turning to the results the operating profit and we referred to operating profit before restructuring, asset impairment, pension amortization and other individual non recurring items. Operating profit for the quarter was up 11%, revenue was negatively impacted by loss of a higher volume, commodity funds and label application and some general price pressure, plus we do know that some of our business has been impacted by the economy, with less demand for our products and accounts that produce hard goods using the housing industry, our overnight package carriers as well as other manufacturing operations. We have some pressure on the units activity.
In spite of the slower revenue, the operating profit improved over the last year helped by the lower SG&A expense, which resulted some of the cost reduction program that we announced in mid 2007. Cash flow -- cash flow was very good, positive in the quarter with a $10 million reduction in net debt from year-end 2007. During the quarter our concentrated efforts to win new business is beginning to payoff.
Our Enterprise Document Management, sales and marketing approach landed us 39 new deals in the quarter, valued approximately $13 million annually. This compares with 46 new contracts last year and these all represent new business. Revenue from these contracts that were signed in the first quarter was started flowing later in the year. We have some specific marketing and sales campaigns that are beginning to payoff as well.
There is -- they are focused on specific application and initiatives by industry. For example in the quarter a couple of them showed good progress. We are the leader in developing and producing tamper-resistant prescription pads that are necessary to meet the upcoming requirements that are being issued by the centers for Medicare and Medicaid and we are seeing a good pace of that business in this prescription pad area.
We have also developed some new solutions for our customer notices that are send out by all kinds of institutions to their customers particularly banks and financial institutions for example and we are better experiencing in this increasing postage costs and processing costs in order to produce the required statements and we‘ve come up with some innovated solutions to help them, being more productive in their processing and reducing the postage costs.
Finally, one of our areas Print Supply Chain Services is a area that we grew 37% in the quarter. This is a service where we are using our expertise and enabling technology to Source Print and manage the Print Supply Chain for our customers, we can operate for our customers on a transaction-by-transaction basis or we can outsource the whole process from them.
We deliver to our customers a good to measure our cost saving and process improvements. Ultimately we do believe there are lines of business that are growing, POD Print On Demand, labels, our security solutions, document systems and our print supply chain services will more than offset the decline in traditional document management business. With the leverage our lower cost structure and higher productivity the resulting revenue growth it should lead to higher earnings.
Now to a couple of specific announcements this week, earlier this week we announced that we would freeze our pension plan that means freezing the benefits accrual under our defined pension benefits plans at the end of the June of this year. This action effects approximately one-third of our workforce, as we have been modifying our pension provisions and benefits over the last two years, working our way from defined benefit towards defined contribution.
The affected employees will be eligible or an increased match in the company’s 401K plan leaving us with a competitive plan that we feel as more affordable and more flexible for our associates. The financial effects of this, I think Craig is going to cover that in his part. Another announcement was, the announcement of Joe Morgan being appointed as Executive Vice President and Chief Operating Officer reporting to me.
Also continuing to report -- report to me will be Finance, Legal HR in internal audit. In his role as COO, Joe is responsible for the operations with the company, including Sales and Marketing and client care, manufacturing and supply chain, information technology Print On Demand Services. He will manage the pace and the process of change to maintain operational effectiveness well drive it our initiatives to improve our execution and operational strategy and to assure we achieved our growth targets to the direct and to our alternative channel.
During the seven year’s of the company Joe has a 11 several of our part of our organization including the turnaround of our Print On Demand services business, our improvement Document Systems, business and service under our overall information technology capability. At this point, I think Joe has a couple of thoughts as to how he is going to make a difference in the pace and performance of the company. Joe would you like to say a couple of things?
Sure thanks Dennis. Over the next 100 days or so I have got the plans for focusing on a few key thinks. As the CEO my main role is around execution of the plan, I’ve bean very evolving our planning process over the last few years index. I’ve been leading that so I am very intimate with what we need to do there and with our alignment that could come through this new announcement and I am very confident that we can move – move that needle very quickly and this that’s the first thing I am focused on as alignment on accountability.
The second thing is around decision making process with the new staff that I have, we are in really good position to make improved all in decisions around on key investments going forward. The third thing is the intense focus on the client I have spent a lot of time in the field with a lot of our customers, both new and existing clients and I see the opportunity before us and we need to continue to bring more people to that relationship with our clients, we’ll be focusing on that.
The next one is the difference in the market which is really around trust the world’s most trusted document services company, trustees are key differentiator and that goes form the client all the way into our operations and everyone in our company and the culture. So, we will be concentrating tremendously there, Lean and Six Sigma those are two different things.
The methodology will be applying that more and more throughout the company not just in operations meeting manufacturing, but also in our technology investments and then the final thing’s is around leaderships. We have invested quite a bit in training and making sure that we have the right people in place, and we’re going to continue to do that in creating an environment where we can continue to attract the right talent to drive our play in force. So those are the six main things that I am going to be focusing my attention on, but as you bolt that all down as Dennis, it’s really the pace of business that bringing energy to execution, which is what I will be spending my time on.
Thank you Joe, that’s great and, we’re confident that this will pick up the pace and performance of the Company. Also yesterday at our annual meeting, we had a slide of directors approved, we have increased the number of Directors to eight and we elected in the annual meeting five of the incumbent and three outside the new Board members. These three new Board members bring a tremendous amount of solid credentials and a breadth of relevant experience.
I’ll just take a moment to work through these three. We have first had David Bailis, who is now running his own consulting business after retiring from, as a Senior Vice President of First Data Corporation. Michael Kohlsdorf, he is currently President and CEO of ADERANT Holdings and he is formerly the Senior Vice President for Ikon Office Solutions and finally Eric McCarthey, he is currently President for the Coca-Cola Company’s 7-Eleven global business team, where he is responsible for the second largest customer and complete operation’s, marketing of their activity with respect to 7-Eleven.
These new Directors have already been through an orientation process and they have a great desire to be very engaged with what they see as a great future for the company. With Joe Morgan in place as COO, I will be focusing more on working with our new Board to develop our long-term enterprise value strategy leading to a more profitable growth that will increase value for our shareholders.
Yesterday also the Board of Directors declared a quarterly dividend of $0.23 per share to be paid on June, 6th to shareholders as of May 23rd, 2008. So, that was the specific announcements from yesterday. Now Craig will provide us usual incredibly clear representation of the financial results for the first quarter.
Thanks. Good morning everyone. We will walk you through P&L, I will talk a little more about the pension freeze implications to expense and funding and we will do a bit brief update on the cost reduction program that we announced last year that Dennis mentioned, and we’ll also touch on a couple of balance sheet items and discuss our cash flow for the quarter a little more detail. As Dennis indicated our revenues in the first quarter was just over $207 million. That was down $20 million from last year's number or about just under 9% decrease.
We are now just indicate that the economy has had a role to some extent for probably at least 75% of this decrease. It takes a couple of different forms, first probably $13 million of the $20 million can be a trace to continuation perhaps even an up tick in competitive pricing related to customers who themselves are feeling pressure from the economy and are now looking for price reductions. A half of that $13 million occurred in the single account, which we expected and which ended there personally from us after the first quarter of last year.
We've also observed few of our units of manufacturing in labels and other areas where we service the manufacturing industry and that was probably a couple of million if the20, and then the balance of about $5 million for various other reasons, but importantly about half of that remaining $5 million relates to a single customer who simply reduced their quantity of units this year, but they were not in a manufacturing industry. So, if we look by segment, and I’ll just mention the dollars, Document Management was $113.9 million in revenue fourth quarter. That compared to a 121.7 so that was off just under $8 million or 6%.
Labels $25.6 million this year compared to $32.6 that was down $7 million or 21% now that’s a large decrease of that single customer I mentioned, accounted for all of that decrease. Document Systems $5.1 million down a $1 million from last year’s $6.1 million, we had a particularly strong quarter last year, the results of this quarter were more inline with the more recent quarters preceding this one. Our Print On Demand business was also off, feeling some price pressure $4.3 million down from last year at $61.3 million down 6.6% in our PathForward unit, it was $1.3 about the same as last year, not much change there.
Gross margin was $69 million compared to 75.9 last year so, it was down $6.9 million on the $20 million drop in revenue. But importantly the percent of revenue was virtually unchanged from last year, it was 33.3% compared to 33.4% and that was we see a lot of good results given the lower unit volumes and that’s primarily resulting from the cost reduction program that we initiated mid-year of 2007. Our analysis indicates that we had cost reductions this quarter were about $3.7 million related to that program, compared to the first quarter of last year. So, that annualizes added about $15 million in that and that’s in the gross margin.
We move on down to the P&L. SG&A expense was $51.8 million excluding pension amortization compared to 59.9 a year earlier. So, that’s a little over $8 million lower with the majority of that almost all other related to restructuring changes that we made mid-year last year. Depreciation and amortization is essentially unchanged from the prior year, which brings us to our operating profit before pension amortization, 10.4 million this year versus 9.4 last year, increase of just under a 11%, a quarter-over-quarter.
Moving on down the page, pension loss amortization is lower this year $5.2 million compared to $7.0 last year that’s a $1.8 million drop, in -- which was inline with our expectations. Our interest expense is the same as last year at $800,000. We have a couple of things going on there, last year our debt was rising as we preceded through the first quarter of ’07. This year our debt is falling, but on an average basis our debt this year was a bit higher than last year, but we also enjoyed lower interest rates and so all in all it was a push with last year.
Pretax profit $4.4 million this year, compared to a loss last year of $400,000 and net income on continuing operations $2.5 million profit this year versus a loss last year of 200,000. On the EPS basis we had $0.09 a share, this year compared to a loss of penny in the prior year, if you look at that $0.09 a share and add that to the pension amortization that relates to prior years principally weak markets in 2001 and 2002 then you get to an EPS excluding that prior year effect of about $0.20 a share that compares to $0.18 a share last year, again up about 10.5% to 11%.
Moving or just make a mention about the cost reduction program, to finish the conversation cost of sales, as I indicated it was -- if you compare this quarter for last year's quarter, $3.7 million better, Our SG&A was about $7.9 million better than last year on items that we can trace to our restructuring programs so that, that gives us a total reduction onside with every – I’d miss spoke.
The SG&A related to the restructuring is $6.2 million not $7.9. So, if you would add a $3.7 and $6.2 to the other you end up with $9.9 million is the amount of savings that we attribute to the restructuring program, which analysis out to just under $40 million, $39.6 million, which is inline with our goal. Pension, as Dennis indicated effective June 29 of this year, we will freeze the benefits earned under our traditional defined under the pension plan.
Employees that are affected by this, which are about one-third of our employees, will retain all of the benefits that they have earned as of that date and we will be eligible for an enhanced 401K match moving forward from that point on and all of other employees the other two-thirds of our employees currently participated in 401(k) plan and after June 29th, all of our employees will be on the same 401(k) plan. The financial impacts of that is that our total retiring expense, which is lower pension expense but higher 401K expense, the net of those changes will reduce our annualized expense by about $7 million per year with about - obviously about half of that or $3.5 million effectiveness in the second half of this year. About $2 million of that $7 million relates to lower pension amortization.
Pension liability is also expected to decrease and equity also to increase and our preliminary estimates of that number are about $20 million. We also expect that funding will be -- will be reduced over the long run. However, in 2008 we will continue to plan for $20million of funding based on the relatively slow start that we have got into market this year. So, we are now continue to plan for $20 million this year, and we will of course continue to fund the plans to meet our obligations, and we will communicate in future years funding as we see how the market goes and as we progress.
Now move on to the balance sheet. In the balance sheet as we saw a decrease in our working capital. Operating working capital excluding cash and debt. Our operating working capital was a $109.5 million at the end of March of '08, which compared to a 126 million a year earlier and 110 at start of the year. So, we were able to improve our management working capital from prior periods.
Our capital assets in the balance were a bit lower than we started the year with, and lower than the prior year as well. Our capital spending was $3.2 million in this quarter, and our depreciation in the quarter was 6.6, so, obviously that resulted in lower net book value of our capital assets. We believe our capital spending this year would be in the $20 million range, plus or minus a couple of million, and our depreciation is still expected to come in around $26 million.
If you look at the turnover of our capital assets and our working capital in relation to revenue, we can see a nice improvement this year compared to – at last year 3.9 times compared to 3.6, a year earlier. As Dennis indicated, our cash flow was approximately 10 million lower, or - excuse me, cash flow is positive by $10 million and our debt was $10 million lower, than it was at the outside of the year. That $10 million of positive cash flow is after pension funding of $5 million in the quarter, CapEx of 3.2 that I mentioned and after dividends were $6.7 million, so it’s a very good cash flow quarter for us.
In fact if you look at the trailing four quarters, our net cash flow is a positive 9 about $9.5 million, and that’s the after CapEx for the trailing four quarters of $17 million, pension funding of $20 million and dividends of $27 million. So, we continue to put out some good cash flow numbers.
That ends our balance sheet, capital structure shows a net debt to total cap ratio of 26.5% compared to 32% for the end of the year and just under 30% at the end of March. So a very strong balance sheet as we entered into second quarter of the year. That’s my report and we will turn it over for questions.
Thank you very much. (Operator Instructions). We will take our first question from Charles Strauzer with CJS Securities.
Fred Buonocore – CJS Securities
I am in for Charlie Strauzer. I am just wondered to see, if you could give us a sense where direction on gross margin, as well as your SG&A spend for the balance of the year relative to Q1?
Well, we – who is this please?
Fred Buonocore – CJS Securities
My name is Fred Buonocore. I am calling for Charlie Strauzer at CJS.
Hi, Fred, This is Craig. We haven’t given guidance specifically about those numbers going forward our guidance, which we reluctant to leave intact from the prior period it was basically build around revenue and our operating profits as we defined it. So, I would say that we don’t want to give a specific numbers on that except to say that we are watching the cost very carefully and we are pleased with our performance in the first quarter, and we recognize the importance of a good cost control. So, I – that’s as far as I can go on that.
Fred Buonocore – CJS Securities
I understand. And then secondly, Dennis you commented on the fact that, some of these other product areas had a certain point would more than offset the weakness in the printing business from a revenue standpoint. Do you have a sense for kind of the timing of that turnaround or can you give us some more color on that?
Well, we have -- we said that we have expect to have a very modest revenue increase that’s the guidance we given in the past and while we’re starting off here with a little bit of weaker revenue, we have good strong back half as you just noticed, we’ve signed several new contracts which will produce revenue later in the year. So, you know our intention is still to strive for that modest revenue increase which is obviously the net effect of the traditional and printing business declining and the new lines of business growing. So, our intention is still strive to achieve that in the course of this year.
Fred Buonocore – CJS Securities
Understood. Thank you very much.
You are welcome.
Our next question comes from Jamie Clement with Sidoti & Company.
Jamie Clement – Sidoti & Company
Hi, Dennis first question for you. In your print supply chain management initiative, I don’t know if you have ever discussed the split I don’t know if you have the exact numbers, but maybe you can venture or guess. When you are procuring print for your customers, do you know approximately how much of that is actually flows through your plans?
Actually, the sourcing of print that we talk about in our – in that print supply chain services, is the primarily or almost exclusively intended to be a service only offering. We don’t run that to our plans generally speaking, what we have is have a portfolio print partners. These are typically, we are sourcing a printed materials that we - that we traditionally do not produce and so, what we are offering as a service to customers to provide them a more effective way to resource their printed material from commercial printers and other special printers and managed the supply chain of those distribution warehousing and certainly of those materials. So, it really is a service offering, as we have mentioned before the gross margin on that is lower than our manufactured products but we have a very, almost no assets involved in it. So the return on that – that investment is, in all expanse and the return is very high.
Jamie Clement – Sidoti & Company
Yeah. And Dennis who are going to ask a question was here there have been some other companies in your industry and I guess still there are. That -- they’ve talked about similar type of services where, a large percentages is still supported by their hard asset, you know what I mean so I just -- I wanted to make sure, that I understood the different there and thanks very much for that.
Let me make one more comment. There are people who have a lot of printing assets and of course they want to offer those services to direct print to their assets. There is a movement that we see developing in the marketplace where our customers want to get the best deal in the marketplace without being captive to printer with who have the assets. And that’s a segment if you well. In the industry that’s developing pretty quickly and we unfortunately have been participating right all like that and we expected to grow significantly.
Jamie Clement – Sidoti & Company
Okay. Dennis, I don’t know whether this question should be directed for you - to you or to Craig, but when you -- going back a couple of quarters to your announcement of the cost savings plan. I think that you know since that time, the economy has suffered some deterioration and obviously if that -- that plays out in your revenue line this quarter, but if you look over the year your comparisons. It really seems like your costs saving number held up and that you didn’t really suffer for any kind of – so called reverse operating leverage or anything like that. Now, the question that I have for you Dennis is, it seems like 2008 priority was to be able to reinvest for growth in certain areas of your business. Now, given the decline in the economy, are you still able to do that and still be able to put up a number like this?
Where our investments that are in training, education, bringing in talent, developing technology is not and some specific assets as physical assets and we expect to continue to focus on investing that kind of money or that kind of investment into the places we want to grow. So, yeah I think our plan calls for us to continue to do that and that is the importance of the long-term future, if we don’t have that growth, in the growth areas, we are going to continue to see decline.
Jamie Clement - Sidoti & Company
I agree completely. I just wanted to make sure, because you know to be honest, I was, I was pleasantly surprised given the economic environment, that your margins held up as well as they did. So, I just wanted to make sure that you are still investing for growth, as you said you would be on the prior call?
Jamie just add to that I think that - I agree with you they did hold up well and we wherever possible are looking to eliminate other expense and take that and redirected the things where there are growth opportunities so we continue to try to do that wherever we can.
Jamie Clement - Sidoti & Company
I apologize if I missed this. The savings as a result of the pension actions that you all have taken, is that part – originally you talked about $35 million of annual savings, that you’ve accomplished by the end of 2007. You suggested there might be another $5 million that you could realize at some point in 2009, is that the pension number that sort of that around that $5 part of $5 million number?
Jamie Clement - Sidoti & Company
No. Okay. Okay all right. Thank - thank you very much
(Operator Instructions). Gentlemen at this time there appeared to be no further questions.
All right well I want to close up by saying then - that we’re working very hard to drive the top-line growth while we maintained our improved cost structure and actually achieve additional productivity, and so, we look forward to talking with you of that results in the second quarter. Thank you for joining us in the call and we will talk to you again.
Thank you very much ladies and gentlemen for joining today’s Standard Register’s first quarter conference call. This does conclude the conference. You may now disconnect.
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