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David A. Gardella - Vice President of Investor Relations

Thomas J. Quinlan - Chief Executive Officer, President and Director

Daniel N. Leib - Chief Financial Officer and Executive Vice President


Scott Wipperman - Goldman Sachs Group Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

David Herbert

Charles Strauzer - CJS Securities, Inc.

R.R. Donnelley & Sons (RRD) Q1 2013 Earnings Call April 25, 2013 10:00 AM ET


Welcome to the RR Donnelley First Quarter 2013 Results Conference Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dave Gardella. You may begin.

David A. Gardella

Thank you, Vanessa. Good morning, everyone, and thank you for joining us for RR Donnelley's First Quarter 2013 Results Conference Call. Earlier this morning, we released our earnings report, a copy of which can be found in the Investors section of our website at During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detail in our annual report on Form 10-K and other filings with the SEC.

Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provide you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website in the Investors section a description, as well as reconciliations, of non-GAAP measures to which we will refer on this call.

We're joined this morning by Tom Quinlan, Dan Leib, Dan Knotts and Drew Coxhead. I'll now turn the call over to Tom.

Thomas J. Quinlan

Thank you, Dave, and good morning, everyone. I'll begin with some brief comments about our performance during the first quarter and then turn it over to Dan Leib, who will take you through our results in detail. When Dan Leib is finished and before we go to questions, I will highlight a few examples of how we continue to implement our strategy.

During the first quarter, we continue to accelerate the sequential improvement in our revenue trajectory. Revenues grew 0.5% during the first quarter as compared to the same period a year ago, aided in part by acquisitions made last year. Absent those acquisitions and adjusting for the impact of pass-through paper sales, changes in foreign exchange rates and last year's customer rebate adjustment, we experienced an organic revenue decline of 1.2%. This continued the sequential improvement in the revenue trend that began in the back half of 2012.

First quarter revenue was in line with our expectations. And as you saw this morning, we are also reiterating our full year guidance on revenue, EBITDA margin and free cash flow. Further, we remain committed to our targeted gross leverage range of 2.25x to 2.75x.

Now Dan Leib will provide more detail as he takes you through the numbers. Dan?

Daniel N. Leib

Thanks, Tom. We are pleased with our first quarter 2013 results, as they reflect the continuation of the momentum that we experienced in the fourth quarter of last year. As my comments will refer to our non-GAAP results, please refer to the support schedules in our earnings release for a reconciliation of our GAAP to non-GAAP results for the first quarter.

Before I get into the detail of our first quarter results, I want to point out one item that we noted in this morning's earnings release that impacts year-over-year comparability. As we discussed last year, our first quarter of 2012 included a $19.8 million adjustment that was related to the over-accrual for customer rebates within our U.S. segment. The adjustment negatively impacts the year-over-year comparison for sales, gross profit and EBITDA by $19.8 million and the earnings per diluted share comparison by nearly $0.08, which approximate the year-over-year variance in both EBITDA and EPS in the quarter.

On the top line, after adjusting for the impact of acquisitions, changes in foreign change rates and pass-through paper sales and the 2012 customer rebate adjustment, our organic revenue declined 1.2% from the first quarter of 2012. In the fourth quarter of 2012, we experienced an organic decline of 2.1%. In fact, this organic revenue performance is the best we've experienced in the last several quarters since the third quarter of 2011. Driving the improvement in trend were most of the reporting units in our International segment, as well as book and directory, forms and labels, financial and variable print within the U.S. segment.

First quarter gross margin was 22%, a 100 basis points lower than the first quarter of 2012. 60 basis points of the decline was due to the customer rebate adjustment in 2012 and 50 basis points was due to the impact of pass-through postage revenue related to our release -- recent logistics acquisition of Presort Solutions, both factors that we noted on our earnings call in February.

Aside from these 2 factors, price erosion was more than offset by lower employee-related expenses. SG&A expense in the quarter as a percentage of revenue was 11.1% or 10 basis points lower than the first quarter of 2012. Lower employee-related expenses drove the improvement.

First quarter adjusted EBITDA of $277.1 million compared to $296.7 million in the first quarter of 2012 and EBITDA margin in the first quarter of 2013 of 10.9% was 90 basis points lower than in the first quarter of 2012. The customer rebate adjustment in 2012 accounted for nearly 70 basis points of the decline, while the increase in pass-through postage revenue accounted for approximately 25 basis points of the decline. Lower employee-related expenses and savings from productivity actions more than offset price erosion and an unfavorable product mix. Changes in foreign exchange rates did not have a material impact on the quarter-over-quarter margin comparison.

At operating margin, we continue to benefit from reduced levels of depreciation and amortization, narrowing the year-over-year decline in the operating margin to 40 basis points from 6.8% in the first quarter of 2012 to 6.4% in the first quarter of 2013.

Our non-GAAP effective tax rate in the quarter was 33% compared to 29.3% in the first quarter of 2012. The 2012 rate included a benefit related to the release of valuation allowances on certain deferred tax assets in Europe.

From a segment perspective, revenue in our U.S. Print and Related Services segment of $1.9 billion declined 0.5% from the first quarter of last year or 2.3% on an organic basis, due to lower volume and price erosion across most offerings, partially offset by higher volume in logistics and variable print. The year-over-year organic decline in the segment has improved and is the best we've seen since the third quarter of 2011. The improvement in trend was most notable in forms and labels and book and directory. The trend in our variable print offering also improved, with organic growth of 2.5%, a marked improvement from the full year organic decline of 4% that we experienced in 2012.

And logistics continued to perform well, with reported revenue growth of 46.3%, 12% organic growth, driven by increased volume in most of logistics' many offerings. Through investment in strong organic growth, our logistics offering now represents 14.1% of the segment's revenue, up from 6.6% in 2009.

Non-GAAP operating margin for the segment of 8.8% declined 70 basis points from the first quarter of 2012. The customer rebate adjustment in 2012 accounted for 96 basis points of the year-over-year decline. Lower depreciation and amortization, productivity improvements and lower employee-related expenses more than offset an unfavorable product mix, volume declines, continued price erosion and the impact of the pass-through postage revenue.

First quarter 2013 revenue in our International segment of $666 million grew 3.5% or $22.5 million from the first quarter of 2012. Organic growth in the quarter was 2.2%, driven by a double-digit volume increase in both Asia and Global Turnkey, as well as a modest volume increase in Europe, partially offset by lower volume in business process outsourcing in Canada, as well as price pressure across the segment.

Similar to the improving trends I mentioned in the U.S. segment, our International segment's organic revenue trend improved by 180 basis points from last quarter.

Non-GAAP operating margin for the segment declined 50 basis points to 5.1% from 5.6% in the first quarter of 2012, resulting from price erosion, wage and other inflationary increases and higher employee-related expenses that more than offset higher volume and lower depreciation and amortization. Changes in foreign exchange rates did not have a material impact on operating margin in the quarter.

Our first quarter 2013 non-GAAP unallocated corporate expenses were $35.1 million, $8.1 million lower than the first quarter of 2012. Lower employee-related expenses were partially offset by increased depreciation and amortization due in part to increased investment in IT-related capital projects.

Free cash flow in the quarter was a use of $133.7 million compared to a use of $97.3 million in the first quarter of 2012. As we've mentioned previously, the seasonality of our business is such that the first half of the year and particularly in the first quarter, our free cash flow is a use of cash. This has been the case since we acquired Bowne in late 2010. The $36.4 million decline was primarily from higher working capital and cash taxes.

We continue to show improvement in working capital management with our controllable working capital, which we define as accounts receivable plus inventory, less accounts payable, as a percentage of the trailing 3-month annualized net sales at 13.1% at March 31, 2013, 60 basis points lower than the same time last year. Due to seasonality, trailing 3-month working capital was 20 basis points higher than at December 31, 2012. And as Tom mentioned in his opening comments, our guidance for our full year free cash flow continues to remain in the range of $400 million to $500 million.

Total debt as of March 31, 2013, was $3.5 billion, $222 million lower than a year ago. We had no borrowings outstanding under our revolving credit agreement. In March, we issued $450 million of 8-year 7.875% notes and used the net proceeds to pay down an aggregate $354 million of fixed debt due in 2016, 2017 and 2018, further improving our already favorable liquidity profile.

We have no term debt maturing in 2013. From 2014 to 2017, our average maturity is $282 million, with the highest majority of $350 million due in January 2017.

As of March 31, our term debt is 81% fixed at an average interest rate of 7.6%. Our net available liquidity as of March 31, 2013, was $1.4 billion. Additionally, our gross leverage at March 31, 2013, was 2.9x compared to 3x a year ago at March 31, 2012. We continue to target growth leverage in the range of 2.25x to 2.75x on a long-term sustainable basis.

Before I turn it back to Tom, let me share our full year guidance for 2013. Our guidance is also detailed out in the press release. You'll note it remains largely unchanged since we last provided guidance in February, with slight tweaks to depreciation and amortization and interest expense. We expect revenue in the range of $10.1 billion to $10.3 billion. Organically, this translates to a decline in the range of 0.5% to 2.5%, as it is inclusive of an expected approximate $100 million negative impact from changes in foreign exchange rates and lower paper sales. We expect our non-GAAP adjusted EBITDA margin to be in the range of 11.2% to 11.4%.

As we discussed in our last call, there are 3 items that impact the year-over-year comparability by a total of 60 basis points. First, lower pension income in 2013 is expected to negatively impact our margin by approximately 20 basis points. Second, the customer rebate adjustment in 2012 favorably impacted the full year 2012 margin by approximately 20 basis points. Third, the pass-through nature of postage revenue related to a recent logistics acquisition is expected to reduce our overall margins by approximately 20 basis points in 2013.

Depreciation and amortization expense is expected to be in the range of $450 million to $460 million. Interest expense is estimated to be in the range of $250 million to $255 million, an increase of $5 million over the previous guidance range.

Our full year non-GAAP tax rate is expected to be in the range of 33% to 35%. We project the full year fully diluted weighted average share count to be in the range of 183 million to 185 million shares.

From a free cash flow perspective, we continue to expect capital expenditures in the range of $200 million to $225 million and free cash flow in the range of $400 million to $500 million. Note that the free cash flow range includes approximately $23 million in cash contributions for our pension and postretirement plan.

With respect to the second quarter, we expect to continue to have a lower level of pension income on a year-over-year basis, as we did in the first quarter of roughly $7 million. Additionally, we expect our second quarter non-GAAP effective tax rate to be at the high end of our full year guidance, in the range of 33% to 35%.

And with that, I will turn it back to Tom.

Thomas J. Quinlan

Thank you, Dan. Before we take questions, I will revisit the strategy that we have been describing with a few examples that illustrate how it is driving RR Donnelley's continuing transformation. Let me frame this up by first restating exactly what it is that we do. In essence, we help people communicate more effectively. In doing so, we work with organizations worldwide to create, manage, produce, distribute and process content. That is our mission. How this mission comes to life for different customers depends on what their business is, which is why we use our diverse product and service portfolio and our multifaceted selling approach to create custom solutions for them.

Whether we're serving a publisher by producing and distributing the content that they sell or helping organizations manage content by providing the virtual data rooms used to facilitate acquisitions, we're responsive to each customer's needs. Executing our mission will position RR Donnelley to be the profitable leader in our industry. We are intentionally proud of the exceptional work that we do in printing on 4 continents for our customers. We will continue, per the strategy that we laid out before -- for you before to win share by aggressively pursuing all appropriate print opportunities across a diverse range of vertical segments. However, describing RR Donnelley as just a printer leaves out a great deal of what we do and where we are going.

Another strategic pillar, we have discussed that we will internally develop and acquire technologies that serve important communication and supply-chain needs for our customers as we continue to diversify our product and service mix.

Let me illustrate our execution of this strategic element by describing one of the needs that is shared by a substantial segment of our customers worldwide. It involves managing content through automated command and control in warehousing, inventory management and distribution.

One of the technologies that our customers use to manage these processes is RFID, radio frequency identification. RFID allows data to be captured by automated readers so that the information can be passed into a computer. RFID is similar to a bar code but offers the advantage of not requiring line of sight for scanning. This technology, which features antennas to allow the electronic communication, requires an inlay that is embedded into tags and labels.

Many of our customers already use RFID in a broad range of applications such as labeling cartons and products, inventory management and retail loss prevention.

Among the vertical segments that are large users of RFID are retail, consumer goods, land and sea logistics, pharmaceutical, health care, book publishing and libraries.

In a couple of days at a major RFID trade show, we'll debut a new capability that extends our line of printed electronics. This is printed RFID antennas, another innovation developed by our research and development team. We will continue to use commercially available RFID inlays, but we will also be able to produce our own antennas via extremely efficient processes.

What is the advantage that this new product creates for our customers? The answer is that our printed electronics model provides customized design and development of inlays for a specific application, so we can focus on custom rather than stock inlays.

Another benefit that this breakthrough technology offers is the ability to integrate the inlays with a broad variety of end-use materials that we already produce, such as labels.

RFID is an established technology used in process management. Though we will begin with RFID from a relatively small base, we like the growth potential that we see in a number of verticals where we have strong existing customer relationships.

During our last conference call, we told you about another of our innovative printed electronic capabilities, near field communications, or NFC. If RFID is designed to make a retailer's warehouse hum, NFC can make the front of the store hum. NFC offers a fresh way to distribute content. You'll remember that NFC can be integrated with the labels, signage, displays and other visual merchandising materials that we produce to allow our customers to engage with consumers in a whole new way.

Printed RFID and NFC antennas are products of the R&D pipeline that continues to expand the range of proprietary offerings that we provide.

ProteusJet, our own high-speed digital color press, is another example of what we have developed in-house. During the quarter, our revenue increase in variable print was in part attributable to the ProteusJet gaining additional traction with our direct-response customers. The increase also reflected our acquisition of Meisel, described last quarter, which supports in-store merchandising solutions that we offer to retailers and which features an all-digital production platform. We will continue to bring new technology and capabilities to our customers.

Another strategic element that I will highlight is how we build on our relationships with customers internationally to sell more services that can diversify and increase our revenue. We offer services across the full range of our platform. They allow us to develop more compelling solutions in creating, managing, producing, distributing and processing content.

During the first quarter, services revenue was up 24.5% as compared with the same period in 2012 and contributed more than 16% of our total revenue. This was a function of organic growth and the impact of 2 logistics-related acquisitions that we made during 2012. Our logistics segment, which provides an extensive range of mail-related and third-party logistics services also saw organic growth, as well as acquisition-related increases. As Dan described in the first quarter, our logistics revenues were up by more than 46% year-over-year.

Let me share a few examples of how our fast-growing services offerings helps us to win business across our platform and especially gives us an edge as compared to competitors who offer only products. I'll start with one that supports distributing content.

For a major financial services and credit card provider, we used our consultant approach to carefully analyze the customer's mailing list. As a result, we recommended a blending mailing approach that uses 2 of our logistics capabilities, co-palletization of the tray mail and drop shipping. We proposed a precise and a highly customized mix.

Other providers offered the customer just a single co-palletization tray option. The posted savings advantage that our customized solution delivered helped us to win the logistics work.

We also serve these customers with associated direct-response printing. Going a step further, we've enhanced our logistics capabilities to help customers reduce dwell time. This refers to the amount of time a customer's mail sits at any consolidation facility. Our fully-automated process unfolds quickly and seamlessly without any human intervention. These cycle times reductions are extremely attractive to our customers.

Organic growth is also arising from our 3PL, or third-party logistics capabilities. Again, we find 3PL especially attractive because of its minimal requirement for capital expenditures. It is also quickly scalable. For example, we have been managing 13 freight lanes for a $70 billion organization. A lane is a root from point of origin to destination. For this customer, we're managing the movement of equipment and supplies that are integral to their business. Based on the results that we've delivered for them, we were awarded the volume in managing 63 additional lanes.

Logistics is a service offering that enables us to provide added-value solutions for customers in a variety of vertical segments, whether we are handling magazines for publisher, freight for a manufacturer, courier services for a financial service company or arranging deliveries in the pharmaceutical industry, services associated with distributing content create unique points of distinction.

Let me shift from logistics to languages. Many of the customers we serve have global requirements. As we help them manage content, our translation offering enables us to serve their localization needs. During the quarter, a CRO, or contract research organization, that serves pharmaceutical companies awarded us a multimillion-dollar, multiyear agreement to provide translations for materials used in clinical trials in a number of countries. We believe that we are among the top 20 providers of translation services in the world, a stat that surprises a lot of people.

Another set of resources that enable us to create solutions internationally involves our supply chain and packaging capabilities. As Dan Leib mentioned, we saw strong growth during the first quarter in Asia, Europe and in our Global Turnkey Solutions business units. In each of these business units, we are deeply involved in creating content through valuated -- value-added services, such as packaging design; managing content, as we use digital asset systems for literature versioning; producing content, as we manufacture a printing that rides along with the packaged goods; distributing content, as we physically pack out products and arrange for global logistics; and processing content, as we interact with our customers' information and technology systems.

In working with product packaging, we're touching the products that our customers actually sell so that the service offering is not related to customers' promotional budgets, which tend to be more volatile than direct materials budgets.

The breadth of our product and service offering allows us a variety of ways to implement our strategy worldwide. Again, as we continue to transform RR Donnelley, we will always focus on operational efficiency, productivity and cost management.

And with that, Vanessa, if you would open up for questions, we would appreciate it.

Question-and-Answer Session


[Operator Instructions] And I see we have our first question from Scott Wipperman with Goldman Sachs.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Maybe just first starting in the U.S. with the trends in organic revenue. What's the expectation kind of over the course of the year? And do you expect that to continue to improve? And is there a chance that we could turn positive at some point here, and maybe which segment outside of logistics do you think could -- can get us there? And I have a couple of follow-ups.

Daniel N. Leib

Sure. Thanks, Scott. so our guidance is reflective -- we're -- guidance of down 0.5% to 2.5%, so we're right in that midpoint in the quarter. We did see the improvement. As we went through in the segments, did see positive organic growth in variable print, a lot of that driven by direct mail and some short-run fulfillment. So we're sticking with the guidance that we had. We like the improvement that we've seen going from Q4 into Q1 -- or rather Q3 to Q4 to Q1, and have seen positive organic growth continuing in logistics. We talked about the variable print. We did see improvement in the financial markets, having a positive impact as well, and then internationally did see some very good performance. So sticking in the guidance, but like the trend that we saw.

Thomas J. Quinlan

And Scott, I think if you go back, I think is we begin this century, I mean, 70% of the company was what we call long-run print, books, directory, magazine, catalog, retail inserts. Today, those important categories comprise 29% of the business. So we're managing through the change every day. And as you've seen variable print, which is now -- which is driving visual, it's grown by about 300% to Dan's numbers. We've got a BPO business that's $600 million. And as we talked about earlier, we talked to you about what's happening over in Asia, Europe and Global Turnkey as we've turned from being a print service provider to a communication service provider. Print is still a core element of us being a communication service provider, but not only -- but it's not the only thing that we're doing. We're creating, managing, producing, distributing and processing this content. But if you go a step further, let's talk about the retail -- multichannel retail vertical. I mean, it's a $35 billion marketplace for us. And I think just to -- as we think about it, we can create the content there by writing copy for catalogs and websites or by taking digital pictures of clothes or whatever the models are wearing. We manage the content by providing digital asset management services. We have millions of digital assets in the systems to help customers. We produce the content for multichannel retailers. We make catalogs, labels. You'll see in the products and see [ph] signs and banners and operational documents. We're distributing the content. When you go into a store, all that printed material you see had to be packaged up by someone. That's the stuff that we're doing. When we talked about NFC earlier in our prepared remarks, you are -- now have the ability to hold up your smartphone, it brings up a coupon, brings up a video or other extended content on your phone. We're helping making that happen. That's electronic distribution, and we're processing content. We can -- we obviously send you credit card statement to you, and we can do that both online and through the physical distribution. So as you start -- as we start to look at the rest of the year, the things that we're bringing forward to our customers are allowing them to reduce their overall total cost of ownership and they're helping them improve their return on what they're looking to do, whatever that investment is. Dan anything else?

Daniel N. Leib

No. I will just add to that Tom that from a total communication services provider standpoint, close above the supply-chain management opportunities, it's very important to think about that in a comprehensive manner as we help our customers look at their communication requirements across their 4 prime constituent groups, being their customers, their shareholders or investors, their employees and their suppliers. And it represents a terrific opportunity for us to be one of the primary folks in the entire industry to be able to provide a comprehensive solution to help them communicate with all 4 of those groups.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

That's helpful. I mean what's -- and I mean, maybe what's the implication to margins over the long term from your perspective as you move more into these ancillary services?

Thomas J. Quinlan

I think we, obviously, feel because we're moving into them and transforming the way they are, the margins are better. And we've got it -- the margins are better and the investment in the platform is less. So we don't have the $30 million large presses that if you go back in time, people were so familiar with this industry. It's completely technology-based. And the other thing where we like this is because if you think about -- because our industry is so fragmented, if you think about the smaller players that are out there, Dan talked to you about spending $200 million on CapEx. We spent a little bit over in 2012, will be there in '13. For a company that are out there today that have products, where they are in their life cycle of their operation, they're going to have to remortgage their business. They're going to have to put a ton of debt on their business to go ahead and get up to speed to what customers are looking for. We think that bodes well for us because of what Dan and his team have been able to do from a financial standpoint by going ahead and making sure that the balance sheet is in good shape, the credit agreement is done until '17. We've got a real good towers that we call them out there, as far as debt maturities go. That if something crazy does happen in the world again, from an economic standpoint, we're prepared for that. So we like where we're taking and we like how we're evolving the company to where we're taking it to.

Daniel N. Leib

Yes. Just to reiterate, the significantly better return on capital offered in those service offerings, and as you've seen our -- taking down capital has been really a function of business mix. So we continue to invest where there's good opportunities but where there's just less capital requirement.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Got it. And maybe just on the balance sheet. I mean, Dan, with a commitment to lower leverage target, obviously, you still need to execute on that. But can you comment maybe on how your dialogue is with the rating agencies? Do you think maybe you can get the negative outlooks back to stable this year? And do you guys have a level as to where you'd ultimately like to see your ratings end up?

Daniel N. Leib

Yes. We -- as I think we've mentioned on the last call, we have extensive dialogue with the agencies, value their input, have chosen a capital structure and commitment to it that's reflective of the business need, so tough for us to target a rating. As we've seen over time, our leverage at 2.8x at the end of 2012 is not dissimilar to where it was at the end of 2010 and the rating itself is lower, and some of that is a function of changing views at the agencies from view on the macro environment and the industry. And so we do listen to them. We do take that into consideration, and we would love to see the rating stabilize or go up, but our target is reflective of what we think we need to run the business.

Thomas J. Quinlan

And I do also want to add to that I mean, look, the rating agencies and people that are spending time in our industry, we greatly appreciate. We continue to try to show them and tell them that we are different from what you're seeing in the industry. We are appreciative that the market itself, the way the bonds are priced, obviously, are recognizing what we've been doing and where we're going and how good things are progressing. We're hoping that the more ammunition by today's results can give the agencies, show them that we are different than the other people that they've lumped us into in the sector.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

That's helpful. And then maybe just last one for me. Just on the $40 million of incremental cash that you're expecting to get from the foreign subsidiaries, Dan, I guess, one, just confirm, I guess, you got the other $40 million this quarter. And then second, is there any upside potential to the total that you expect to get this year? Meaning, could you get back more? I know you guys are ultimately expecting to get back more in the next couple of years, but could we -- is there a potential to get more back in 2013?

Daniel N. Leib

There -- so our expectation is, is that -- first of all, to confirm, we did get the $40 million back in the quarter. Year-to-date we brought back roughly $127 million or so. We do have the plan for the incremental $40 million. And this is a 5-year obligation, but we do have the ability to prepay. So as cash flow is generated and as we free up the need for cash internationally, we can bring back additional amounts in '13.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

And the $120 million -- I mean, that's total, since you announced this, right, it's not for 2013?

Daniel N. Leib

Correct. So yes, we talked on the last call, there was the $70 million that was here at the end of 2012 that wasn't here as part of that note, and then we paid that down in the beginning of '13.


[Operator Instructions] And we have our next question from Kannan Venkateshwar with Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

So on the cost side, you had mentioned I think last quarter that there is some scope for reduction in costs during the year. Wanted to see if you can provide us more granularity in terms of where that's going to come from. And beyond that, in terms of international growth, wondered if it's possible to give us more granularity on where that's coming from and how sustainable that is for the rest of the year.

Thomas J. Quinlan

I'll take the first part. Look, as you've been around for a long time with us as well. I mean, we continue every day to manage cost no matter what the economic environment is out there. We don't change either because it's good times or bad times. Obviously, when we look at what's taking place in the marketplace, we think we've been able to, from an operation standpoint, continue to run more efficient, continue to help technology allow us to be more efficient and to continue to take cost out of the platform. So we don't see that changing. We see that continuing to take place, and not looking at that as being something that is going to be hard for us to find.

Daniel N. Leib

Yes, in terms of internationally. So we've -- saw very strong growth. If you go back to 2012, saw good organic performance in Global Turnkey, Asia, BPO. And looking into the quarter, continue to see strong performance organically in Asia of 16% or so. In Global Turnkey, it was up over 12%, and that's as we've ramped on some new customer wins from a year ago or so. And so they continue to have a nice pipeline, continue to bring work onto their platform. And then Europe actually turned positive in the quarter. So feel good that it is a broader recovery or broader change in trajectory, and it's not just sitting in one area. And then we've talked through where we're seeing growth domestically.

Kannan Venkateshwar - Barclays Capital, Research Division

Okay. And just one question on the pension side. The highway bill, the way I understand it is your upfront commitments on the cash side came down but it got deferred to the later part as maybe to 2015 onwards. Wanted to get some clarity on how much of that cash commitment will be at the back end of the whole cycle.

Daniel N. Leib

Yes, sure. So we have frozen the U.S. plans and then our major international plans. So we have very, very few still open. So we're not accruing any additional service cost. The -- as you referenced, the highway act bill that was passed last year certainly had a lot of help to 2012, '13 and '14, starts to ramp up a bit in '15. Our expected cash in '13 is $23 million, as we mentioned. Our expected cash in '14 is $82 million. Obviously, a bunch of rate assumptions and return assumptions baked in here. As those change -- these numbers will change, we're in a historically low environment. But as we would project, even assuming similar rates that were currently experienced, we hit the high watermark in 2012 of our payments, which were between pension and OPEB, $149 million. So while we do some increase requirements, it doesn't hit that level that we hit in '12.


Our next question comes from David Hebert with Wells Fargo.

David Herbert

I just wanted to focus on the maturity schedule. Your bonds have performed relatively well since the new issue earlier this year. Would you consider coming back to the market to focus on some of the near-term maturities?

Daniel N. Leib

Yes. Well, as we mentioned, the bonds have performed quite well. We don't have any maturities in '13. There is some seasonality to the cash flow. If you look at last year, Q2 was -- or first half of the year was negative in free cash or just about breakeven. So we'll have some expected drawings under the revolver in Q2. So as we generate cash, we'll have some of that to pay off, and we're always keeping an eye on the market to see opportunities. And we've done a couple of those transactions over the past 3 years of an issuance and a tender. But right now, feel like we're really well situated.


Our final question comes from Charles Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

If you've already have gone through this, we can follow up offline, obviously. But Tom, if you could talk a little bit more -- I don't know, like I've said, if you've talked about this, but shareholder value and some of the components of the business that maybe you could maybe help investors get a better sense of the value of some of the pieces of the puzzle. And also talk about a little bit more about the M&A cycle in terms of what you're seeing out there in terms of the potential properties that might be coming up for sale.

Thomas J. Quinlan

You know us long enough that we don't comment on M&A. But I would tell you that look, it's an -- it continues to be an environment where people of size -- when I say of size, I'll say the mom-and-pops, it's a tough environment out there for them. We talked about how to reinvest back into the business, these are decisions that they're going to make -- have to make. We continue to look at acquisitions for the 3Cs: customer, cost and capacity. And as Dan and Dave and team continue to plow through all the things that come our way, we'll continue to look at that. But completely understand, that the guardrails that we're operating in are 2.25x to 2.75x, as we think about this. So we will look to continue, as we always do, to explore the opportunities that are out there. But know that if we do look to pull the trigger on anything, it is going to be with, first and foremost, where those guardrails are, as we've indicated to you over the last couple of calls. From a growth standpoint, we did, Charlie, and I won't go back into it too much. But I think as we continue to evolve this company from being a print service provider to communication service provider, with print being the core element, there are some great opportunities that are out there for us. And it took us a while to make sure that we start to turn this aircraft carrier ever so slightly. But we're not forgetting about any of the long-run businesses or the conventional print. I mean, when you think about book, when you think about the common core or state standards that are now out there, there's going to be some opportunity for us there. I think what the Business Roundtable under Rex Tillerson's leadership from Exxon and the UpGrade America 2013 and Ed Rust from Allstate's (sic) [State Farm] running, it's key that that's going to take place. 45 states have adopted it. What is that going to mean for content? Countries not ready for electronic distribution of K-12 content yet. So we're positioned pretty well for when that takes place. I do think when people get the results from a 2013 test in 2014, there's going to be a lot of gnashing of teeth going on in this country. It's going to be a bipartisan effort to go back and say, "What can we do to make this better?" Content is going to be key from where that stands. When you think about magazines, print is still an anchor for good magazines. They've got great brand relationship. In our minds, they've stabilized. Almost 200 -- roughly 200 new magazines that tried to come to market last year. The advertisers still look at them as being part of their multichannel media approach. People have great experiences with them, but content is still the key. It's a passion -- passionate community that follows magazines, and I think the word comes from the word storehouse, and that storehouse is becoming more dynamic and more interactive. Mobile is becoming more key as the e-commerce. So both of those channels, we still feel good about, as we're sitting here. And Dan, not sure if you want to say anything, have anything else?

Daniel N. Leib

The only thing I would add to that, I think we're very positive on our position on whether it's competing at selling individual products and services to the marketplace, whether it's building comprehensive solutions for individual customers, whether it's the opportunities that are out there to lead the industry verticals with comprehensive communications solutions or whether or not it's being able to fulfill its supply chain -- a very disjointed and fragmented supply-chain void that exists for our customers, our go-to-market strategy is wrapped around all 4 of those, and we're very excited about the opportunity to drive growth at those 4 channels.

Thomas J. Quinlan

Look, as we wrap up here, we know it's Take Your Children to Work Day. Hope everybody's going to enjoy that. But just to leave you on a note that says, look, we're out there. We're looking to win our share of the printing that's out there. We're building on our strong operating expertise, our procurement scale and our customer relationships. We're selling more services internationally to diversify the offering, and we're driving free cash flow and margin through continued and aggressive.

cost compression.

So appreciate, look forward talking to each of you in about 90 days. Have a nice day.


And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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