Summary of Q2 Earnings Call By Gail Kailing July 30, 2003 - Standard Register (NYSE: SR), provider of document management and label solutions, consulting and fulfillment services, and e-business solutions, announced results for the second quarter ended June 29th, 2003. Revenue for the second quarter was $232.9 million, down 8.2% from $253.8 million last year, primarily in the document and labels solutions business unit. Year to date revenue of $469 million was down 9.4% from $517.6 for the same period last year, and the majority of the drop was traditional product decline. Gross profit was $89.1 million as opposed to $101.0 million in the second quarter 2002, down 11.8%. Gross margins were 38.3% (2003) vs. 39.8% (2002) and were in line with expectations. The first half of 2003 showed a net loss of income before taxes of $22.4 million while the first half of 2002 produced a net income of $35.2 million. Topics of this summary: * Business Overview * Market Conditions and Operations * Broadlane, Inc. * Growth Opportunities * Second Quarter Restructuring * Financial Summary * Q&A Business Overview Standard Register is in the process of implementing a strategy intended to produce an enduring business to drive superior, long-term shareholder value. The company continues to receive validation from customers who are expecting to work with suppliers who can provide a full range of document solutions including print, outsourcing, facilities management, and technology-enabled processes. To execute on this strategy, it takes a lot of investment in talent, technology, and capability. This investment is occurring now and will continue for the rest of this year, and the payoff will come in the future. Making these investments, which are mostly expensed, puts a strain on current results when the traditional business is under pressure from the slow economy, pricing pressure, and increasing shift to digital solutions for printing and document solutions. In the meantime, Standard Register is undertaking initiatives to improve sales productivity and additional cost reduction and restructuring actions. These actions will drive approximately $13 million in savings in the second half of this year, and $28 million in annualized savings. Standard Register continues to make significant progress in building its capabilities to execute the long-term strategy, even though current conditions are creating a confluence of challenges that need to be overcome. The good news: cash was positive in the second quarter and Standard Register's financial condition remains strong. Market Conditions and Operations Standard Register was impacted by weak economic conditions in the quarter and year to date. Customer efforts to reduce costs have caused pricing pressure and a unit weakness in some industries resulting from the company's customer's businesses being negatively impacted. Many companies are delaying technology purchases or even canceling projects to meet their own near-term profit targets. This has been the case particularly in the software and systems units of Standard Register's business. The sales cycle, in some cases, has also lengthened as technology spending has come under additional scrutiny. Despite these conditions, the company is stepping up its efforts in the traditional document business with more aggressive sales and marketing campaigns. There are early signs of success as the pipeline of opportunities continues to grow: * The newly formed lead generation group has provided leads totaling several million dollars to the sales organization. While the majority of leads have not resulted in orders thus far, Standard Register is optimistic about the potential of this initiative. * The strategic accounts organization is making good progress. This organization is focused on assisting customers to execute their document strategies and provide business process management. * The area sales organization has been making progress as well with a solid pipeline of opportunities. The focus of this organization continues to be on a targeted number of industries including health care. Standard Register is taking a highly disciplined approach to increasing sales productivity. While the company has wins and a strong pipeline of opportunities, it's important to note these don't immediately translate into revenue. The full revenue potential isn't recognized for about 6 months, on average, and as late as 9 -12 months after the sale. This is dependent on current customer inventories, product design requirements, software implementation, and other factors. Each customer implementation is different. Broadlane, Inc. Standard Register has signed a five-year agreement with Broadlane, Inc., a leader in delivering innovative business services to the healthcare industry. The agreement selects Standard Register as one of five suppliers to Broadlane customers for their document solution needs, estimated at $100 million annually. The five suppliers consist of California based consortium of three suppliers, Standard Register, and Relizon, a Dayton Ohio-based company providing business communications comprised of document solutions, billing solutions, and marketing solutions. The agreement, which takes effect Aug. 1, 2003, will give Broadlane's more than 2,000 healthcare customers access to Standard Register's full portfolio of document solutions (from healthcare documents, fulfillment services and patient identification systems to e-procurement and print-management software). Standard Register will also provide consulting and training in cost management, standardization and process improvement. Standard Register is well positioned due to the company's significant health-care industry expertise and innovative solutions that enable health care organizations to enhance their efficiency, reduce costs, and improve accuracy in patient care. Standard Register has over 30 years experience in health care including serving many of the acute care hospitals in integrated delivery networks. "We are absolutely excited about this opportunity," said Dennis Rediker, President/CEO. "We are focused on aligning our resources to capture our share of this $100 million spend." Growth Opportunities The growth opportunities in which Standard Register is investing will become increasingly important parts of the company on their own right and will be a differentiator in decisions involving traditional documents. These opportunities include: * Print-on-Demand * Facilities Management * Consulting Services Print on Demand During the quarter the company stepped up investment in the growing $28 billion print on demand market. A number of print-on-demand centers were equipped with digital color capabilities including software and hardware for color output, and full bindery capabilities. Standard Register's goal is to offer a full range of solutions that help customers communicate more effectively. Print-on-demand provides the customer with the documents they want, when they need them, in the exact quantities desired. Examples of applications include training manuals, newsletters, client presentations, benefit packages and various types of marketing collateral. These products generally have a short shelf life because the content is frequently changed or updated. The company is now positioned to help customers achieve cost savings from eliminating goods in storage, waste, and obsolescence. In addition, customers can mitigate risks by insuring that the most current version of critical documents is always in use. The solution is powered by SMARTworks and allows end users to order existing documents or create custom documents and send them directly to a production facility. Facilities Management The services being performed include on-demand copying, equipment fleet management, and print outsourcing. Whether on-site or near-site this concierge approach relieves the customer of these activities. Standard Register's value proposition includes cost reduction, an alternative to deploying expensive equipment in house, and seamless integration in managing the entire universe of customer documents from copies to collateral. The technology backbone of this offering is SMARTworks as well, which enables order entry, tracking of work in progress, and transaction reporting. This program is being implemented in a number of accounts. Consulting Services Standard Register continues to add highly talented consulting personnel to the PathForward organization, including staff from organizations such as Kinko's, IKON and Danka. PathForward services include developing enterprise document strategies, software integration and implementation, as well as strategic sourcing. A current Fortune 100 customer has engaged PathForward to develop bid specification for an enterprise-wide print strategy that includes outsourcing an in-house print center, fleet management of all copiers and printers currently in use, and providing a technology platform to manage all print. Second Quarter Restructuring The current restructuring initiatives are in response to declining demand for some of the company's traditional products caused by the weak economy, competing technology, and the company's own success in eliminating some of its customers' need for printed documents. Restructuring activities included: * Closed a rotary plant in Missouri * Consolidated four facilities into one state of the art facility in Dallas * Consolidated several warehouses * Reduced staffing at headquarters * Eliminated approximately 600 positions, company-wide. The cost of restructuring was $13 million pre-tax, and Standard Register expects to incur additional restructuring expenses related to these actions as the year progresses. Those additional expenses are for items that could not be accrued this quarter and are expected to be in the neighborhood of $3 million pre- tax. Financial Summary R&D and SGA were $74.2 million compared to $70.8 million in the same quarter 2002. If you discount acquisition and pension expenses, not included in the second quarter last year, expenses were actually down more than $2 million, reflecting the continuing emphasis on good cost controls. The balance sheet continues to show positive cash flow. Cash and cash equivalents dropped slightly from $122.8 million at the end of June 2002 to $113.0 million for the same date in 2003. Accounts receivable and inventories were down slightly as well. Q&A 1. The opportunity funnel continues to grow for document outsourcing and production. The selling cycle, traditionally a very long cycle, has not changed dramatically. 2. The company is excited about a new consulting service for outsourcing print procurement. 3. Standard Register is optimistic for the second half of the year based on early wins and the sales pipeline. 4. Standard Register has been reinvesting in the business - technology development, talent acquisition, and deployment of human capacity. The company has a strong cash position, they are still looking at acquisitions. Rather than acquisitions to add revenue, Standard Register is looking at looking for strategic acquisitions, those that will help execute the long term strategy. 5. Segment sales for the second quarter were: Document/Label Solutions -$162 million Fulfillment - $60 million InSystems - $11 million Other - a small fraction Segment sales for the first half of the 2003 year were: Document/Label Solutions - $324 million Fulfillment - $120 million InSystems - $24 million Other - about $1 million 6. Standard Register's effective interest rate on the total debt is about 1% and the normalized tax rate is approximately 40% 7. Cash flow from operations was $15 million for the quarter 8. The overall investment in the print-on-demand centers is expected to be about $4-5 million in capital with some additional expense to be fleshed out. 9. Equipment utilization varies by the type of press, but is reaching into the high 70s. 10. Standard Register has had a focus on the Healthcare industry for years. There are vertical market specialists located across the country in pursuit of business. A combination of the depth and breadth of the product portfolio and the company's knowledge of the heath care industry will make an impact.