R.R. Donnelley & Sons' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: R.R. Donnelley & Sons Company (RRD)
by: SA Transcripts

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

Q4 2013 Earnings Conference Call

February 26, 2014 9:00 AM ET

Executives

Dave Gardella – Vice President-Investor Relations

Thomas J. Quinlan III – President, Chief Executive Officer and Director

Daniel N. Leib – Chief Financial Officer

Analysts

Charles Strauzer – CJS Securities, Inc.

Kannan Venkateshwar – Barclays Capital, Inc.

Craig A. Huber – Huber Research Partners, LLC

Edward J. Atorino – The Benchmark Company, LLC

Operator

Welcome to the R.R. Donnelley Fourth Quarter 2013 Results Conference Call. My name is Christine and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Dave Gardella, you may begin.

Dave Gardella

Thank you, Christine. Good morning everyone and thank you for joining us for R.R. Donnelley’s fourth quarter 2013 results conference call. Yesterday afternoon, 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 will 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 that presentation of non-GAAP and pro forma results provides 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 are 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 III

Thank you Dave, good morning everyone and a special welcome to our colleagues from Consolidated Graphics. As many of you may know we’re hosting an Investor Day later today so my remarks this morning will be brief. Following Dan Leib’s remarks, I will discuss our two most recent acquisitions and provide background on the benefits these acquisitions bring to R.R. Donnelley and most importantly to our customers. Before I turn it over to Dan Leib, however I would like to talk about R.R. Donnelley’s management team and the DNA of R.R. Donnelley.

When we came together as a management 10 years ago this month, we all knew that we were at an organization with a long successful and colorful history. We also knew that the organization was facing a direct result from the electronic delivery of content on the products that made this company a leader it has been since its inception.

To maintain R.R. Donnelley’s leadership position, required the company to be more focused and more aggressive in managing cost and serving customers and diversifying its offerings and in growing the business.

Over these past 10 years, we have continued to demonstrate to all of our stakeholders, customers, employees, investors vendors, retirees that on a daily basis, we will match cost of revenues, we will make the tough decisions regarding capacity, we’ll bring innovative solutions to our customers to utilizing and serving their customers and we’re prudent in the way we manage capital.

Not to be omitted is this fact; R.R. Donnelley has always evolved with technology and has found ways to leverage its reputation and serve expanding parts of our customer supply chains. We were around for the innovation of the Telegraph, the Radio, the Telephone, the Television and the Web. Now we are bringing forth Communications Solutions to customers that embrace the Internet.

R.R. Donnelley is 150 years old this year and we are joyfully celebrating this unique business milestone. We enter our 150 years of extremely focused, recognizing the challenges in some of our offerings, but also recognizing an organizational ability to evolve and leverage our diversification in broad product and service portfolio to win a larger share of our customers applicable spend.

We have got a very solid foundation these past two years and are now more than prepared than ever to assist our customers in their communication needs, both physical and the in electronic. With R.R. Donnelley trusted brand and capabilities, we are becoming the provider of choice for many organizations’ communication materials.

When you can demonstrate to customers that you can reduce their overall total cost and significantly improved the return on their investment. Customers have time for you and your solutions. I am happy to report customers have lots of time for R.R. Donnelley and that is a great thing for us and for you on this call.

With that, I will turn it over to Dan Leib to discuss the fourth quarter in detail and outline our new segment reporting structure. Dan?

Daniel N. Leib

Thank you, Tom. Before I review the quarterly performance, I want to highlight the new operating segments that we announced in last night’s earnings release. In the schedules to the earnings release, we have provided historical financial information in the new segment structure and we will discuss the segmentation, business drivers and outlook for each segment in more detail at today’s Investor Meeting. The new segments aligned with the operating management of the company and we will provide you with additional transparency of performance, trajectory and strategy.

Publishing and Retail Services is comprised of magazines, catalogs, retail inserts, books and directories. In general, these offerings operate under similar asset base and are sold into publishing customer vertical and for catalogs and retail inserts into the retail vertical.

Variable Print is comprised of commercial and digital print, direct mail, labels, statement printing, forms and office products. These offerings utilize similar assets and have some of the same revenue drivers. The Consolidated Graphics acquisition that closed on January 31 of 2014 will report within the commercial and digital print unit within this segment.

Strategic Services, our third reportable segment includes logistics, financial, digital and creative solutions and domestic based sourcing. These four offerings are comprised primarily of value-added services that complement our print based offerings. The financial offering includes not only domestic operations, but also those in the network in Asia, Europe, Canada, and Latin America.

Our International segment, which existed prior to this quarter was modified to move the financial print offerings outside the United States into the Strategic Services segment as I just mentioned. Otherwise, the offerings within this segment remain unchanged and include our Global Turnkey Solutions offering, Business Process Outsourcing and our product and service offerings in Asia, Latin America, Europe, and Canada.

Lastly, we have our unallocated corporate expenses. In addition to reorganizing our offerings into new segments, we are now reflecting a greater portion of our operating expenses within each of the segments in order to more fully reflect the cost of each of our operations.

Two most meaningful changes are related to IT, which is now fully charged to the operating segments and employee benefits which is now being charged to the segments at a rate that better reflects actual cost. What remains in corporate is primarily administrative overhead, stock compensation expense, LIFO inventory provision and pension and OPEB income or expense.

Corporate expenses also include variances for certain costs that are allocated to the segments based on an annual estimate, including employee benefits, selling expenses, bad debt expense and workers’ compensation expense.

And now to the quarterly results; as with prior quarters, the focus of my comments will be on certain non-GAAP results and measures. Please refer to the support schedules of our earnings release for a reconciliation of our GAAP to non-GAAP results for the fourth quarter and full year.

We are pleased with our fourth quarter performance. Revenue of $2.8 billion in the quarter exceeded our expectations and translated into 2.3% organic revenue growth. This growth included a benefit of roughly 40 basis points of growth from pass-through postage revenue as well as a 70 basis point unfavorable timing impact from a project in Latin America that was completed this year in the third quarter and last year in the fourth quarter.

Our non-GAAP adjusted EBITDA margin of 10.7% was in line with our expectations and we generated strong free cash flow of $310.7 million in the quarter. Our full year free cash flow of $478.2 million in 2013 marks the 10th consecutive year of free cash flow of at least $450 million. Fourth quarter gross margin was 21.9%, flat to the fourth quarter last year. Higher volume and favorable mix were offset by price erosion, inflationary pressure on wage and other costs and a 40 basis point negative impact from higher pass-through posted revenue related to the Presort Solutions acquisition.

SG&A expense in the quarter as a percentage of revenue was 11.3% or 40 basis points higher than the fourth quarter of 2012; primarily due to higher variable compensation expense, a higher bad debt provision and lower pension income.

Fourth quarter non-GAAP adjusted EBITDA of $293.6 million compared to $292.2 million in the fourth quarter of 2012 and non-GAAP adjusted EBITDA margin in the quarter of 10.7% was 30 basis points lower than in the fourth quarter of 2012. Unfavorable changes in foreign exchange rates contributed nearly 20 basis points to the quarter-over-quarter margin decline while higher pass-through posted revenue accounted for an additional 20 basis points of the decline. Higher volume and a favorable product mix offset the price pressure, higher benefits related expenses, wage and other cost inflation and a higher bad debt provision.

As the businesses become less capital intensive over the years, we continue to benefit from reduced levels of depreciation and amortization in our non-GAAP operating margin 6.8% of the fourth quarter 2013 was 20 basis points better than the 6.6% margin in the fourth quarter 2012.

Our non-GAAP effective tax rate in the quarter was 22.1%, well below both last year’s fourth quarter rate of 33% and our full year rate of 30.5%, driving the lower quarterly rate in 2013 were valuation allowance releases internationally and favorable resolution of federal and state tax audits.

Now I will discuss revenue and non-GAAP adjusted EBITDA performance in each of our segments. Revenue in our publishing and retail services segment was $746.1 million, representing a decline of 1.1% or $8.6 million from the fourth quarter last year due primarily to lower pass-through paper sales. The segment’s organic sales were flat for the quarter has increased one color in book fulfillment and catalog volume offset continued price erosion in magazines, catalogs and retail inserts.

For the year, our book reporting unit realized organic growth of 0.8%. Non-GAAP adjusted EBITDA margin for the segment of 12.1% declined 120 basis points from the fourth quarter of 2012. Price erosion accounted for 200 basis points or more than all of the declines. Additionally, higher volume and productivity initiatives more than offset higher variable compensation expense.

Revenue in our Variable Print segment was $674.4 million, representing a decline of 1.8% or $12.1 million in the fourth quarter of 2012. On an organic basis and for adjusting for the impact of the Meisel acquisition in 2012, sales were down 2.4% year-over-year. Volume driven revenue increases in labels and office products were offset by declines and price pressure in the remaining offerings. The segment’s non-GAAP adjusted EBITDA margin of 12.2% in the fourth quarter declined 40 basis points from the fourth quarter of 2012.

Higher variable compensation expense accounted for 40 basis points of the decline. Productivity improvements and lower spending and IT related initiatives offset price pressure, lower volume and unfavorable mix.

Revenue in our strategic services segment was $618.6 million in the fourth quarter of 2013, an increase of 19.7% or $101.8 million from last year’s fourth quarter. After adjusting for the impact of the Presort acquisition and for changes in foreign exchange rates in a financial offering, the segment realized year-over-year organic growth of 11% in the fourth quarter.

Logistics and financial both experienced double-digit organic growth while Digital and Creative Solutions had strong organic growth as well. For the year, Logistics realized organic revenue growth of 13.8%.

Non-GAAP adjusted EBITDA margin of 11.7% for the Strategic Services segment which was negatively impacted by 100 basis points from the impact of pass-through postage revenue improved 160 basis points from the fourth quarter of 2012. Higher volume and a favorable product mix and financial as well as productivity improvements more than offset higher variable compensation expense.

Fourth quarter 2013 sales in our international segment were $716.2 million, growing by 2.1% or $14.6 million from the fourth quarter of 2012. Organic net sales grew 2.4% after adjusting for the impact of changes in foreign exchange rates and pass-through paper sales. Latin America, Asia, Canada, and Europe all posted organic growth in the quarter consistent with last quarter.

As mentioned, our Latin America offering had an approximate $18 million hurdle to overcome due to a timing shift in a major customer project. Continued volume declines in low-margin outsourcing work and business process outsourcing led to an organic decline of 18.6% in the quarter, consistent with its performance since the fourth quarter of 2012.

The non-GAAP adjusted EBITDA margin in the segment of 11.2% were 70 basis points better than the 10.5% margin in the fourth quarter of 2012, inclusive of approximately 60 basis points unfavorable impact from changes in foreign exchange rates. Higher volume and favorable product mix in part driven by less volume from low margin outsourcing work more than offset inflationary pressure, increased variable compensation expense, a higher bad debt provision and price erosion.

Fourth quarter 2013 non-GAAP unallocated corporate expenses were $31.7 million or $11.5 million higher than the fourth quarter of 2012. Lower pension income, higher variable compensation and a higher bad debt provision were the primary reasons for the increase.

Free cash flow in the quarter of $310.7 million was lower than the fourth quarter of 2012, by nearly $166 million. As discussed earlier in the year, we expected 2013 to be less seasonal in cash flow than 2012 due to some process improvements in working capital management that we implemented in 2012 as well as the harmonization of systems and processes following the acquisition of Bowne.

Substantially, all of the decline was due to an increased use of working capital driven by volume as our controllable working capital rate, which we define as accounts receivable plus inventory, less accounts payable as a percentage of our trailing three-month annualized net sales, improved 90 basis points from 12.9% at December 31 last year to 12% at December 31, 2013.

For the full year, free cash flow of $478.2 million were $7.8 million lower than in 2012 as volume driven increases in controllable working capital more than offset lower pension contributions of almost $80 million after tax and lower restructuring cash payments.

As of December 31, 2013, our gross leverage was elevated as we prefunded the Consolidated Graphics acquisition in November with a 10-year $350 million bond issuance as well as allowed cash to bill to pay down the April 2014 debt maturity of $258 million, our net debt or total debt less cash decreased by $224 million from the third quarter of 2013 and our net available liquidity was $1.4 billion, an increase of $135 million from the end of the third quarter of 2013. We have no term debt to pay down, no borrowings outstanding under our revolving credit agreement and just over $1 billion in cash as of December 31, 2013.

As the acquisition of Consolidated Graphics closed on January 31, 2014 our gross leverage at December 31 of 3.3 times included all of the debt from the pre-funding and none of the EBITDA related to the Consolidated Graphics acquisition. As noted in our press release, we continue to target gross leverage in the range of 2.25 times, the 2.75 times on a long-term sustainable basis and expect that we will lower our leverage in 2014 as we incorporate Consolidated Graphics into our results.

At the mid-point of our 2014 guidance, pro forma for a fully synergized full year of Consolidated Graphics gross leverage is except to be at the top-end of our targeted range by 12/31/2014. Our average term debt maturity from 2014 to 2018 is $256 million with a highest maturity of $350 million due in May of 2018. As of December 31, 2013, our term debt is 83% fixed at an average interest rate of 7.5%. As discussed with you throughout 2013, our post retirement plans funding levels improved significantly during the year.

At December 31, 2013, our post retirement plans inclusive of pension and OPEB were $421 million under-funded, an improvement in funding levels of almost $1 billion. Pension represents $245 million of the total under-funded status.

Given our major plans are frozen and closed, we do not accrue service cost. Therefore the primary factors impacting the plans benefit obligation and funded status are discount rates and investment returns. Both those factors improved significantly in 2013, relative to 2012.

Our current estimate for our 2014 cash contribution for post retirement plans is in the range of $59 million to $79 million with expected income of approximately $45 million. Looking ahead based on current estimates, we would expect that next few years cash contributions to decreases from the 2014 level.

Before I turn the call back to Tom, let me discuss in more detail the full year 2014 guidance that was summarized in yesterday’s press release and is inclusive of 11 months of performance from Consolidated Graphics.

We expect revenue in the range of $11.5 billion to $11.7 billion. This translates to pro forma revenue growth after adjusting for the impact of the Consolidated Graphics acquisition in a range of flat plus 2%. We expect our non-GAAP adjusted EBITDA margin to be in the range of 10.5% to 11%. Depreciation and amortization expense is expected to be in the range of $500 million to $510 million, inclusive of an estimated $25 million related to CGX’s purchase accounting amortization. This range will be refined once purchase accounting is complete later in the year.

Interest expense is estimated to be in the range of $275 million to $285 million. Our full year non-GAAP tax rate is expected to be in the range of 33% to 35%. We project the full year of fully diluted weighted average share account to be approximately $199 million shares, inclusive of the impact of the 60 million shares issued in conjunction with the acquisition of Consolidated Graphics. We expect capital expenditures in the range of $225 million to $250 million and free cash flow in the range of $400 million to $500 million.

As per seasonality, we would generally expect similar seasonality in the business with a couple of notable items. First, for those of you that followed Consolidated Graphics you’ll recall the impact of election activity. In an election year like 2014, we expect the Consolidated Graphics business performance to be weighted much heavier towards second half of the year.

In addition having closed the acquisition mid first quarter, we would expect to recognize approximately 30% of our synergies for the year and the first half of the year with minimal synergy benefit in the first quarter. Below EBITDA, we will begin to recognize purchase accounting day one and again those estimates will be refined throughout the year.

And with that I will turn it back to Tom.

Thomas J. Quinlan III

Thank you, Dan and a big thank you to Drew Coxhead and team for the work that went through on the re-segmenting that took place. An important component of our growth strategy is the target acquisition of organizations that enhance our offering and extend our capabilities. The recent acquisition of Consolidated Graphics and our announced agreement to purchase Esselte, North America, are an important step forward in support of this strategy.

The capabilities of each of these well regarded organizations will strategically enhance our existing capabilities and improve our ability to serve our collective customers. We are in an even more stronger position to provide our customers with innovative solutions that assist them in fulfilling their communications objectives. We are very pleased and excited to be joining forces with these talented teams. Our combined organization reflects R.R. Donnelley’s commitment to being the leading communications management services provider.

Let me put these acquisitions in the correlation to our strategy into context, and also call out the benefits each brings to the organization and to our customers. Consolidated Graphics which we acquired on January 31, is a leading provider of digital and commercial printing, fulfillment services, print management and proprietary Internet-based technology solutions.

The addition of Consolidated Graphics perfectly supports the objectives behind the go-to market approach that we have discussed on previous calls. For us, this addition expands our digital capabilities and increases our local presence to enable us to be even more responsive to the day-to-day transactional communication needs of our customers.

The expanded platform which we now operate also enhances our ability to provide bundled offerings in a fully integrated approach that serves the complex communications and print management needs of large and small customers alike. Our collective supply chain management capabilities and process expertise enable us to even more effectively manage our customers’ supply chain requirements, especially as they relate to promotional products, packaging and specialty services offerings.

The addition of Consolidated Graphics further positions us to drive meaningful supply chain efficiencies for customers in targeted industries, such as retail, healthcare and financial services with industry specific integrated workflow solutions. Together, we bring an extremely compelling set of benefits to customers.

Once the acquisition closes, Esselte North America will be part of R.R. Donnelley’s TOPS office products business. Esselte is a manufacturer of nationally branded and private label office and stationery products. The acquisition of Esselte will offer substantial value as it extends R.R. Donnelley’s office products platform. They are an organization with a strong reputation for quality, service and customer commitment that fits well with R.R. Donnelley’s values.

With the extensive range of capabilities and well known brands at Esselte North America brings to R.R. Donnelley in combination with our popular office products brands including TOPS, Adams, Cardinal and Globe-Weis we will be well positioned to provide enhanced offerings to assist our customers in fulfilling their core office product requirements.

Importantly, the consideration for each of these acquisitions allows us not to extend our balance sheet and when integrated will allow us to de-lever on our commitment to reduce – to deliver on our commitment to reduce leverage. As we move through the integration our focus will be on identifying opportunities, to share best practices and capture benefits across the combined business. As a result of these two acquisitions, our customers will benefit by receiving access to an expanded platform of products and services and we’ll be able to offer them the best of the best in meeting their communication objectives.

As I reflect on the changes our company has experienced as we approach the 150th anniversary, I am very proud of all that has been accomplished. We’re also announcing today that R.R. Donnelley Board members Steve Wolf and Lee Chaden are reaching retirement age this year and will be coming off of the R.R. Donnelley Board after the Annual Shareholders Meeting in May. All of us thanks Steve and Lee for their many, many contributions to R.R. Donnelley. The Board has elected Jack Pope to becomes its Chairman following the annual meeting. The transition will be seamless and we look forward to continuing and we are closely with Jack as the evolution of our R.R. Donnelley continues.

Last, safety continues to be the first and foremost job at R.R. Donnelley. In 2013, we experienced a recordable cash rate that is 29% lower than the industry average and more than 50 facilities work the entire year without experiencing a recordable injury.

Well many programs and policies are in place to support our safety initiatives and continues to be the relentless, daily attention of our valued employees that produced such results.

And now Christine, we’ll open it up for questions.

Question-And-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Charles Strauzer of CJS Securities. Please go ahead.

Charles Strauzer – CJS Securities, Inc.

Good morning.

Thomas J. Quinlan III

Good morning, Charles.

Charles Strauzer – CJS Securities, Inc.

Tom, if you can. First of all, thank you for giving us the increased granularity into the segment businesses and I think it will be helpful to kind of show the true operating performance of the businesses going forward and that’s very helpful so thank you there. Then secondly…

Thomas J. Quinlan III

You can ask for me every time we get together.

Charles Strauzer – CJS Securities, Inc.

Just that if you can look at the kind of start of the year Tom. Can you maybe expand a little bit on kind of what you’re seeing trend-wise and also kind of give us some update on the progress of you’re kind of hitting the ground running with CGX and cost savings and something like that there?

Thomas J. Quinlan III

Sure. I think, look I don’t think and as we talked about many times, this business because of our customers has become sort of the canary in the coal mine and we’re sort of right on top of what’s taking place out there. We’ve never been wants to use weather as an excuse for anything I mean, when you think about Hurricane Katrina or Sandy everything else has taken place in the world, we’ve never had that but this first quarter seems to begin off to a slower start and probably I think as everybody has seen that’s out there.

So, the way we built our budget it’s not going to be, we’re not worried about our full year guidance that obviously we’re talking about here. So, we just thought coming off of what the end of the year was in 2013. We would have seen a little bit more of the consumer spend, but let’s not forget thing consumers getting it with higher energy costs that they have to go ahead and that takes away from discretionary income. Quite frankly, people aren’t being able to get out, throughout I think it was 40 states at one point were below freezing for an extended period of time. So that all impacts things, but again as we go through the rest of the year, we feel good about it.

I think if you look and see what we have got going on from the standpoint of the sales, we’re going to continue to look to drive profitable growth and today, at Investor Day you are going to hear the team discuss, how we are doing that, but it all starts with us supporting the customers brand by integrating technology, we would have focused on craftsmanship, having solutions that cover the customers entire process and making sure the customer has a great experience throughout the process.

Now you opened up and saying about the re-segmenting, this is something again where I think many of you on the call have said to us we can’t compare you to anyone, we don’t know really how you are doing, how you relate to someone else and now we think that by enable to have the segments that we have you are going to be able compare our performance to other publicly traded companies whether its equity or fixed income that they have got in the public marketplace.

We told you that R.R. Donnelley is different and it’s in not experiencing some the headwinds that others are in certain products and services and I think now we’re going to able to show you that, so that’s why that’s important. All of us know that you have choices to where you invest your capital and we think reporting in this manner will make it easier for the investors to follow the R.R. Donnelley story, but the big thing again with this everybody should take away is that we’re not going go ahead and change how we are going to marketplace, we’re still going to leverage the breadth of our products and services while recognizing the dynamics exist within the platform.

Charles Strauzer – CJS Securities, Inc.

And then lastly Tom, would you say that the primary use of a cash flow in the near term is more kind of your debt pay down?

Thomas J. Quinlan III

Well I think we’re 2.25 to 2.75. We talked about for number of quarters now as we go through there. Yeah, I mean the April maturities coming due, so that’s where we are looking ahead and pay debt down. From an acquisition standpoint, obviously I said with the personal choice as far as communication materials by companies, we will obviously come and show us properties that they have every day, but we are going to continue to just look at properties that relate to the communication needs of our customers.

We have demonstrated to you that we’d use a combination of consideration of results and accretion and allows us to de-lever at the same time. So I think the guardrails of 2.25 to 2.75 are going to continue to be there and a long-winded way of saying that will be our best use of capital as we see things going through right now.

Charles Strauzer – CJS Securities, Inc.

Great, thank you very much. I will see in a little bit.

Thomas J. Quinlan III

Thank you.

Daniel N. Leib

Thank you Charles.

Operator

Thank you. Our next question is from Kannan Venkateshwar of Barclays. Please go ahead.

Kannan Venkateshwar – Barclays Capital, Inc.

Thank you. Just a couple of questions; the first one is on the guidance for next year and the free cash flow side, it looks like you are very conservative in light of CGX, so I just wanted to understand that a little bit better, is that just a function of volumes picking up or you guys have been little bit more conservative?

Thomas J. Quinlan III

Yeah sure, Kannan. Consistent with our guidance that we gave in 2013, if you look at 2014, we have increased use of cash or before cash taxes. So over the past couple of years that has become a higher use of cash. If you go back to 2012, our cash taxes were about 50% of our non-GAAP tax provision. If you look at 2013, that was about 60% and we are looking at something more in the 80% range.

For 2014, couple of legislative impacts there, but also in addition to taxes, we would have a higher cash restructuring, so we’ve talked to you in the past about the status quo, excuse me, in an acquisition environment is a little bit higher than when there are no acquisitions.

So, given that we’ll be a little bit higher than the 70% to 75% range that we’ve targeted in years when we don’t have an acquisition. Working capital has not seen to be much of a change. And then when you look at pension as we said the guidance of $59 million to $79 million spend on pension compares to a $23 million spend in 2013, obviously those are pre-tax numbers so there is a bit of a tax benefit but that’s incorporated within my earlier tax comments.

Daniel N. Leib

Thanks Kannan and thank you for your – earlier comments as it related to the election work that Consolidated Graphics is in. They’ve also expanded our large and grand format product that we can do. If any of our views of Dan Knotts, Drew Coxhead [ph], you can see what Henderson [ph] plan did, front in center outside earlier that day which is we’re very excited about to have that capability.

We’ve got over 20 to 40 additional sheet presses, 20 to 50 additional high-end digital presses, 50 additional web-print presses, each of those are going to generate cash for us. For the customers who require broad scope of products specialized solutions and integrated approach, we’re going to continue to leverage our whole business platform, the R.R. Donnelley platform. For those that wanted local service, they’re going to continue to benefit from the local model that’s being so successful at Consolidated Graphics.

Kannan Venkateshwar – Barclays Capital, Inc.

Thank you. And one more question on margins, which is the margin guidance from excluded 50 basis points, low end is about 50 basis points lower, and longer-term looks like that the discontinued margin pressure in some of your lines like magazines and catalogs, and so on. So, should we look at M&A as of one of those strategies to keep margins constant, or I guess you guys will talk more about it during the Investor Day. But what are the other ways we should think about the margin lines, as to where that stabilizes?

Daniel N. Leib

Yes, sure. So if you look at this year and we’ve talked extensively about excuse me, most of the margin impact being driven by pension in 2013, decreased income there and also by the Presort acquisition, we’ll obviously have some incremental impact from Presort moving into 2014, if you look at the guidance, it looks at from a flat margin down to 50 basis points. And as you mentioned, we do have the pricing dynamic in certain of the segments. We’ve also seen the increased volume in other segments, we will go into guidance by segment when you get into or at the investor meeting rather. And so I think you’ll see what is driving the margin guidance, but it’s essentially from flat to down 50 basis points.

Kannan Venkateshwar – Barclays Capital, Inc.

All right. Thank you.

Operator

Thank you. Our next question is from Craig Huber of Huber Research. Please go ahead.

Craig A. Huber – Huber Research Partners, LLC

Yes, good morning and thanks for taking the questions. Just some quick housekeeping questions. Can you just let us know the pension expense income is repeatedly what it – what do you think it is going to be for 2014 and what it was for 2013 I have a few follow-ups? Thank you.

Thomas J. Quinlan III

Sure. So 2013 was roughly $18 million and 2014 is roughly $45 million.

Craig A. Huber – Huber Research Partners, LLC

Both pension income you’re saying?

Thomas J. Quinlan III

Both pension income, both and that’s inclusive of pension and OPEB.

Craig A. Huber – Huber Research Partners, LLC

Okay, and then also the tax rate guidance for this upcoming year I mean, some of the years here you’ve had to true-up your tax in the fourth quarter including this fourth quarter, I’m just curious why the tax rate, that’s just 22% was so low in the fourth quarter we just finished?

Thomas J. Quinlan III

Yes, so we have give a tax guidance each year and there are certain discrete items that impact the tax rate, some of those impact the rate over the year, some of those impact a specific quarter. Specific to this, fourth quarter we had some valuation and leases and then also had some resolution of certain audits that we were going through. So, that’s what drove the rate this year, I think – to think back over the past few years that’s probably pretty consistent that it’s been discrete items, the guidance that we gave is reflective of where the profit is hitting by jurisdiction.

Craig A. Huber – Huber Research Partners, LLC

But it obviously must come up really last minute in the course of the year but you kept your tax rate guidance the same as you guys reported in the third quarter, right?

Thomas J. Quinlan III

In this year there was more adjustments in the fourth quarter and other years it’s varied by quarter.

Craig A. Huber – Huber Research Partners, LLC

Also can I ask of the restructuring charge, the cash portion for 2014, what do you sort of ballpark in that I mean, something above the $70 million, $75 million but I think like $100 million, $125 million or maybe to a higher amount of cash portion?

Thomas J. Quinlan III

Yes, so I think what we’ve talked about in the past is $70 million to $75 million and then slightly more in an environment following M&A activity but we haven’t given a number on that.

Craig A. Huber – Huber Research Partners, LLC

My last quick question please. Just refresh of the organic growth number you’re looking for 2014, just little puts and takes in that, I mean what do you think it will do better than that in 2014 or what do you think the pressure is going to be at please?

Daniel N. Leib

Yes, sure. So if you look at 2013 the organic growth was roughly 0.6% and if you look at this what’s in the guidance for 2014 it’s roughly 0 flat to plus 2%. Pretty consistent mix by business and that’s by segment rather and that’s as Tom mentioned a lot of what drove the re-segmentation, clearly there will be some puts and takes, we’ll talk more at the Investor Day today about some of the initiatives that we have in our go-to market strategy specific to the retail vertical, in-store marketing et cetera.

And, we’re expecting good things out of that it is bulls-eye with the Consolidated Graphics acquisition and the ability to leverage that platform, and if you are familiar we’ve consolidated about 35% of their revenue was in the higher growth digital packaging point-of-sale wide format type of product line, packaging et cetera cards business and so those areas are seen as major contributors moving into 2014.

Craig A. Huber – Huber Research Partners, LLC

Certainly last quick question. What was the incentive comp in the fourth quarter, I think it was $4 million a year, or $5 million the year before?

Thomas J. Quinlan III

Yes, it was $19 million higher.

Craig A. Huber – Huber Research Partners, LLC

Great, thank you.

Daniel N. Leib

Thank you.

Thomas J. Quinlan III

Thanks Craig. Next question Christine.

Operator

Our next question is from Edward Atorino of Benchmark. Please go ahead.

Thomas J. Quinlan III

Hi Ed.

Daniel N. Leib

Hi Ed.

Edward J. Atorino – The Benchmark Company, LLC

Good morning. I might have missed this, could you discuss some of the major product categories, books and magazines such and such like that. Did you talk – touch on that at all?

Daniel N. Leib

Sure, yes, happy to go through it. In the quarter, these comments specific to the fourth quarter book was – of this is our organic growth, book was positive. It was about 7% organic growth, magazines were negative 1.5% or so, total we mentioned in the call the Publishing and Retail Services segment was flat on an organic basis. When we move into the Variable Print segment, we saw some growth in our labels offering, so had done a couple of acquisitions going back few years. Those had been positive on the prime label side, office products was positive organic growth and the rest of the offerings range between 0 and negative 5 on organic growth. We move into, yes, sorry.

Edward J. Atorino – The Benchmark Company, LLC

This is the first time books have been positive in a long time?

Daniel N. Leib

Book had positive organic growth in the third quarter as well. That was about 1.5%, seeing very good progress there on the one color side, the education cycle doesn’t have an impact in the fourth quarter and so we’ll, we’re at a pretty low base on the four-color education side right now, and hoping for some adoptions in 2014, 2015.

Edward J. Atorino – The Benchmark Company, LLC

You mentioned magazines and catalogs, did I miss that?

Daniel N. Leib

Yes, magazines, catalog, retail inserts were down 1.5% organically in the quarter which were…

Edward J. Atorino – The Benchmark Company, LLC

That will be in the – that will be in the….

Daniel N. Leib

[Indiscernible].

Edward J. Atorino – The Benchmark Company, LLC

Yes, thanks.

Daniel N. Leib

Yes, yes.

Edward J. Atorino – The Benchmark Company, LLC

I appreciate that. Bye.

Daniel N. Leib

Okay.

Thomas J. Quinlan III

Thanks, Ed. Operator given the fact that we’ve got Investor Day coming up, we’ll look to close now and sorry for closing now.

I’d like to thank everybody for being on the call. I think – to summarize 2013, we demonstrated that our R.R. Donnelley’s platform is solid and strong. The transformation of R.R. Donnelley from a printing company into a communication service provider is a differentiator for us in the marketplace. And we think we’ve been proving that.

So in 2014, we’ll continue to evolve the supply chain to make our customers’ communications more cost efficient, more powerful and more targeted. And with that, thank you everyone.

Daniel N. Leib

Thank you.

Operator

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

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