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Edited Transcript of RRD earnings conference call or presentation 30-Oct-19 3:00pm GMT

Q3 2019 RR Donnelley & Sons Co Earnings Call

CHICAGO Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of RR Donnelley & Sons Co earnings conference call or presentation Wednesday, October 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Feeney

R.R. Donnelley & Sons Company - SVP of IR

* Daniel Lee Knotts

R.R. Donnelley & Sons Company - President, CEO & Director

* Terry D. Peterson

R.R. Donnelley & Sons Company - Executive VP & CFO

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Conference Call Participants

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* Charles S. Strauzer

CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst

* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* William McGoldrick Mastoris

Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst

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Presentation

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Operator [1]

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Welcome to the RR Donnelley Third Quarter 2019 Earnings Call. My name is Lois, and I will be your operator for today's call. (Operator Instructions) Please note that this call is being recorded. I will now turn the call over to Brian Feeney, RR Donnelley's Senior Vice President of Investor Relations. Please go ahead.

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Brian Feeney, R.R. Donnelley & Sons Company - SVP of IR [2]

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Thank you, Lois, and thank you, everyone, for joining RRD's Third Quarter 2019 Results Conference Call. Joining me on today's call are Dan Knotts, RRD's President and Chief Executive Officer; and Terry Peterson, our Chief Financial Officer. At the conclusion of today's prepared remarks, Dan, Terry and I will take questions.

As a reminder, we prepared supplemental slides for today's call, which can be found on the Investors section of our website at rrd.com. As we review third quarter results on today's call, we will reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves. The information that will be reviewed during this call is addressed in more detail in our third quarter press release, a copy of which is posted on the Investors section of our website at rrd.com. This information was also furnished to the SEC on the Form 8-K we filed yesterday.

Throughout this call, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risks and uncertainties. Therefore, our actual results could differ materially from our current expectations. For a complete discussion of the factors that could cause our actual results to differ materially, please refer to the cautionary statement included in our earnings release and the risk factors included in our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and other filings with the SEC.

Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides investors with useful supplementary information concerning the company's ongoing operations and is an appropriate way to evaluate the company's performance. These non-GAAP results are provided for informational purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the Investors section of our website as part of our press release and within the non-GAAP presentation under the Events and Presentations tab.

I will now turn the call over to Dan.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [3]

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Great. Thanks, Brian, and good morning, everyone, and thank you for joining us. On today's call, I will recap our third quarter performance, review the continued progress we're making in executing our strategic priorities and share a couple of examples that demonstrate how we are leveraging the power of the RRD platform to create value for our clients and win new business in a challenging market.

But before I begin, I'd like to provide a couple of comments on our announcement earlier this week regarding the sale of our U.K.-based Global Document Solutions business to Paragon Group. This transaction is strategically important for 2 reasons. First, it represents another important step forward to further optimize our portfolio and improve our financial flexibility through debt paydown. Second, it represents a great example of how we're actually enhancing the breadth of our service offering through a strategic alliance versus owning a business, and our new alliance with Paragon Group does just that. Through this agreement, we've expanded our access to a broader portfolio of capabilities to support the evolving needs of our global clients in that region. I would like to thank our former GDS colleagues for their tremendous support of RRD over the years and wish them future success as part of the Paragon Group.

Turning to our third quarter overview on Page 3. We delivered strong financial results for the quarter highlighted by continued improvement in our organic sales performance, double-digit increases in income from operations and earnings per share and a 70-basis-point improvement in operating margin. Organic sales improved sequentially from the previous quarter marked by favorable results in our Marketing Solutions segment. While Commercial Print and Logistics continued to experience market softness, we generated organic growth in a number of our higher value product categories, including Direct Marketing, Packaging, Labels and Digital Print.

Our sales teams are aggressively navigating the challenging market and remain laser-focused on converting our opportunity pipeline into wins, adding both new logos and expanding existing client relationships. Our operational execution and productivity was strong across the majority of our businesses, and we significantly reduced SG&A costs in the quarter. With our favorable Q3 earnings performance, we have now delivered 3 consecutive quarters of improved operating earnings and 5 consecutive quarters of year-over-year operating margin expansion. Our teams are very focused on driving performance improvement around the world.

Our positive results for the quarter are directly attributable to our sustained focus and consistent execution of our strategic priorities. We continued to strengthen our core performance by aggressively driving our productivity initiatives, rationalizing our global footprint and lowering our cost to serve through reductions in SG&A spend. We are favorably shifting our business mix by driving growth in our strategic higher value product categories, including Direct Mail, Labels, Packaging and Digital Print. We are further expanding our capabilities and enhancing our operational agility through both targeted investments and external partnerships, and we are continuing to execute our plan to reduce debt through cash repatriation, business divestitures and asset sales. While we always have more work to do, we are confident in our strategy and the actions we are taking to position RRD for future success.

I'm also pleased to report that during the quarter, we successfully launched the production of the U.S. Census, and we are meeting all performance expectations. Additionally, we ramped up operations in our new China printing facility and have effectively transitioned the previously farmed-out work back in-house. Stella Ye and our team in China have done a tremendous job of managing this critically important initiative for us. The new facility looks great, and operating performance is consistently exceeding the efficiency metrics achieved in the former China location. Great job, team China.

Turning to Page 4. We have a very clear strategic focus to help our clients better connect with their customers through their marketing programs and business communications. Day in and day out, we are working with our clients to enhance the impact of their communications by utilizing the right types of content across the right channels to drive up consumer engagement while simultaneously driving out cost. I'd like to share a few examples that demonstrate how we are leveraging our industry-leading capabilities to help our clients solve their communication execution challenges.

For a large hotel and travel services company, we're delivering an end-to-end marketing solution in support of their new customer loyalty program. This client's loyalty program merged with 2 other large hotel companies and required a full relaunch of the entire program under new branding. Our clients sought a supplier with a footprint that could produce and deliver a large-scale multicomponent program across multiple continents with speed to market and the ability to adapt to their evolving communications requirements. We successfully executed the production of more than 150 million communications, including membership collateral, cards, key folders and guest materials for over 7,200 properties worldwide. Going forward, we will continue to produce and deliver these communications that provide a cohesive brand experience for their hotel guests.

As a second example, we recently expanded our relationship with a large home improvement retailer. We provide this client with creative services, print collateral and in-store marketing services, including the design and production of their store signage. As this client looks to continuously improve the experience they're providing to their shoppers, they are enhancing and expanding their distribution centers across the country. Given RRD's strong performance and extensive capabilities, they turn to us to develop a unique labeling solution that enables an automated workflow while enhancing the presentation of their in-store merchandise. Through the efforts of the RRD Labels team, we successfully met this challenge and have signed an agreement that further expands our relationship with this client.

We also recently teamed up with Greetabl, a fast-growing 4-year-old company that patents greeting card that doubles as a gift box. Greetabl sought to capitalize on the growing consumer desire for more meaningful personalized experiences that go beyond the traditional greeting card. The company turned to RRD to help reimagine the traditional package to reach today's consumers. Consumers can craft special messages, so each gift must be handled individually through a fully-integrated and automated workflow. Our solution includes the on-demand production, kit pack and fulfillment for each Greetabl gift so the client's team can focus on future development and growth of their product offerings.

And as the needs of our clients continue to evolve, we are further strengthening our capability through targeted investments and expansion of our partner network. To that end, we recently established a new partnership with ActionIQ, a leading marketing activation platform. This new partnership complements our leading data management capabilities by providing access to an enhanced real-time customer data platform and enables personalized customer experiences to be delivered at scale. With the customer data management and analytics landscape undergoing rapid change, partnerships like this one are playing an important role in enhancing our ability to provide clients with best-of-breed marketing technologies.

We're also establishing partnerships that help our clients enhance their solution offering by integrating RRD's capabilities into the services they're providing to their customers. We recently partnered with Mastercard to deliver their upcoming Bill Pay Exchange solution. Bill Pay Exchange will make it easier for consumers to pay their bills with cards, real-time payments or from their bank account and receive confirmation of payment all within their banking app or website. RRD is one of the content providers selected by Mastercard to help deliver this solution to consumers, and we're excited to incorporate our comprehensive content management capabilities and strong client relationships into a partnership with Mastercard.

Turn to Page 5. Before turning the call over to Terry, I'd like to highlight a number of awards that we've recently received in recognition of the quality, creativity and ingenuity that we're providing to our clients around the world. Hormel Foods recognized RRD with the 2018 Spirit of Excellence Awards. Hormel Foods cited our superior quality in the more than 250 million labels that we produced for them last year. We've worked with Hormel Foods for more than 2 decades producing labels used in the storing and shipping process for products like Skippy, Spam and Applegate.

Cisco Systems selected RRD from among their wide array of global suppliers for their 2019 Supplier Quality Alert. RRD has delivered marketing and communications support to Cisco for more than a decade.

We're also proud to have received 8 of Printing Impression magazine's prestigious 2019 Gold Ink Awards. And just last week, we were ranked #15 on Crain's Chicago 2019 List of the Most Innovative Companies.

These awards symbolize the tremendous work that we're doing to support our clients' communications requirements, but importantly, they also signal that we continue to earn the right to grow with our clients in the future because of the level of performance we are delivering for our clients today.

Terry, over to you.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [4]

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Thank you, Dan. We are pleased to report adjusted diluted earnings per share for the third quarter of $0.31, which was up 24% over the prior year. We also reported a significant increase in adjusted income from operations, which grew 14.2% in the quarter to $77 million, and our adjusted operating margin improved 70 basis points to 4.8%. This marks our fifth consecutive quarter of year-over-year margin improvement. Sales for the third quarter also demonstrated improvement with our best organic performance since we began paring back on unprofitable business in the fourth quarter of last year.

Turning now to Page 6 of the supplemental slides. Reported net sales of $1.62 billion were down $30.1 million in the quarter, which included a reduction of $13.4 million associated with 2 recent business dispositions and another reduction of $10.5 million associated with the stronger U.S. dollar. Net sales were down 0.4% organically.

For the segments, Business Services reported an organic decline of 4.6% primarily driven by lower volumes in Commercial Print and Logistics. Sales in Commercial Print continued to be negatively impacted by ongoing secular declines and the exit of unprofitable business, including plant closures. We estimate that the secular organic sales decline rate for our Commercial Print products was approximately 4% in the third quarter.

Sales in our Logistics business continued to be negatively impacted by softer market demand compared to the peaks experienced in 2018. Last year, the logistics industry as a whole experienced higher demand driven by a strong economy and capacity shortages among shippers. Demand and capacity levels are stabilizing, and we expect comparisons to the prior year will improve beginning in the fourth quarter.

Importantly, Labels and Packaging, 2 of our strategic growth categories, they both reported favorable organic sales performance in the quarter. Growth in our Labels products was driven by strong domestic sales of shipping labels, while Packaging benefited from higher sales of our consumer electronics products produced in China.

Marketing Solutions reported organic growth of 19.9% due primarily to higher volumes in Direct Marketing as well as Digital Print and Fulfillment. Direct Marketing benefited from significantly higher volumes including the 2020 Census contract and growth with existing clients. The Census work is expected to contribute substantially through the second quarter of 2020. The favorable performance in Digital Print and Fulfillment was largely attributable to expanded relationships with our retail clients.

On Page 7, our adjusted income from operations of $77 million was $9.6 million higher than the third quarter of 2018. The combination of our ongoing cost reduction initiatives, favorable product mix and prior year losses from recent business dispositions more than offset the impact of pricing pressure and lower pension and other postretirement benefits income.

Adjusted SG&A expense of $190.2 million in the third quarter is down $13.6 million or 6.7% from the prior year, reflecting the ongoing execution of our strategic initiative to lower our cost to serve.

Adjusted earnings per share of $0.31 in the third quarter increased $0.06 as compared to $0.25 per share reported in the prior year period. In addition to the favorable impact from higher adjusted income from operations, our EPS also benefited from a $4.6 million reduction in interest expense. This reduction was driven by our team's actions to reduce debt outstanding, and we also benefited from lower average interest rates.

Partially offsetting these increases was a higher adjusted effective tax rate of 49.5% for the quarter. The elevated tax rate was primarily attributable to higher disallowed interest deduction in 2019 and discrete benefits recorded in the 2018 quarter. We expect our ongoing efforts to reduce interest expense, among other initiatives, will help improve our effective tax rate in future years.

Our GAAP results for the quarter included a pretax restructuring credit of $2.3 million due to a pretax gain of $4.7 million related to the sale of 2 recently exited facilities, partially offset by other restructuring actions. The prior year GAAP results included a significant tax benefit associated with an adjustment to the provisional amount associated with tax reform and a gain on the sale of our Print Logistics business. In addition, 2018 results also included $11 million of restructuring charges related to lease termination, employee severance and other restructuring costs.

Turning now to the balance sheet and cash flow on Page 8. As of September 30, 2019, we had total cash on hand of $144.7 million and total debt outstanding of $2.03 billion, including $223 million drawn against the credit facility. Remaining availability on the credit facility was $438.6 million at the end of the quarter.

Net cash providing operating -- provided by operating activities of $29.3 million in the quarter was down $34.8 million due to the timing of prior year working capital changes primarily in China.

Capital expenditures of $31 million in the quarter were $6.3 million higher compared to the 2018 period due to the strategic investments we are making throughout the course of 2019 to fund incremental investments related to the new China facility and the 2020 Census project.

Our ongoing capital priorities remain unchanged. As I stated in past quarters, we expect to continue to make strategic investments in our business, including both organic investments and potential acquisitions. And we continuously evaluate opportunities to optimize our portfolio as demonstrated by our recent sale of the Global Document Solutions business.

Page 9 shows a summary of the progress we continue to make to reduce our debt outstanding.

In regards to the pending sale of our printing facility in Shenzhen, China, during the quarter, we migrated the print work that had been temporarily outsourced into our new facility, and we are now consistently achieving improved efficiency metrics. At this point, we have completed all activities related to this important project and want to extend our congratulations to the China team that made this transition seamless to our clients. The buyer continues to work with the government to secure the necessary approvals, which they expect to obtain in early to mid-2021. Once approved, the transaction will close, and we expect to record a significant gain on the sale. As a reminder, our contract with the buyer requires them to pay the entire purchase price even if the government's approval is not obtained and the sale does not close. Also during the third quarter, we collected an additional $23.7 million deposit from the buyer as planned.

We continue to focus on improving our balance sheet flexibility. Last quarter, we announced our strategy to accelerate the repatriation of cash from foreign jurisdictions to the U.S. This quarter, we transferred an additional $134 million of international cash to the U.S., bringing our year-to-date total to $256 million.

Further, during the third quarter, we also sold 2 additional facilities for combined gross proceeds of $8.1 million. These funds have been used primarily to reduce debt outstanding.

Looking ahead, we expect to transfer an additional $55 million to the U.S. during the fourth quarter, which includes net proceeds from the recently announced sale of our Global Document Solutions business. Given that our debt outstanding at the end of the quarter is usually near its highest point during the year due to the seasonal nature of our business, we believe the best comparison to show the progress we have made in reducing our debt is to compare the amount of debt currently outstanding to the same period in 2018. Since September 30, 2018, we have reduced total debt outstanding by $148 million.

Page 10 of the supplemental slides show the various maturities of our outstanding debt by year as of September 30. The 2020 notes with an outstanding balance of nearly $66 million are scheduled to mature in June and are reflected on our balance sheet in the current category. We plan to repay those notes using availability on our credit facility, similar to how we retired the $172 million of 2019 notes that matured last February.

In addition, during the third quarter, we opportunistically repurchased 2021 notes and debentures with a face value of $44.1 million at an average price of $102. The repurchases were funded with availability on our credit facility. Our updated expectations for full year 2019 are reflected on Page 11 of the supplemental slides.

We continue to take actions to strengthen our core profitability including executing our cost reduction initiatives, improving our portfolio mix and exiting unprofitable business. Despite top line softness in a couple of parts of the business, we are pleased to be increasing the midpoint of our pretax profitability estimates, while tightening all ranges as we enter the final quarter of the year.

We have revised our estimated range for net sales to $6.25 billion to $6.35 billion. This adjustment reflects the softer market demand in Logistics, and to a lesser extent, Commercial Print as well as the October sale of our Global Document Solutions business.

Our new range for adjusted income from operations is $245 million to $260 million, reflecting a higher midpoint based on strong operating performance and cost management, offset by the impact of lower net sales.

We also tightened our adjusted EPS range to $0.67 to $0.76, reflecting strong operating performance, lower interest expense and a slightly higher effective tax rate.

Regarding cash flow, we now expect our operating cash flow to range from $150 million to $165 million, and capital expenditures are expected to be approximately $140 million.

Before I wrap up my comments, I would like to remind everyone that fourth quarter is our largest, most profitable quarter of the year due to normal seasonality. It is also the strongest from a cash flow generation standpoint, with working capital and other investments during the second and third quarters expected to be monetized with higher volume. We plan to utilize our increased cash flow to further reduce debt before the end of the year. Our teams are prepared, and we are off to a good start to the fourth quarter as we look to close out another successful year for RRD.

And now, operator, let's open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Jamie Clement from Buckingham.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [2]

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A couple of questions in no particular order, but I think, Terry, it was you. I think you said that secular decline rate in Commercial Print, I think you said was about 4%. Is the implication there that the rest of that decline is related to business that you are moving away from as you discussed in prior quarters?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [3]

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Yes. Definitely some of the unprofitable stuff that we've moved away from, some of the closed facilities hit that category. And then also Brazil, the shutdown of Brazil at the end of March, that also affects reported sales in that category.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [4]

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Okay. Was any of the Census work in any of the other segments other than Direct Marketing?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [5]

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This quarter, it was just Direct Marketing.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [6]

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Okay. Okay. And how will that kind of evolve over the next couple of quarters?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [7]

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I did mention in my remarks that the revenue volume from that, it will have a significant impact pretty consistently throughout the remaining 3 quarters after this month, so that will go into the second quarter of next year. There won't be a complete full second quarter of 2020 benefit, but it'll go good halfway through that quarter.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [8]

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Terry, what I actually -- I'm sorry, I didn't -- what I meant was, are we going to see it more in some of the other reportable segments?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [9]

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Yes, it will. Direct Marketing will also be the largest beneficiary there. But as we get into later stages of production and binding, we will start to see some of that benefit show up in our Commercial Print products.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [10]

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Okay. All right. So Dan, over to you, if I may, and I'll let Charlie ask some questions. So on Logistics business, some of the -- some of your pure-play peers have reported their quarters. I think it's kind of clear what's been going on there. In the earnings release, you seem to suggest you think conditions have bottomed.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [11]

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Yes, Jamie. Thanks for the question. I think there's a couple of answers I would like to provide to that. I think as you look at -- and we pay very close attention obviously to both the performance of the carriers and those who look more like us in the 3PL space.

I think it's fair to say that, as you are very well aware, Q4 of 2018 kind of came out of nowhere as a surprise to a lot of folks. And I think what's important to note is that if you look at 2019 to the first 3 quarters, Q4 becomes that lapping effect, if you will.

But I think a couple of important points that need to be made. 2019 is a -- has been a tough year relative to expectations. And if you looked -- however, if you look coming off of a high 2018, 2019 performance in particular for us, there's still growth for 2019 versus the 2017. So '18 was, as we talked about before, was a high year. Expectations were very high coming into '19, and the industry just hasn't lived up to those expectations.

More specific to your question, as you look at Q4, the short answer is yes, we are seeing stabilization. We track revenue loads on a daily basis, and we are seeing a stabilization of that business while still early in Q4.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [12]

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Okay. All right. In looking at your revised guidance and in looking at the strength of the third quarter, my personal take -- and maybe this is a year-over-year comparison issue, but it looks to me like your third quarter year-over-year looks a lot stronger than what you're sort of -- not a lot, a little bit stronger than what you may be implying, kind of at the midpoint for the fourth quarter. What are some things we should be thinking about for the fourth quarter there in terms of year-over-year comparisons?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [13]

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Yes. As you know -- Jamie, this is Terry. I'll take that question. I think we've been kind of chipping away to portfolio optimization and kind of paring back in unprofitable business. Unfortunately, none of that stuff has individually been large enough to garner the discontinued operations reporting, so we were forced to leave it in. So on a comparative basis, we see decreases in things like sales. And while something like Brazil has been kind of a tailwind for us in Q2 and Q3 because they were reporting losses in those quarters at this time last year, fourth quarter was when they made all their money. And so next quarter, we'll be lapping a profitable quarter for Brazil. But -- so it's some of those factors that are certainly playing into the situation here.

Election revenue is another one. Fourth quarter last year benefited from top line and bottom line election-related support. And there's a few other cats and dogs in the cost structure too, but those are some of the headlines as to why -- and if you look at our guidance, say, for the -- from income from operations, with our new range even at the top end of that range, that would imply on the top side, we can hit kind of a flat performance over the year. But absolutely, you're right. The midpoint is down a bit for just a whole host of reasons, not one dominant factor.

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Operator [14]

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And our next question is from Charlie Strauzer from CJS.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [15]

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Can you talk about the GDS sale real quick? How much of the sale is impacting your new kind of guidance here? And then like how much is coming out of Q4 here if you factor into our model? And also was there any tax implications from the sale as well?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [16]

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Yes, I'll take that. We reported that last year's sales were about $270 million. You kind of -- it's taking 2/12 of that. You're roughly in the $40 million range for an adjustment for the last 2 quarters. It was with us for most of October, not quite all, but most of it, so a good couple of months there is what will come out there.

From a cash standpoint, there will be a little bit of tax leakage, not much, but a little bit of tax leakage on the repatriation of that money back here. We're able to shelter the gain in local taxes. But there will be -- when we do repatriate that, we'll have just a very small couple of million-dollar tax leakage on that number. So really a good cash efficient transaction from that standpoint.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [17]

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Great. And then just looking at the improvement in adjusted income from operation margins, is that trend likely to continue into next year? Or are we kind of hitting kind of the meat of the cost cutting, so to speak?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [18]

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Yes. No. Obviously, we haven't provided guidance for next year. But we -- those margins are being aided by certainly the cost-cutting actions that we'll not quit. This year, those are going to be part of our DNA, and we're going to have to deliver on those every year, just like we have been for the past many years. So that will certainly be a piece of it.

But also, too, we have really gone pretty aggressively after evaluating the business that we are conducting and really kind of paring back and saying no to some of the stuff that isn't meeting performance or profitability expectations. And while we do get a nice pop and benefit from that, the -- we do have to sacrifice some sales as we've done some cleaning up with that.

The -- since that big push really started, we'll lap that real -- that element in fourth quarter because it was really fourth quarter, we started talking about a big push on that. Certainly, some incremental benefits will still continue to come in because we continue to do more of that as the quarters have gone on. But our first big lapping of that initiative will happen in the fourth quarter now.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [19]

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Great. And then, maybe, Dan, you can talk about this. But on the Direct Marketing side excluding the Census work, what kind of good things are you seeing there in terms of trends in the business?

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [20]

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Yes. The Direct Marketing side, we continue to trend well there. We are -- from a program standpoint, particularly the higher end, more complex, highly variable-type product that is being produced there, we continue to see significant request demand from clients.

I think as we've talked before, Direct Marketing is not dead, and we still feel good about our position in the market and our path forward there. So the ability to support our clients' challenges on the higher end of the production continuum, the product complexity continuum is where we thrive, and we feel good about where we're operating at there and on a go-forward basis as well.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [21]

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And can you just give us some of the challenges you see in Commercial Print? I mean, do you feel like the industry needs to consolidate further or capacities come off-line more rapidly?

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [22]

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Yes, I'd say 2 things about that, Charlie. The first one is we actually have -- and kind of put this into perspective, we have the advantage of having an enterprise selling organization and a significant client base that we continue to leverage and drive Commercial Print sales into those larger opportunities, while at the same time, competing on the local basis.

And I would tell you that -- as we know, it remains a very fragmented part of the industry. And I would also tell you that in the last, I don't know, I guess, 30, 60, 90 days, we've seen a significant increase in inbound activity from other commercial print suppliers across the industry looking for relief or an exit plan given the performance, deteriorating performance, of their business. So the short answer would be as they're -- consolidation is -- would be a good thing for the overall industry to support the secular decline that we're seeing there.

I think the other comment I would make on that is if you look at Commercial Print within our Commercial Print business, there's 2 components of that. There's the work we are actually producing, and the work that we are sourcing on the outside. And to Terry's point, we are being very selective about the type of work that we're expending resources, particularly if it has to go to the outside with very lowered or minimal margins on that work. And that's impacting us on the top line, but overall, if you look from a sourcing standpoint, it's actually helping the bottom line because we're being more selective in choosing to accept a more profitable work.

So there's a number of dynamics that are going on there. We feel we have an advantage because of the enterprise selling efforts that we have in addition to the local efforts that we have. The market is -- the Commercial Print market is challenged, and capacity rationalization would be a benefit.

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Operator [23]

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(Operator Instructions) And our next question is from Bill Mastoris from Baird.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [24]

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I'd like to begin with, Terry, a statement that you made a little bit earlier. It's the first time I've heard you talk about acquisitions. Before, it's been a matter of strategic partnerships. So I'm just kind of wondering, are the -- maybe the mention of acquisitions because you've been successful in these strategic partnerships, and maybe those partnerships actually become acquisitions. Is -- am I reading that correctly? So that's the first question.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [25]

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Yes. On that, I have been pretty consistent in mentioning that we do look at acquisitions. Obviously, we've done very, very few since the spin as we've really prioritized improving our capital structure in that same period of time as well. But you should not read any additional emphasis into the mention of it again this quarter. The only thing that really changes -- if you look closely in the release, we actually did complete one small -- very small acquisition in the current quarter, but no greater or lesser emphasis or point in time on that part of our strategy.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [26]

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Okay. And then I'd like to -- my second question really is a follow-up on some earlier questions. And this has to do with, what inning are we in right now in terms of your portfolio optimization? And when we get to the cost side, which you indicated that that's going to be part of your DNA, I'm just wondering what cost categories can you cut further? I mean for the last several quarters, you've done a pretty good job on cutting those cost categories. I'm just not sure how much is left.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [27]

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Yes. There's -- we're getting costs out at both our -- I would say the cost of goods sold and the gross profit level through greater efficiencies and better buying behaviors and negotiating with our vendors, who are also continuing to get progress on the SG&A front. And we don't normally talk about it this way, but I certainly look at it this way.

I also consider good, solid efforts to reduce interest expense as another form of cost cutting, and we've had some really good wins on that front as well.

And then over on top of that, we also get benefits, too. I mean, the type of stuff we're exiting or selling in case of portfolio optimization, those generally have, say, SG&A structures that are greater as a percentage of those sales than what the overall company is. We do get benefits when we sell businesses like shutting down Brazil or selling the GDS business. Those give us additional benefits. So the continued focus and the continued execution is going to still deliver in all 3 of those categories.

And then in regards to kind of what inning on the portfolio optimization, I would say we're in definitely an earlier inning still. We've got some smaller wins and progress that we made in that category, and we're going to continue to chip away at that. I mean, we'll always continuously evaluate what's in our portfolio depending on kind of where we're at with the strategy and how we see that evolved over time. But I would say that we're working hard to actually do more.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [28]

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Bill, it's Dan. Bill, I want to add a couple of comments to your question there -- both questions actually. So from an acquisition standpoint in partnership -- versus partnership, I think it's important -- there's an important distinction there as you look at the partnership activities that we have. They've been skewed more towards the digital side of our business.

And the interesting part about the digital side of the business in partnerships and the importance of partnerships versus acquisitions, acquisitions of digital companies is not a one -- an acquisition of digital company is not a one-and-done activity. Technology changes every single day, week, month, et cetera. And your ability to not just acquire that, your ability to be able to reinvest and stay abreast of the technology that somebody else is developing to compete with you is a monumental task. So that's not one on a large scale that fits where we sit and where we're going. So the use of partnerships for us are going to continue to be an important aspect of that, particularly as it relates to more the technology digital side of our business. And to Terry's point, from an acquisition standpoint, we absolutely have talked about that, hasn't been a significant priority, remains lower in our priority list until we reach the point of the financial flexibility that we believe affords us the bigger opportunity to do that.

In terms of the innings from both a cost-out and a platform optimization standpoint, addressing each one of those, so from a cost-out standpoint, thank you, I do believe we've done a very good job of managing our cost structure. It's in our DNA, and I absolutely expect that to continue.

But one of the things I think is really important for this company and for many companies around the globe is that this cost-cutting has 2 components of it. The first is, as we view it, the first is we look at the -- within the operating platform we have, we look at the productivity efficiency that we have with each of the walls of every facility we have, and we also look at the number of facilities that we have. So you'd count the walls. And as you look at the right opportunities to consolidate and drive a scale that's very much needed in this industry, we are focused on doing both, of driving productivity within the walls of every facility we have as well as rationalizing our footprint to drive the scale that we need. And that becomes even more important in a tight labor market environment and trying to keep up with labor turnover in so many facilities. To have the advantage of having scale and flexibility to serve your clients and adjust your labor pool now becomes a competitive advantage in our mind.

The second thing I think that's really important about costs, and it really pertains to the infrastructure and SG&A costs. And you hear a lot of companies talking about it, and we are right there with them. The cost reduction activities in terms of driving out costs more related to being able to do more with less has been a historical focus of business. And what really is happening here as you think about AI and machine learning, the next opportunity, and it's a very big opportunity, to get after the SG&A and the infrastructure costs that exist in many companies is to address how we actually work in the ability to take nonvalue activities and automate those nonvalue activities. To get those costs out so you can reinvest not at a full rate but a lower rate into the growth areas of your business is critically important. So I completely agree with what Terry said, early innings relative to costs, but it's more about moving forward with changing how we work, utilizing technology versus squeezing more out of our current organization and continuing to do the same things.

In relative to platform optimization, my last comment on that is we are also in the early innings there as well. But I think it's important for everyone to understand is from a portfolio optimization activities, that needs to come at the right time in the right valuation. And we are very, very focused on -- and you can never be perfect in that scenario, but it needs to fit your path forward and your plan. We all want to go faster. I want to go faster every single day, but it has to be at the right time in the right valuation for us to continue to move forward. And we're not looking to reduce our offering to our clients. We're looking for a more consolidation opportunities where -- or divestiture opportunities like the GDS one where we continue to be able to provide our services, actually enhance the services we can provide for our clients. We just don't need to own that business. And you'll continue to see us focus on that as well.

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William McGoldrick Mastoris, Robert W. Baird & Co. Incorporated, Research Division - High Yield Desk Analyst [29]

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Okay. Then finally, Terry, this is the first time I've seen you actually repurchase bonds in the open market. Is there going to be an ongoing program where you repurchase bonds in the open market? And would that be skewed towards the near-term maturities? Would that be a fair assessment?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [30]

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Yes, I don't know if I would go so far as to call it a program. But certainly right now, my focus is entirely on the '20 and the two 2021 maturities as we prepare to redeem those. I mentioned in my prepared remarks that the 2020, which is a little under $66 million, we will take that out with the availability on the credit facility. And again, we're still trying to work on the strategies on the 2021. But those are my focus ones right now. Again, I wouldn't call it a structured program of any sort. But as those do become available, if they become available, they're very thinly traded, I would consider additional purchases at the right price.

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Operator [31]

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And at this time, there are no further questions in the queue. Please go ahead, Dan.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [32]

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Great. Thank you, Lois, and thank you, everyone, for joining us on the call today. A recap of the messages, our key messages, for the quarter are listed on Slide 12 of our presentation.

In closing, I'd just like to say thank you to all of our employees for your dedication to our clients and our company. With the fourth quarter already underway, we continue to be grateful for your focus, your energy and your commitment to finish the year strong. Please note your efforts are greatly appreciated.

And with that, I'll turn the call over to back to Brian.

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Brian Feeney, R.R. Donnelley & Sons Company - SVP of IR [33]

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Thanks, Dan. As a reminder, information to access the telephonic replay of RRD's third quarter 2019 results call can be found in our third quarter press release, a copy of which is posted on the Investors section of our website at rrd.com.

Thank you for joining us this morning, and that concludes the RRD third quarter 2019 earnings call.

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Operator [34]

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Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.