R.R. Donnelley & Sons Q1 2010 Earnings Call Transcript

| About: R.R. Donnelley (RRD)

R.R. Donnelley & Sons (NASDAQ:RRD)

Q1 2010 Earnings Call

May 05, 2010 10:00 am ET

Executives

Thomas Quinlan - Chief Executive Officer, President and Director

Dave Gardella -

Miles McHugh - Chief Financial Officer and Executive Vice President

Analysts

Jake Kemeny - Morgan Stanley

Charles Strauzer - CJS Securities, Inc.

Edward Atorino - The Benchmark Company, LLC

Sachin Shah - ICAP

Daniel Leben - Robert W. Baird & Co. Incorporated

Scott Wipperman

Robert Ravitz

Operator

Good morning. My name is Trinity, and I'll be your conference operator today. At this time, I would like to welcome everyone to the R.R. Donnelley First Quarter 2010 Results Conference Call. [Operator Instructions] Thank you. Mr. Gardella, you may begin.

Dave Gardella

Thank you, Trinity. Good morning, everyone, and thank you for joining us for RR Donnelley's First Quarter of 2010 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 rrdonnelley.com.

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 detailed 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 in 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, Miles McHugh, and Drew Coxhead. I'll now turn the call over to Tom.

Thomas Quinlan

Thank you, Dave. Good morning, everyone. During the first quarter, our employees continue to implement our One RR Donnelley approach as we delivered our industry-leading product and service offering to our customers while working together to control our cost. As a result, we posted GAAP EPS of $0.25 a share, up 257% from the same quarter in 2009 and non-GAAP EPS of $0.33 a share, up 38% from Q1 last year.

As we have continually demonstrated, we did not suddenly acquire financial discipline and a focus on generating cash flow during challenging economic times. These qualities are baked into everything we do at RR Donnelley and are clearly reflected in the more than $4 billion in free cash flow or operating cash flow less CapEx that we have generated between 2004 and 2009 and continue to be reflected in the $600 million to $650 million that we expect to generate in 2010.

As we have consistently promised, our focus is on maximizing liquidity and driving operational excellence, and as reflected by our ongoing performance, we continue to deliver upon that promise.

Miles would take you through the quarter in more detail, but before he does, I'm going to put our performance and prospects into context by briefly discussing the following: First, where we believe RR Donnelley will be positioned as the industry begins to settle; and second, what we are doing to continue implementing our digital strategy.

Both of these topics are important in understanding the strengths, capabilities and opportunities that we continue to leverage and the direction that we have charted in this fast-changing environment. I'll start with how RR Donnelley is positioned to continue to be the industry leader.

We hold the following distinct advantages relative to our competition, each of which influence our customer relationships, our research and new product development efforts, our investment/acquisition strategy and our structure. One distinct advantage is our ability to help our customers achieve their two most important goals: cost-compression and enhanced ROI.

Let me share an example. Penguin Group USA just awarded us an agreement to produce digital books on demand, including adult and young readers trade hardcover, trade paperback, mass-market paperback books, bound galleys and advanced reader copies. By utilizing our ever-expanding digital platform, we are making shorter runs more affordable and driving waste and obsolescence out of the publisher's supply-chain.

In addition to lowering costs, RR Donnelley's innovation can also enhance ROI as publishers can reopen their backlist to create incremental revenue.

With RR Donnelley, effective no title is out-of-print. These types of solution that deliver cost compression and increased ROI are replicated across our entire global platform.

Another distinct advantage is the diversity of our product and service offerings, our customer base and our geographic reach. This is important for several reasons: We participate in virtually every industry vertical segment, from consumer package goods, to retail, to healthcare, to financial services, to publishing and on and on. Our extensive reach means that we are involved in all of the fastest recovering segments, including medical services, packaged goods, entertainment, investment services, brokerage services, electronics, food services and others. Unlike most of our competitors who only serve one or two industry verticals with one or two products, our unmatched product and service offering and industry vertical exposure uniquely positions us to deliver integrated communicative solutions for our clients around the world, which brings me to my next point, our geographic diversity.

Our geographic diversity enables us to leverage our client relationships internationally and create differentiated solutions that utilize the capabilities of our integrated global platform. As they awarded RR Donnelley with their renewed and expanded multimillion dollar contract, Thomas Nelson Inc. told us that our responsive customer service model makes it easy to do business with RR Donnelley, whether a publication is produced down the road or around the world. Simply stated, our global platform enables us to deliver the optimum mix of cycle time and cost benefits for our customers.

Our comprehensive product and service offering not only provides an opportunity for our customers to reduce their total cost of ownership by consolidating their supply chain, it also means that it is rare for us to be excluded from servicing any client in any industry vertical. As an example, even if a customer were to award a portion of its traditional long-run print to a competitor, RR Donnelley can maintain a relationship with that customer by providing transactional printing, fulfillment and distribution, digital services, BPO capabilities and much more.

A third advantage is that because of our close customer relationships, we continue to have direct access to the key decision makers in our customer's organizations. If you can find a positive in the global economic crisis, it is in the fact that it creates a much more open and receptive audience for us to talk about our ability to compress costs and increased ROI for our clients.

We continue to develop and expand our sea level relationships based on our ability to complete consultative assessments of our customer's communications activities, identify specific value-added recommendations utilizing our expansive product and service offering and implement a very efficient and effective operating model using our broad portfolio of web-enabled tools to serve those customers.

Together, these advantages create the key difference between what RR Donnelley was nearly a decade ago, a leading provider of printing services, and what RR Donnelley is today, the leading global provider of integrated communications solutions.

Now I will address what RR Donnelley is doing with regard to our digital platform and more broadly, what we are doing to take advantage of the opportunities being created by digital technologies. This is not just a single initiative as we are simultaneously pursuing our digital strategy across a number of fronts. For example, one front involves a seamless integration of digital technologies into our operations. Our platform includes more than 1,000 proprietary and commercial digital printing units. Now there's a tendency to think that digital equals short run. Digital units are frequently used in projects that enabled the creation of short-run content, but not always. For instance, the USPS presented information last month about intelligent mails biggest test to date, successfully processing, delivering and tracking the hundreds of millions of U.S. Census Bureau forms sents to households this year.

The Intelligent Mail Height-Modulated Barcode is used to sort and track letters and flats. It greatly expands mailer's visibility into the mail system. In describing the census, the USPS said we could view the entire process from individual pieces, the assembled loads, trucks from the printer and then throughout our system. That is the kind of result that can be achieved by our digital capabilities, including those on conventional long-run printing assets that have been retrofitted with RR Donnelley's high-speed, high-quality digital color capabilities.

Another front involves employing digital technologies on our platform to create entirely new interfaces between print and electronic communications. For example, our photography and pre-media professionals are capturing 360-degree rotating images that are deployed to websites. Imagine that you're working on a home repair project and you want to see what it should look like when it is finished. You point your smart mobile device at the using care guide that RR Donnelley produced, kitted with other materials and packaged with the device. Your device sees and recognizes a dimensional code that we printed and it pops that rotating image we photographed. That's an end-to-end digitally enabled solution.

A third front involves using digital technology to help contain SG&A by allowing our customers to self-surf through web tools such as our proprietary CustomPoint system, which again saw a sequential growth in the number of orders it accepted. Even against the traditionally strong fourth quarter, during Q1, we saw a 2 1/2% sequential increase in the volume of orders placed to us through this unique portal.

On the forefront, we are using digital technologies to help customers expand the power and reach of their brands. For example, our DigiMag product enables publishers to complement their printed magazines with digital versions. As you saw, we were just awarded an agreement by Hanley Wood to create all of the DigiMag versions of their B2B publications. DigiMag also allows published to leverage other content channels by making publications available to their mobile consumers. These online communications complement print, such as magazines, book, direct mail and commercial printing that we provide.

As customers expand their communications mix, we expand a number of ways that they can choose RR Donnelley as their provider. Customers that modify their marketing mix do not have to shift away from RR Donnelley. We can simply utilize other capabilities within our integrated platform to meet their communication needs.

Another front involves helping our customers bring their own digital innovations to market. For example, consumers are evaluating an array of devices that put all kinds of apps into the palms of their hands. If they make a decision to buy one of these popular units, there is a really good chance that they are going to wind up touching some of our work.

Our global print, packaging and supply chain management professionals are hard at work designing, printing, sourcing, packing out and fulfilling some of the most popular devices. When you received that product from your online order or pick up the box from the store, you're handling a great representation of our work.

RR Donnelley's digital strategy encompasses virtually every aspect of our business and is even influencing direction that we are taking in our hiring, training and development of human resources. For example, we are continuing to attract top talent from top campuses nationwide and bringing these young people into comprehensive and specially designed development programs.

We're giving them a thorough grounding in our global capabilities and through there energy and passion, they're giving us a deeper understanding of how RR Donnelley can support customers as the customers exploit the fast-changing communication possibilities associated with social networking.

As marketers use these sites to gather microdata about their customers and prospects, we are using our digital capabilities to help use those data in results-producing communications. And with that, I will turn it over to Miles.

Miles McHugh

Thanks, Tom. We are happy to report that our first quarter 2010 non-GAAP earnings per diluted share of $0.33 exceeded our first quarter 2009 earnings per diluted share of $0.24 by 38%. Several key factors, which I will discuss in greater detail, contributed to our improvement over last year.

I told you that during our fourth quarter 2009 earnings call that we expected full year 2010 sales growth over 2009 to be a percentage in the low single-digits. Although our first quarter revenue declined slightly on a year-over-year basis, the decline was in line with our expectations, and we continue to expect low single-digit percentage growth for the full year.

Compared to the first quarter of 2009, revenue declined 1.6%. The favorable foreign exchange rate impact of approximately 202 basis points was largely offset by lower paper sales for the quarter. The lower paper sales were due to both lower paper prices and a relative increase in the amount of customer-supplied paper.

Excluding the impact of both foreign exchange and paper, revenue declined by approximately 2%. This decrease was due to continued price erosion and slightly lower volume. The reported revenue decline of 1.6% compares to a 7.6% decline in the fourth quarter of 2009, a 14.0% decline in the third quarter of 2009 and a 19.4% decline in the second quarter of 2009, as demand has continued to stabilize and we are now overlapping past quarters during which we felt the full impact of the recession.

GAAP income from operations was $145.8 million in the quarter, $58.4 million higher than income from operations in the first quarter of 2009. Included in these amounts are $15.5 million of restructuring and impairment charges and $2.0 million of acquisition-related expenses in the first quarter of 2010, compared to $54.2 million of restructuring and impairment charges in the first quarter of 2009.

A full reconciliation of our GAAP to non-GAAP earnings is included in our earnings release.

In spite of the revenue decline we experienced in the quarter, we were able to generate $301.9 million in non-GAAP EBITDA, $12.3 million more than we generated in the first quarter of 2009. Driving the year-over-year improvement were our ongoing efforts to reduce costs and increase productivity, a higher recovery on print-related by-products due mainly to favorable pricing and a more favorable product mix.

Partially offsetting these favorable impacts were continued pricing pressure and higher incentive compensation and benefits-related expenses, including a $10.2 million increase in the non-cash pension and post-retirement benefits expense. Changes in foreign exchange rates did not materially impact the year-over-year earnings comparisons as the negative impact of the Venezuelan currency devaluation was mitigated by the favorable impact of other currencies.

Our non-GAAP effective tax rate in the quarter was 35.6% and was lower than the non-GAAP effective tax rate of 37.1% in the same period last year due to a more favorable domestic manufacturing deduction in 2010 and a change in the mix of income across tax jurisdictions, partially offset by a one-time charge of $3.3 million associated with the enacted Patient Protection and Affordable Care Act.

Now we'll discuss our operating results by segment. Sales of our U.S. Print and Related Services segment declined 3.7% to $1.8 billion in the quarter. As I mentioned earlier, we continue to see paper prices trend lower, especially impacting our magazine, catalog and retail insert offerings. Lower paper prices and the mix of customer-supplied paper contributed approximately 214 basis points to the overall U.S. sales decline of 3.7%. Overall volume in this segment was essentially flat as volume declines in our book and directory and magazine catalog and retail insert offerings were offset by volume increases in our variable print, logistics services, pre-media and financial print offerings. We are still though experiencing price pressure across this segment.

Our International segment's reported sales were $578.3 million and grew 5.5% from the first quarter of 2009. Excluding FX however, sales were 3.5% lower than the first quarter of 2009 as price erosion in Europe and Asia and volume declines in Latin America more than offset the favorable trend of our increased volume in our Global Turnkey and Asia products and service offerings.

Our non-GAAP unallocated corporate expenses of $49.6 million increased by $9.3 million from the first quarter of 2009. We indicated last year that our non-cash pension and post-retirement's benefits expense would be significantly higher in 2010. And in the first quarter, this expense was $10.8 million higher than the first quarter of 2009, accounting for more than the total increase of corporate expenses.

Capital spending was $39.9 million in the quarter, $15 million less than the first quarter of 2009. For the full year, we expect to spend roughly the same amount on capital expenditures in 2010 as in 2009, about $200 million.

Our first quarter 2010 operating cash flow of $76 million was lower than the first quarter of 2009 as several one-time benefits favorably impacted our operating cash flow last year. In addition, this year's first quarter operating cash flow was negatively impacted by expenditures of $74.7 million related to our restructuring programs, of which $57.5 million was related to last year's termination of the significant long-term customer contract in the International segment. We continue to expect operating cash flow less CapEx to be in the range of $600 million to $650 million for the full year.

We continue to maintain a favorable debt-maturity profile. As of March 31, 2010, our debt was $3.3 billion, of which $326 million matures on May 15. In addition, we expected to pay approximately $481 million for the Bowne acquisition and anticipate funding these obligations through a combination of cash on hand, borrowings under our revolving credit facility and the issuance of debt securities.

As of March 31, 2010, our debt is 99% fixed at an average interest rate of 6.7%. We are still targeting a debt-to-EBITDA ratio of 2.0x to 2.5x on a sustainable basis recognizing that under certain circumstances, we may be at or above the high end of that range.

With one quarter successfully under our belt, we have revised some of our full year expectations since our last earnings call. Let me share with you some of these key expectations, all of which exclude the impact of the Bowne acquisition. We continue to expect year-over-year percentage revenue growth in the low single digits. Our non-GAAP operating margin is expected to be approximately 7.0% to 7.2%, an increase of 50 basis points to the low end and 20 basis points to the high end of our previously communicated range.

We expect depreciation and amortization expense to be approximately $555 million, $5 million lower than previously estimated. Interest expense is now projected to be approximately $210 million, a reduction of $10 million from our previous guidance.

Our non-GAAP tax rate will be in the range of 30% to 32%, 100 basis points lower than previously communicated. This estimate could be impacted by business trends affecting different countries in which we do business or by changes in tax law.

We expect a fully diluted share base of approximately 210 million shares, our CapEx will be approximately $200 million. And finally, as both Tom and I have mentioned earlier, we continue to expect our free cash flow or operating cash flow less CapEx to be in the range of $600 million to $615 million for the year and to be more heavily weighted towards the back half of the year.

And with that, I'll return you to Tom.

Thomas Quinlan

Thank you, Miles. Before we open it up for questions, I like to make a few brief comments. First, earlier as I identified some of RR Donnelley's unique competitive differentiators, I would be remising that specifically mentioning the resilience, innovation and deep commitment of all of our people. They are the difference makers.

Second, we continue to work towards the closing of our acquisition of Bowne & Co. Under the guidance of our Legal departments, we are planning the integration work that will allow us to hit the ground running when we come together. The people who are working with are confirming what we believe as we considered acquiring Bowne, that the acquisition will bring RR Donnelley some very talented people who will be a terrific fit with our customer-first culture.

We also believe that the customer-centric focus that has held Bowne forged strong relationships with many of their customers and that this will open the door to additional opportunities to present and sell the broader RR Donnelley product and service offering once the combination is complete.

Third, we are thrilled that the judges at the International Print Exhibition, IPEX, have found fit to award Donnelley the IPEX 2010 Champions in Print Award. The IPEX judges broke with tradition and gave their most recent award not to an individual but to the printing group that they cited as having made one of the most positive impacts on the industry and which has been a shining example of pioneering innovation.

We are proud to stand as a 2010 winner, along with such prior individual winners as Dr. John Warnock and Dr. Charles Geschke, founders of Adobe, as well as J.K. Rowling, author of the Harry Potter series.

Finally, we look at the balance of the year with what I would call tempered enthusiasm. The foundation that we built is proving to be solidly in line with what our customers are looking for and we continue to have confidence in our employees' ability to execute our strategy. And now, operator, with that, we will take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Charlie Strauzer of CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Let's get the obligatory Bowne question out of the way about your Hart-Scott review. Obviously, it's expiring next week in terms of the 30-day review. I assume you haven't heard anything new from Justice [Department of Justice] in terms of that?

Thomas Quinlan

Charlie, if we do, we would definitely share it with everybody. As I said or as you've indicated, May 12 is when the 30-day expires then. I mean the great thing for us, as we're doing the integration planning right now, is that we've been able to meet a great number of individuals at Bowne & Co. and again, as I mentioned in my script, it's been a pleasant surprise to see their enthusiasm, their passion, their excitement as we're looking to go ahead and get together with them. So again, we're waiting for the FTC to come back and we will go from there. And we'll notify you as soon as anything that we're aware of takes place.

Charles Strauzer - CJS Securities, Inc.

And obviously, if things do move ahead next week without any hitches, given the kind of the hitting the ground running commentary just made, obviously, are you prepared to basically make this thing closed maybe by the end of this quarter, if you do get the approval?

Thomas Quinlan

Well, Charlie, I mean, from a procedure standpoint, Bowne shareholders still have to go ahead and have their vote take place. That is scheduled for May 26, I believe. And then obviously, you'll need a couple days after that. So again, look, again, timing is all the conditions involved in it. So as soon as we possibly can get everything completed, meet all the conditions that are required to get completed, we will look to close this transaction, take all the uncertainty out of both organizations and move forward.

Charles Strauzer - CJS Securities, Inc.

And then, if we talk about kind of the economic recovery that's underway and given your tone for continued kind of growth in the low single digits on the top line, if the economy continues to recover as is or even a little bit better, what's kind of the benefit to Donnelley and what could basically happen there? And secondly, what are you seeing, in terms of ad pages and other items, that could may easily provide some additional benefits there too?

Thomas Quinlan

Charlie, what I would tell you -- again, we're better positioned for an economic rebound because of the platform that we built. What we built is working. We're not contingent just upon ad pages, which is a great thing for us. Our multi-product offering is the perfect solution for companies that are looking to implement their integrated marketing plan. Companies with their integrated marketing plan are looking to use conventional print, digital print and electronic means, as they're looking to secure prospects or increase customer spend. If you look at what we built, and if you go -- I'll spend two seconds going by products. I mean, you think about books. Consumer spending for new and backlist titles is going to increase if the economy goes well. We know the states have budget deficits in the United States. Hopefully, they can get that back underway. Once they do, adoptions will get better. The state of Florida are starting to have more adoptions in certain subject matters. Our state imprinting, that's going to expand. There'll be increased consumer spending, which means that there'll be more line items per document. Our BPO operation, there'll be more transactions taking place. As I think about catalogers, catalogers are going to start to test more, increasing the number of pieces that are mailed. Hopefully, their response rates with consumers go up. Obviously, branding, commercial printing, more merchandising. Hopefully, there'll be either new store openings or stores that are remodeled, which will again, will impact us. There'll be more hiring of employees, which will again mean more printed communication material. Direct mail, where there'll be increased consumer spending, and not for profits will look for more donations. There'll be more testing. There'll be more rollouts of different formats. Even when you think about directories and start-ups of new businesses that are going to take place, again, as the economy starts to improve, that's going to help us. As you go through financial printing and services, what we just talked about with Bowne, obviously, there's going to be more capital markets activity. There'll be more M&A activity. Labels, consumer-packaged goods, different products, they all have labels. We do all those stuff. Logistics, there'll be an increased volume in co-pay or co-mail distribution. Magazines? Yes. Ad pages go up, page counts will go up. That's a good day for everybody. There'll be probably more start-ups that will take place in B2Bs. The premier that we talked about, there'll be more photography taking place, more page layouts that will take place than what happened before. And obviously, with print fulfillment services, there'll be more of these electronic devices that are taking place, which we're involved in. If you think about office supplies, retail inserts, translation services, all of them get impacted by a better economy, which, as we look around, and I know we make it tough for you because you have no one that you can go ahead and put us in a box with, and say, "I'm going to compare you against this person." There's no one else that has this. And the level of interest that we're seeing, by our customers, because we have these solutions, is by far the most we've ever seen. We've got companies now that are truly, because of the crisis that they've gone through, are looking for ways to do things that take things off their plate that aren't their core competence. Again, the multiple product offering that we've got allows for cost compression, increase the return on investments and it's companies of all sizes. So as we sit here today, I mean, we give you our 90-day report card that I call it, 4x a year, and this is one of the report cards that we're very, very proud of and excited about what the future can hold, given where we're starting to see some things. Now on the flip side, I'll tell you, if the economy doesn't rebound or doesn't grow maybe as quickly as we thought it would, we still got ability here to take costs down and manage costs. I mean, if anything, I think we've proved to you over the years is that we know how to manage costs and we know how to go ahead and either dial it up or dial it down, with no impact to our customers. So I know, probably a long-winded answer for you, but that's, again, to drive home the point that we're not limited to ad pages. We're not limited to just one segment of communications, and that we participate in every one of these industry verticals is a great thing for us here at RR Donnelley, for our customers and for our stakeholders.

Charles Strauzer - CJS Securities, Inc.

And kind of picking up from that tone, if you look into Q2 and kind of getting an early glimpse there, can you give us a little bit of better sense of direction there as well?

Thomas Quinlan

Yes, I mean, what I would tell you what we've -- obviously, 1/3 -- yes, I mean, we're seeing some positive -- the positive momentum is continuing. And again, there's crazy things that are occurring in the world today, from a sovereign risk standpoint, but I think, where we see things, we -- our comment about tempered enthusiasm, I think, is well placed. I mean, if you look at what the capital markets have reacted this week, you look at the way certain countries have their own fiscal deficits -- again, we're excited. We're enthusiastic about what we think we can do this year, given the platform we built. But we also know, we've got high unemployment out there, we've got countries that have over extended themselves, and sooner or later, you got to pay it back. And again, I think if you look -- whether you're managing a company or a country, you've got to continue to be a good fiduciary of your balance sheet and make sure that you don't put yourself in a situation where you're going to have to take away things from people, you're going to have to reduce your services or you're going to have to compromise something that people, whether it's people in the country or whether it's customers, don't expect you to do. So again, we feel pretty good as we're sitting here, and we're going to continue to plug away.

Operator

Our next question is from Dan Leben from Robert W. Baird.

Daniel Leben - Robert W. Baird & Co. Incorporated

Could you talk about some of the drivers behind the increased margin guidance? So whether that's on the cost side, or are there some specific issues that you looked at that gave you the comfort to increase that?

Thomas Quinlan

Yes, I think, obviously -- 2009 was a year, where again, we didn't make a big fan for about the tough decisions, tough steps that we had to take here. But we made very difficult decisions in here in 2009 that are paying -- reaping the benefits from, from a cost standpoint, now in 2010. So that's obviously one of the drivers there. I would tell you, as well as that, that again, our top line -- we're talking about single-digit growth on the top line, low single-digit growth. I mean, for somebody like us, when you have a base of $10 billion and offsetting a 1% to 2% price decline, if you're able to catch your cost structure in line, that would -- some people may perceive as a small increase is pretty significant, and that should flow through the P&L in a very positive way. But again, Dan, as you get to know us, you'll see that we manage all aspects of costs everyday, and try to, as best we can, make sure that we don't -- as we manage those costs, we don't go ahead and jeopardize any one part of what we're trying to do here, from an operational efficiency standpoint.

Daniel Leben - Robert W. Baird & Co. Incorporated

And so in other words, the way we should think about it is, it's a very modest increase in the top line assumption. Still in the low single-digit range, but nothing has changed on the cost side. You just keep great flow-through, in terms of incremental margins.

Thomas Quinlan

Yes. I mean look, we're always -- technology is helping us to be more efficient. We talked to you about the CustomPoint portal. I mean, that's something where if we can have more customers serve themselves, in essence, should be that, that's a help, from a technology standpoint. What we've been able to do, from a digital standpoint, that is also a key driver for us. I mean, we're one of the few people, if anybody, who has -- the transaction that we did with Muller Martini last year is not an insignificant transaction, as you think about costs for us in the digital landscape. We should be able to, as a result of that, be advantaged by having that technology on board with us for many different reasons. So again, as we go about trying to show customers what we can do by compressing their costs, we've got to make sure that our costs are also in line, or we're not going to be able to do that.

Daniel Leben - Robert W. Baird & Co. Incorporated

And then, Miles, was there any impact from LIFO in the quarter, on the costs?

Miles McHugh

Nothing significant.

Daniel Leben - Robert W. Baird & Co. Incorporated

And then you talked about a lot of different areas where the move to digital and doing some very innovative things for your clients is helping. Could you give us a sense of kind of some of the segments where you're seeing the most impact, either in terms of revenue shifts or incremental profitably relative to, say, books versus magazines versus retail inserts, and so forth?

Thomas Quinlan

Sure, I mean, we're better positioned than anyone else to serve customers, from a digital standpoint. And the great thing for us, the fortunate thing for us is we did not just start to create a digital platform. This was part of our plan that was started nearly six years ago. We have the scale and digital infrastructure around the globe to serve customers' needs, whether they are in publishing or in the corporate world. Again, you've seen some of the announcements that we've made this week with Penguin on the book publishing side, Hanley Wood on the magazine side. We've got others in place on what I call, the Fortune 1000 side. So again, the digital error for us is going to develop new products that's going to make integrated communications critical to companies' success. So companies aren't going to do away with print. I mean, one of the things that I would hope I can drive home today is print is going to be a part of whatever that integrated communication spend is going to be. Whether it's via the net, cell phone, Blackberry, iPad, Kindle, whatever it may be, there's print that is going to be associated with it. So again, for us, as we look at it, we're excited that our infrastructure is there. We're excited that, again, from a conventional print standpoint, we've still got that great equipment with us, and we're going to be able to assist companies to do whatever they need to do. If they need to change from doing a retail insert, they want to then do a direct mail piece, bang, we can do it for them. They don't have to go some place else. And trust me, companies want to reduce their supply base because they need to go ahead and improve their margins. We talked to you a lot today about cash flow. Let's spend two seconds on CapEx. I mean, CapEx, for us, as you've gone through the years, I think it's been a concern for some you over the years. Look and see what we've done, going back, over the years. 2009 and 2010 are pretty similar amounts. And as we sit here today, I mean, we don't see why that amount, going into the future, shouldn't be consistent as well. Obviously, we could grow through acquisitions or there could be something else that takes place. But as we sit here today, we think the numbers that we're talking to you about, from a capital expenditures standpoint, don't have to change, as a result of us getting new business. That's a great business model. The business model where you got to go buy new equipment because you brought on a new customer, as most of you know, that's not a good business model. So we're excited about what digital is going to bring with conventional print, and again, we think we've got more than a head start on many, many people.

Operator

Your next question is from Scott Wipperman from Goldman Sachs.

Scott Wipperman

Appreciate the comments in the beginning about the advantage your scale provides. I guess, I'm just wondering, can you touch on the competitive environment? I guess, what I'm wondering is right as the economy improves and end markets improve, is it actually increasing the competitive environment? Are you seeing your competitors being more aggressive on pricing? Any color you could give there would be helpful.

Thomas Quinlan

Yes. Look, I've been around this industry for as long as we have been. And starting out where we did, I mean, we learned right away, pricing is always going to be there and you can't use that as an excuse. And look, pricing in our industry is always going to be tough. The great thing for us, as we sit here, we've got people we would never considered competitors, probably over the years, that are now coming into the marketplace, that are seeing the advantages that are here that we can have. So I think, from the standpoint of having others join and trying to do some of the things we do, it should shine a light on us because of our capabilities and because of how well we do it. Again, I know we don't make it easier for you, as far as some competitors are, but there is no one that does this product and service offering the way we do it, or have them that we do. So if you want to look at individual products, there's hundreds of competitors within each of one of those individual products. They may have good days on certain products, but those good days come and go. And what else is there to sustain their ongoing effectiveness? So with the platform that we built, no matter what price is, and we know we've got to overcome price every single day, and you've got to do that by making sure that you've got a low-cost platform that can go ahead and meet your customers' needs at the same time. So the old saying that, a rising tide lifts all ships, yes, there's some truth to that. But how much will they benefit from it? Where will that take them? I mean look, we're one of the few ones that, as we sit here today, we're still working on solutions for the USPS with them, with our customers. Obviously, they're going through some interesting times. How can we go ahead and make sure that we can pass along cost savings to our customers, which people who don't have the scale really can't work towards that? So we may be end up benefiting them. They may have to come to us to help them benefit from that, so...

Miles McHugh

Maybe I could add some numbers to that. Our print revenues in our U.S. Print and Related Services segment dropped 3.7%. 2% of that was due to paper prices and increase in customer-supplied paper. So excluding paper, we had revenues drop about 1.7%. So since volume was approximately flat in the quarter, you can work out that the price erosion was about 1% to 2%, which is in line with what we've seen, and we've seen in long-term trends over historical times. So we don't really see a real significant change in any way of normal price erosion.

Scott Wipperman

And then maybe just briefly, just on the international operations. Just any additional color or certain regions or businesses that are feeling better or worse than maybe you expected heading into this year.

Thomas Quinlan

I think, heading into this year, we knew that the global economic conditions did not leave anybody alone. I think everyone from Asia, Latin America, North America, Europe, obviously, have been impacted by it. Some places are more difficult than others because of the fragmentation in the industry. But I would say that the great thing for us is the customer relationships that we have, no matter what time zone we are in across the globe, are paying dividends for us. So we're connected with the right customers, which is more impactful for us right now than what is it taking place in the geography that we're located in.

Scott Wipperman

Just quickly on the balance sheet. I heard the comments previously, in terms of funding your upcoming debt maturities and the Bowne acquisition. Just in terms of timing and accessing the capital markets, should we be thinking that the Bowne acquisition needs to close first? Or could you potentially look to pre-fund that?

Miles McHugh

We have, as I said, plenty of cash on hand or availability under our revolving credit facility, and we have ongoing access in the capital market. So we'll just have plenty of different alternatives to fund the upcoming debt maturity, the Bowne acquisition and normal operations. So we don't have to have any one of those things in any certain order. We're in good shape.

Thomas Quinlan

Our checkbook is okay.

Operator

And your next question comes from Edward Atorino from Benchmark.

Edward Atorino - The Benchmark Company, LLC

On the margin, that was pretty good for margin performance, year-over-year, in a tough environment. Last year, second quarter, the margin was a little bit better than the first quarter. How do you think about the gross margin trend short term here?

Miles McHugh

There's some seasonality to our margins. But overall, our full year guidance for margins, we increased it. We think the benefits to our margin, our cost structure, our productivity that we've seen this quarter is going to continue throughout the year. So we're still very positive there.

Thomas Quinlan

And then, I don't know if James told you, but we did increase from -- we were at 6.57% when we talked to you in February, and now we're 7% million to 7.20% on operating margin, so...

Operator

Your next question is Sachin Shah from Capstone.

Sachin Shah - ICAP

So I just wanted to clarify the closing of the deal. You've mentioned earlier that there is a possibility that you can close the deal this quarter?

Thomas Quinlan

No, I didn't. But thank you for saying that. Just to be clear, so everyone knows, we still got to clear FTC, which again, as we talked about earlier, the 30 days expires May 12. There are other conditions that Bowne has to meet. And again, that have to be met before we can close. And as soon as all that is met, we will go ahead, and as quickly as we can, we will look to close the transaction.

Sachin Shah - ICAP

So the shareholder vote is on the 26th, if there isn't a secondary request on HSR. Based on the HSR, it seems like they're past the completion [ph] (50:02). If that's the case, then you can't close the deal shortly thereafter?

Thomas Quinlan

Look, I don't want to speculate on any of this. So I mean, there's HSR, there's the Bowne shareholders, there's other conditions, because again, this is a global company, Bowne, so there's other conditions that have to be looked at. As soon as all those are met, we will go ahead and let you know. And we'll get the close done as quickly as we possibly can. We've got the money to close it, and again, just making sure that we get these conditions behind us, met and move forward [ph] (51:39).

Operator

Your next question is from Jake Kemeny from Morgan Stanley.

Jake Kemeny - Morgan Stanley

Just a question on the use of your excess cash flow. Given the guidance of about $625 million at the mid for free cash flow, you also have about $220 million of dividends that you pay. So the excess cash flow you guys are going to generate is more about $400 million. And so should you choose to draw down on the revolver for the various funding needs that you have, do you anticipate using that free cash flow to reduce your debt fairly quickly? Or how do you think about the uses for that excess cash flow?

Miles McHugh

Well, yes, we've got plenty of options for cash flow. In the past, we've been balanced on how we utilized it amongst all the different opportunities on how to deploy it. So we'll continue to do that. Last year, we paid a lot of debt. This year, we're using it a little bit more for M&A. In the future, we'll keep it balanced. We don't have any significant debt maturities coming up for the next couple of years, so we'll have plenty of opportunities to utilize the cash flow as best in the circumstances.

Thomas Quinlan

I think, hopefully, again, what we've proved to you over the years is that we've been good fiduciaries when it comes to the cash. And we've made sure we've been prudent with the decisions that we've made. If we weren't, we would not be able to be in the position that we are today.

Operator

Your next question is from Robert Ravitz from Neuberger Berman.

Robert Ravitz

I'm looking at the Bowne proxy, and in it, there's a unordered prospective financial information, which indicates very significant improvement in 2010 and then somewhat heroic progressions for 2011. Now I know these are things that investment bankers come up with, but could you discuss their prospects? I mean, are they particularly positioned to have a stronger rebound than overall Donnelley?

Thomas Quinlan

Bowne, these are their numbers. These are their projections. Dave Shea, and their management team and their employees obviously do a great job. And they're not, what I would call, anything that we would comment on. But obviously, we're excited about getting together with them for the possibilities that both of our companies have in the marketplace with customers, to bring more products and services as we go to market.

Robert Ravitz

Well is it because their considerable exposure to the capital markets that, that is the basis for...

Thomas Quinlan

You'd have to give the people of Bowne a call to find out what was behind their thinking for what they put in that document.

Robert Ravitz

Well, but when you decided to buy them, was that an aspect of it that was definitely attractive?

Thomas Quinlan

Look, from our standpoint -- without talking about their document, from our standpoint, obviously, we see more activity that could be taking place in the financial arena, whether it's debt-capital raising, M&A, IPOs. As I talked about earlier to you, if there's an economic rebound, all of these different products and services that we have should benefit from something of that nature. The degree to which they benefit will be different, but there should be good times there for what we've got on our platform. And again, that's why we're excited about the transaction. That's why we would really love to close it as soon as we possibly can. And we look forward to getting together with them.

Thomas Quinlan

Operator, thank you. I appreciate, everyone, your support, joining us today. We look forward to talking to you in about 90 days, and hope everyone has a good day. Thank you.

Operator

Thank you for participating in today's teleconference. You may now disconnect.

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