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Edited Transcript of RRD earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 RR Donnelley & Sons Co Earnings Call

CHICAGO May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of RR Donnelley & Sons Co earnings conference call or presentation Wednesday, May 1, 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

* David Lawrence Phipps

Citigroup Inc, Research Division - Director and Senior Industry Analyst

* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for your patience in holding. Welcome to the RR Donnelley's First Quarter 2019 Earnings Call. My name is Justin, and I'll be your operator for today's call. (Operator Instructions) Please note that today's 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, sir.

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

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Thank you, Justin, and thank you, everyone, for joining RRD's First 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 have prepared supplemental slides for today's call, which can be found on the Investors section of our website at rrd.com. As we review first 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 first 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. They are provided for informational purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in our press release and the Investors section of our website under the Presentation 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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Thank you, Brian. Good morning, everyone, and thank you for joining us.

On our call today, I will recap our first quarter performance and provide an overview of the progress we made during the quarter in executing our strategic initiatives and further advancing RRD as a marketing and business communications company. I'll also share a couple of client examples that reinforce how we are leveraging our leading marketing and business service capabilities to win new clients and expand relationships with our existing clients by helping them to more effectively manage the complexities of their marketing campaigns and execute their essential business communications.

Turning to Slide 4. For the quarter, our results were in line with our expectations, and we made solid progress in executing our strategic priorities: to strengthen our core, accelerate growth of our higher-value products and services, extend our capabilities to grow with our clients, reduce our cost to serve and maintain a disciplined approach to capital allocation with an emphasis on reducing our debt and improving our financial flexibility.

Our strategy to successfully position RRD for long-term sustainable growth remains constant. Our executional focus is deeply embedded throughout our company, and our teams are diligently driving our 2019 game plan in an ever-changing business environment. And as conditions within the markets and geographies we serve continue to evolve, we are taking the actions necessary to support our clients' growing communications challenges, capture the new opportunities being created by these market and client changes and adjusting our operating and cost structure to improve our business performance.

Turning to Slide 5. As we shared on our Q4 earnings call, we expected a softer start to the new year with lower organic sales in the first half, inorganic growth in the second half driven by new business wins, including the 2020 census. For the first quarter, our organic sales were unfavorable by 3.3% while both our adjusted income from operations and operating margins improved versus the prior year. We are aggressively pursuing our strong pipeline of new sales opportunities to improve our top line performance while we simultaneously execute our cost takeout actions to better match our cost with our revenues.

Let's shift to our segments, starting with Business Services. Business Services reported a 3.6% decline in organic sales with improved adjusted operating income and operating margin versus the prior year. Organic growth in Labels and Business Process Outsourcing, 2 of our higher-value businesses, was more than offset by volume declines experienced within Commercial Print and logistics services.

During the quarter, we took several important actions to strengthen our core performance as we continue to execute -- or continue to exit a very low-margin business, we further consolidated our Commercial Print platform and we closed our business in Brazil. Against the backdrop of a challenging business environment, we are rigorously executing our plans to improve our business mix, lower our cost structure and enhance our competitive position in the markets we serve. We also remain highly focused on capturing the business opportunities being created within our targeted markets.

Our Business Services teams are actively helping our clients enhance the impact and improve the efficiency of the communications they utilize to strengthen their relationships with their customers. Our clients continue to face the ongoing challenge of effectively managing and executing the multitude of communications required to service, inform and transact with their customers and build deeper relationships with those same customers over time.

With our extensive capabilities, we are providing differentiated solutions at scale that drive greater execution efficiency and enhance the quality and consistency of our clients' business communications. I'd like to provide an example of how our Business Services team is leveraging our differentiated capabilities to help one of our clients manage and execute their compliance communications with greater efficiency.

We recently expanded our business relationship with a large financial services firm. This client came to us looking for a better way to achieve their compliance requirements. After consulting with this client, we leveraged our global outsourcing, digital and creative services and statements capabilities to build a comprehensive solution to address this client's stringent compliance communications requirements. To effectively execute this engagement, our global outsourcing business provided expanded consultative services to improve this client's internal workflows, our digital services team provided content creation services and our statements team managed delivery of these critical compliance communications.

In our Marketing Solutions segment, we reported an organic sales decline of 2.1% with an associated decline in adjusted operating income and operating margin. Organic growth in our higher-value direct marketing business was more than offset by the organic decline in our digital and creative services business related to our strategic shift away from traditional premedia services. The negative comparison associated with this shift will conclude in the second quarter of this year.

We continue to see growth opportunities within our Marketing Solutions segment, and our teams are diligently working to capture those opportunities while executing our plans to improve our financial performance.

Through our powerful combination of integrated capabilities and data-driven insights, we are providing marketers with tools that can be used before, during and after a campaign to optimize marketing performance across both online and offline channels. Over the past year, we have made significant progress in building out our Marketing Solutions tool set to both complement and broaden our existing marketing execution capabilities. Our expanded tool set includes Acuity by RRD, which enables marketers to test direct mail campaigns before production; and Digicom, which enables marketers to transform catalogs into interactive shoppable experiences across web, mobile and email channels.

During the quarter, we took an important step to further expand our Marketing Solutions capabilities through a new commercial agreement with Marketing Evolution, a company recognized by Forrester as a leader in marketing measurement and optimization solutions. This agreement further strengthens our Marketing Solutions tool set by adding capabilities to provide marketers with the insights needed to measure the effectiveness of their marketing activities and show how their marketing investments are directly impacting their sales performance.

I'd like to provide a client example that further demonstrates how we are leveraging our Marketing Solutions tool set to win new business. Our data insights and direct marketing teams recently partnered together to deliver an integrated solution to a regional bank looking to improve the effectiveness of their marketing spend. This new client was seeking a more effective way to deliver highly relevant offers to their customers at the most opportune time.

In consultation with the client, we developed targeting analytics to identify customers most likely to purchase specific products and then use that information to create and deliver highly relevant direct mail to those target clients while they were in the search and buy cycle. We are then deploying our data analytics capabilities using back-end data analysis to understand customer response and using those insights to further improve the effectiveness of this client's future marketing campaigns.

With the continued strategic expansion of our Marketing Solutions capabilities, we are creating value for our clients and we are gaining important recognition in the markets we serve. Just this week, RRD Marketing Solutions was listed within the top 10 largest U.S. agencies from all disciplines in Advertising Age 75th Annual Agency Report. Marketing Solutions' inclusion in the top 10 further demonstrates our ability to compete broadly with both traditional and nontraditional marketing solution providers joining respected competitors and collaborators such as Accenture Interactive, Wunderman Thompson and Publicis Sapient. This is the first year that Marketing Solutions has been included on this list just over 1 year after the new segment was formed to help our clients optimize marketing communications across all channels: online, offline and on-site.

As we look to the balance of 2019, we remain focused on our actions to return our top line to organic growth in the back half of the year. We are continuing to work on new client implementations and converting our strong pipeline of new sales opportunities into new business wins. And with our continued focus on reducing our cost structure, we are confident in our ability to deliver our 2019 profitability and cash flow commitments and further advance RRD as a leading provider of marketing and business communications.

With that, I'll turn the call over to Terry.

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

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Thank you, Dan. Please refer to Page 6 on the supplemental slides as I begin my remarks. This page provides a snapshot of our first quarter products and services' net sales performance by segment and by geography for consolidated RRD.

On a reported basis, net sales were down 10.9% in the quarter, which included a reduction of 6.3 percentage points associated with last year's sale of our Print Logistics business. The Commercial Print category was negatively impacted by significant volume reductions in our recently closed Brazil operations, normal secular decline and the continued planned reduction in very low margin sales.

Despite the sales decline, portions of our business impacted by the planned reduction in very low margin sales did report an increase in profitability during the quarter, and we expect the Brazil closure to improve future profitability as well. We estimate that the secular sales decline rate for our domestic Commercial Print products was approximately 3% in the first quarter.

Page 7 shows the organic sales trend by quarter and by year. Our first quarter organic sales were down 3.3% due primarily to lower volume in Business Services, which included the reduction in Commercial Print products I described on the previous slide. As I mentioned last quarter, we planned for organic declines in the first 2 quarters of this year, and we expect positive performance from the back half of the year as we continue to ramp up new large clients, including sales associated with the 2020 Census contract. In addition, the declining sales in the Brazil operations will be excluded from the organic calculation beginning in the second quarter as a result of the closure on March 31.

On Page 8, adjusted income from operations of $36.4 million was $3.5 million higher versus the first quarter of 2018. 2018 results included our Print Logistics business, which was sold in July 2018. Our corresponding operating margins increased from 1.9% in 2018 to 2.4% this year. The combination of an approximate $11 million benefit from changes in foreign exchange rates, ongoing cost reduction initiatives and lower health care and bad debt expenses positively impacted our results in 2019 versus the same period in 2018. However, the quarter's results were negatively impacted by unfavorable volume and product mix, modest price pressure in our Business Services segment and higher paper and labor cost.

Adjusted SG&A expense of $199.3 million in the first quarter is down $15.3 million or 7.1% from the prior year, reflecting our ongoing efforts to reduce our cost served. Adjusted diluted loss per share was $0.06 in the first quarter as compared to a $0.10 loss reported in the prior year period.

As has been the usual situation in the first quarter, our adjusted effective tax rate is a bit nonsensical because of the seasonally low income and the disproportionately high portion of the business operating at a seasonal loss for which we do not report a tax benefit. Our adjusted effective tax rate was 600% in the first quarter of 2019. Similar to last year, we expect the rate to normalize in the last half of the year as we generate seasonally higher earnings. We continue to expect our ongoing efforts to reduce interest expense, among other initiatives, will help reduce our effective tax rate in future years.

Our GAAP results for the quarter included pretax restructuring and other charges of $17.1 million, which included $8.1 million for employee termination costs primarily associated with the closure of our China facility and $8.2 million for lease termination and other costs. In addition, 2019 results for the quarter also included a $4.6 million gain mostly attributable to the currency translation adjustments associated with the Brazil bankruptcy and lower interest expense.

Next, I will discuss the highlights for each of our segments. On Page 9, first quarter 2019 net sales in our Business Services segment of $1.24 billion were down $179.8 million or 12.7% compared to the prior year. After adjusting for the effect of the Print Logistics disposition, which accounted for a decline of $107.4 million and foreign exchange rate changes, organic sales decreased 3.6% in the quarter. We did experience growth in Labels and Business Process Outsourcing, however, volume was down in our Commercial Print products, our remaining Logistics business and in Statements.

Adjusted income from operations of $41.8 million was up $3.7 million versus the 2018 period. The profitability improved as a result of favorable foreign exchange rates and productivity, partially offset by unfavorable volume and product mix, inflationary cost increases and modest price pressure.

Net sales in our Marketing Solutions segment of $285.6 million for the quarter were down $6.1 million or 2.1% to the prior year quarter on both a reported and an organic basis. An increase in direct marketing products was more than offset by the expected decline in Digital and Creative Solutions related to our continued strategic shift away from traditional premedia services for noncore market segments. The impact of this shift will conclude after next quarter.

Adjusted income from operations of $8.7 million was down $5.1 million from the prior year due primarily to unfavorable volume and mix and inflationary cost increases. First quarter 2019 non-GAAP unallocated corporate expenses of $14.1 million decreased $4.9 million from 2018.

On Page 10, net cash used by operating activities was $130 million, which was an improvement of $10.3 million as compared to the 2018 period. Improvements in working capital were partially offset by higher tax payments. Capital expenditures of $37.4 million were $15.9 million higher compared to the 2018 period. As a reminder, the 2019 amount includes incremental investments for the construction of the new China facility and the 2020 Census project.

Turning now to the balance sheet. As of March 31, 2019, we had total cash on hand of $274.3 million, which was down $96.3 million compared to December 31. Total debt outstanding was $2.17 billion, and the remaining availability on the credit facility was $378.2 million as of March 31.

Next, I would like to provide you with an update of our ongoing capital priorities. As I stated in past quarters, we expect to make strategic investments in our business, including both organic investments and potential acquisitions, and we continuously evaluate our portfolio for opportunities to optimize stockholder value. In regards to the pending sale of our printing facility in Shenzhen, China, we recently completed construction of the new printing facility and are on track to vacate the old facility by the end of second quarter this year.

We also expect that we will collect 1 additional nonrefundable deposit in the third quarter of 2019. Once we complete our move, the buyer will continue to work to obtain the necessary approvals from the government regarding their plans to redevelop the site. Based on the buyer's previous experience, they estimate the required approvals will be obtained in early to mid-2021, at which time 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.

We will also continue to focus on improving our balance sheet flexibility. On February 1, our 2019 senior notes with an outstanding balance of $172 million matured, and we repaid those notes using proceeds from our credit facility. As a reminder, those notes bore interest at 13.25% which was the most expensive issuance in our capital structure.

Page 11 of the supplemental slides show the various maturities of our outstanding debt by year as of March 31. In addition, we are exploring opportunities to accelerate the transfer of excess cash from certain international locations in order to reduce debt outstanding.

Our expectations for the full year 2019 are reflected on Page 12 of the supplemental slides. We have reaffirmed all guidance except for net sales, which we have reduced due to the closure of our Brazil operations on March 31. The Brazil closure does not significantly impact our income from operations guidance as previously expected losses in the second and third quarters were expected to be offset by income in the fourth quarter.

Before I wrap up my comments, I would like to comment on our expected performance for the second quarter of the year. We will continue to onboard new large clients and reduce our cost structure through our productivity initiatives and the execution of our business improvement plans. In addition, we are continuing to focus on relocating our printing business in China and preparing for the 2020 Census work, both of which are expected to drive higher capital expenditure levels in the second quarter.

We do expect our net sales in the second quarter to be down from 2018 primarily due to the sale of our Print Logistics business, which reported net sales of $96 million in the second quarter of 2018 and the closure of our Brazil business, which reported $14 million in net sales in 2018. We also expect continued softness in our Commercial Print products related to the closure of certain low-performing printing facilities as well as planned reductions in sourcing work in both the U.S. and in China.

Sales from the U.S. Census work and a new client we are currently onboarding are expected to help generate organic growth in the last half of the year. From a cost perspective, we expect to incur startup cost as we prepare for the U.S. Census production. Additionally, our China margins will be negatively impacted during the relocation to our new facility as we plan to outsource production to third-party printers to minimize client disruptions during this transition period.

Higher paper and labor costs will also continue to negatively impact Q2, but we do expect to make further progress passing these increases onto our clients. We expect to partially offset these inflationary pressures through continued cost reductions and favorable FX. Interest expense is expected to be favorable in the quarter following the repayment of our 2019 notes, and our tax expense is expected to be higher.

Taking all of these factors into consideration, we expect our adjusted diluted loss per share to be similar to last year's reported amount. Also, each of these factors have been considered in our full year guidance.

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) First we have the line of Charlie Strauzer with CJS.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [2]

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A couple of things I'd like to discuss a little bit, first is the -- on the margin side, you had good margin expansion in the quarter, and it sounds like you got your hands around the -- some of the headwinds on labor and paper. And maybe you can expand a little bit more what's going on in the paper front and other -- just some closures of some paper facilities and what's that doing to paper price in the near term and in the longer term.

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

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Charlie, it's Dan. Relative to -- I'll take the paper pricing piece of that. It's one that's impacted the broader print industry in general and obviously, a lot of communication and noise out there about it. And as we've discussed on our prior call, we are continuing to execute our plans to pass along those paper price increases when we have the opportunity to do that primarily from a contractual standpoint as well as in the spot market and very, very focused on negating that impact, which will take a bit of time, but we are seeing improvement there.

Relative to the current paper situation, we are continuing to see, for select paper types, paper price increases being tested in the market. And I think at the end of the day, it's -- as we see the volumes, the demands and consolidation of the different mills and shifting of paper machines over to different types of products, we expect that pressure to exist in 2019, and we have to continue to work to get ahead of that and pass that along from a client standpoint as quickly as we possibly can.

And as you know and we all know from our experience within the industry, the ebb and flow of that, as demand settle down and capacity, supply/demand becomes more balanced, we believe we'll see a gradual leveling out of that. But for right now, we continue to see, for select paper types, further price increases on the horizon.

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

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And then on the smaller print locations, Charlie, one of our key priorities and strategic initiatives is really focused on strengthening the core operations of our business. And it was last year where we started really taking a hard look and started closing some of our smaller Commercial Print locations where we just didn't have enough volume in the facilities and the locations were operating at losses.

So we've been on that journey that started last year, continued through the first quarter now into second quarter. And that again is having a positive impact and contributing to the margin expansion that you referenced. But in some cases, we're not able to hold on to all of those sales. So we do see some impact on the top line when we're not able to transfer some of that existing business into a nearby facility.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [5]

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That's a good segue actually, sorry -- looking at Q2 sales, not sure if you'd give us -- you've given a lot of good information there, but how should we think about sequentially Q2 sales versus Q1? Historically, it's usually down in Q2 slightly from Q1. But is that a trend that we should see again in this year?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [6]

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Yes. I mean that is a trend. We do expect, as I said in my prepared remarks, that we would see an organic decline there. But there's actually -- our sales are fairly similar to slightly down a little bit if we look sequentially from Q1 going to Q2. Again, remember on the Brazil situation, that is moving out of our core reporting for organic and it is also moving out of our numbers because we just literally shut it down and we'll no longer be conducting business down there. So that will -- those sales that would have been reported from that operation will no longer be there so that will be a little bit of a downward pressure. On the sales side, obviously, that will have a positive impact on profitability of the quarter and more neutral for the balance of the year.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [7]

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And then so basically, you -- I think it was, what, $14 million in Q2 from Brazil. Is -- what was reported on there?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [8]

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Brazil is $14 million in Q2 of last year, so that would be the reported. Since we're not -- since it's too small to report that as discontinued operations, we won't be able to restate last year's numbers, so there will be a $14 million reported reduction associated with Brazil. However, when we do report and present our organic numbers, it will be adjusted out of that, so that will be a clean comparison without Brazil in either period.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [9]

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Got it. And how should we think about Q3 and Q4 for the Brazil impacts as well?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [10]

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Brazil impact for Q3 will be similar, maybe up just slightly, but a vast majority of that business was very strong seasonally to the fourth quarter. So the fourth quarter is where we would see a negative impact on profitability and a much larger decrease associated with the asset for sale. And that was because there was large amounts of testing work that we did down in the Brazil operations, and that was all fourth quarter activity.

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Charles S. Strauzer, CJS Securities, Inc. - Senior MD of Sales & Trading and Analyst [11]

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Got it. Okay. So that got both of the sides of that and -- okay, great. And then looking at Logistics just briefly and I'll jump back in queue, but I noticed, even on a pro forma basis, was still down organically year-over-year. What was that percentage number down year-over-year on an organic basis? And what's driving the lower volumes there?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [12]

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Hold on one second here. Dan, I'll maybe let you comment on kind of what's driving the (inaudible).

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [13]

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Yes. From a volume standpoint, while Terry tracks down the number for the quarter, break that down, Charlie, between 3 major components of our Logistics business, our DLS Worldwide business, which is our third-party brokerage business, our expedited business and our courier services. We saw a softness continue to start -- or softness in the -- start in Q4, and we saw that continue into the first quarter of this year. Lots of different explanations and theories on that relative to weather-related impact, the impact last year of availability of full truckloads or lack of availability of full trucks to carry that and work shifting over to LTL last year and going back on to full truckloads this year to the impact of overall price increases, et cetera.

The reality there is we are working feverishly to restore that growth within -- across each of those from a courier expedited and DLS Worldwide standpoint, pursuing the addition of new stations across the country. So to pin it on one particular thing, it's very difficult to do. I think it's a multitude of things that have caused that, and we're going to be working hard and we are working hard to improve that and restore organic growth to that business going forward.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [14]

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And Charlie, the organic decline rate in Logistics was right around 5%.

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Operator [15]

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(Operator Instructions) Next, we have the line of Jamie Clement of Buckingham Research.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [16]

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I just -- I wasn't going to ask this first, but just because Charlie finished that way, I'll segue off of that. But listen, I mean probably -- I mean if all one's goal is, is to grow revenue in, I'll say a brokerage business like a DLS, I mean that's not hard to do, but obviously, it's hard to do profitably. And I did want to ask, in terms of your mix between spot and contract, obviously, spot rates have come down substantially. I would have assumed that would have meant the business that you had on contract, the margin probably should have expanded in the first quarter. How -- like I know you don't report it this way, but like were your margins -- even with the lower organic volume, were you better year-over-year in Logistics?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [17]

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Hold on a second here.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [18]

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And I guess to continue, while you check that, just to continue, are -- would you be worried that with lower spot rates, as you move later on in the year, that the Logistics business could actually get a little worse?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [19]

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Yes. Profitability was just up a slight amount on a year-over-year basis, but it's probably close, not to where I would actually characterize it as more flat.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [20]

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Okay. But in terms of as you evaluate your guidance like -- I mean I think there are some concerns about spot rate kind of going forward, the concerns about Amazon being in this business in some way, shape or form, and just want to make sure that, that -- the scenario that the spot rate stays down or gets worse is factored in your guidance enough.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [21]

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Yes. We have absolutely modeled that into our guidance, the current situation there, in terms of also to -- looking at what actions we can take to further stimulate sales as well as additional profitability through cost-out actions that are there. We have absolutely gone through that pretty hard and have reflected that with our best visibility, and the best view on that is reflecting our current guidance.

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

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And Jamie, just to weigh in on that for a second, it's -- without getting into tremendous detail because it's a complex -- relatively complex business and scenario to sort through in a short period of time, but the impact of declining spot rates and is -- goes both ways. And from a standpoint of -- given the brokerage nature of that business, every day you're competing against the availability of loads that are out there, and those clients that you're brokering for and carrying for, obviously, have choices amongst multiple brokers.

So there's a dynamic that -- on the upswing who's passing along and on the downswing who's giving it back in order to capture and win that business, and that's a daily challenge being faced by our team. I don't think it's quite the issue relative to when the rates go up and down contractually because most of that stuff, even with -- contracts are bid out for the individual loads that are being carried there.

So I think the -- in general, I think it's safe to say that wherever the rates are at, the ability to pass it on, as we know, there's a -- when they're increasing, there's a lag there. And when they're decreasing, it's who's actually passing back those rates on a spot load basis and how you're competing against those who are passing that back, which ultimately determines the margin that you're capturing or retaining as the spot rates come down.

To Terry's point, it's a very large segment for us. It's an important business for us as we operate within those markets, and we've modeled out various scenarios there, factored that into our overall guidance I'm thinking for the back half of the year and as I mentioned previously, continuing to take actions historical or consistent with our historical actions that we've taken to grow that business because we do believe we do have the opportunity to grow that business going forward.

The Amazon impact will be an interesting one, and I think that will be interesting from the standpoint of the approach that Amazon actually takes. Does it end up being -- putting more carriers and trucks into the marketplace, which takes volume away from existing carriers of all that responsible be? Or is it a matter of actually utilizing the existing carrier network that is out there, which will challenge the pricing and availability of the LTL network again? So that was going to take a little while for that to unfold. We're watching that closely to see which direction that goes.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [23]

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Okay. That is phenomenally helpful, and I appreciate that. Moving on to the Census, can you -- it's been 3 months since this conversation. Can you help us understand how you anticipate kind of the revenue as well as cost cadence, profitably cadence of the Census to kind of work out over 6 quarters, just kind of in general terms for us?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [24]

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Yes. Right now, I didn't update our perspective or our guidance on that particular contract and how will that impact the current year. So we're really -- our views on that as it relates to 2019 is pretty similar to what it was a quarter ago. And just as a reminder, that was -- we had estimated that kind of in our midpoint of our sales guidance, we were expecting about $25 million of the $115 million contract would land in the 2019 year, so that will be some in third quarter and more in fourth quarter. And then whatever the balance is, depending on where that ultimately lands, the balance would essentially come through in Q1 and Q2 of 2020.

So that 4-quarter window straddling the year is when most of that profit and revenue will come through. Right now, we've just got -- we're -- more of the activity is around CapEx right now. There's some P&L investments that are coming through in Q1, Q2. They are big activity and the big impact on results will actually happen later this year and early next year.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [25]

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And this may seem like a silly question, but I -- where exactly -- if I look at Page 6, your segment revenue breakdowns, where exactly is this work going to appear? Or is it going to be in several sections? I could see that.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [26]

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It will be in several sections. Direct marketing is one primary area that, that will be reflected. It will also be up -- some of that work will also be done in our Business Services, in Commercial Print, some facilities will be up a little bit.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [27]

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Yes. So I think to Jamie's -- Jamie has kind of laid that out. We'll see the -- we will definitely see the impact within the direct marketing side where the bulk of that is going to be printed. We'll see the -- from a commercial standpoint, you'll see, as we shift over to actually the stitching and inserting of that, we'll be leveraging our Commercial Print platform to do that, Commercial Print locations to do that. And the third area that you'll see an impact is in Logistics as we carry that freight to its end destination.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [28]

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Okay. I -- is there an opportunity -- I think you just mentioned the stitching and that kind of thing. Is there actually print production going on at Commercial Print? The reason I ask is when you did the Census the last time, I mean is this something that can help absorb capacity on the presses and help kind of just boost overall productivity and capacity utilization for better margins? Or is it just specifically the stitching stuff?

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [29]

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Yes. The print side of it, Jamie, will be done within our direct marketing -- with direct marketing facility, not within Commercial Print. It's web-based, and that's where the sweet spot is, within direct marketing.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [30]

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But it will -- it's going to -- so it will help there though, kind of absorb capacity, that kind of thing? I mean it should be margin-enhancing forever for everything, shouldn't it?

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [31]

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Absolutely right.

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Operator [32]

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(Operator Instructions) Next, we have the line of David Phipps of Citi.

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David Lawrence Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [33]

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Can we talk a little bit about Europe? So that was a bright spot versus what we were expecting and different from what we heard from some other players in the industry.

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [34]

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Yes. We got a very small operation out there. I mean it reported just a little over $120 million of revenue in the quarter. But you're right, it is -- we've actually been reporting growth in several of the recent quarters there, not always, but many of our recent quarters have reported growth over there.

So we have -- as we've seen in other quarters too, that growth is really kind of in several different areas. It's not really concentrated. It's not big dollars in any particular area. But certainly, we're seeing some growth in some of our work over in the U.K. and some of our packaging work also in the European markets as well. But coming from quite a few places, it's not huge dollars-wise, but it does pop out here because of the small base, their small revenue base there.

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David Lawrence Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [35]

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And as we go through the year on Asia, do you think we can get to positive organic growth for the year in Asia?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [36]

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Yes. I do. I think we'll have some disruption that I have spoken to with the transition of that printing work over -- really, that will really conclude in the second and third quarters. But yes, and certainly, there are some dependencies there too on some of the technology clients and what volumes actually look like from that population as we get to their heavier time of the year. So some unknowns there, but we absolutely do see that we can get back to organic growth there.

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David Lawrence Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [37]

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And the final question. You've given good color on what we should expect sequentially from the sales line. And on the margin, that sounds like there's some put and takes in expenses that will come in here, maybe some price changes. And look back from your first to second quarter, the margins have been up, either -- EBITDA has been roughly flat or it's been -- second quarter has been somewhat lower. So what kind of seasonality would we think about? Or as we put all the puts and takes together, should we have a decline in EBITDA sequentially that's small or make it larger than small?

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Terry D. Peterson, R.R. Donnelley & Sons Company - Executive VP & CFO [38]

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Yes. I spent a little time talking on -- about this in our last call as well. Really, on kind of a full year basis, we were anticipating roughly a flat -- if you look kind of -- as you kind of back into the midpoint of our guidance, it was pretty flattish from an overall EBIT dollar standpoint. So that would suggest that, on slightly lower sales, that, that would actually be an improvement in the margin.

The pattern for that, and we can all -- the most leverage is obviously coming in fourth quarter for both -- in -- from operations as well as EBITDA because of the seasonally strong sales. Q3 is better than Q2. Q2 can be similar to our first quarter. Sometimes it's a little bit less, but it can be close there too. And again, we're focused on improving our cost structure too that can benefit all of our quarters. And certainly, on a margin percentage basis, we would expect that to have a positive impact in each of the remaining 3 quarters.

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Operator [39]

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And with no further questions here queued by phone, I'll be happy to turn it back to Dan Knotts for any closing remarks.

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Daniel Lee Knotts, R.R. Donnelley & Sons Company - President, CEO & Director [40]

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Great. Thank you. In closing, I'd just like to thank all of our employees around the world for your continued commitment, your commitment to our clients and to our company. Your ongoing hard work continues to fuel our strategy as we work to drive profitable growth, improve our balance sheet and fundamentally transform our business, and please know that your efforts are greatly appreciated. And with that, I will turn the call back over to Brian.

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Brian Feeney, R.R. Donnelley & Sons Company - SVP of IR [41]

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Thanks, Dan. As a reminder, information to access a telephonic replay of RRD's First Quarter 2019 Results Call can be found in our first quarter press release, a copy of which is posted on the Investors section of our website at rrd.com. Thank you for joining us, and that concludes the RRD's First Quarter 2019 Earnings Call.