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

Q2 2010 Earnings Call

August 04, 2010 10:00 am ET

Executives

Miles McHugh - Chief Financial Officer and Executive Vice President

Thomas Quinlan - Chief Executive Officer, President and Director

Dave Gardella -

Analysts

Daniel Leben - Robert W. Baird & Co. Incorporated

Charles Strauzer - CJS Securities, Inc.

Craig Huber -

Sachin Shah - ICAP

Eugene Fox - Cardinal Capital Management

Edward Atorino - The Benchmark Company, LLC

Scott Wipperman

Operator

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

Dave Gardella

Thank you, Jeff. Good morning, everyone, and thank you for joining us for RR Donnelley's Second Quarter 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 provides you with useful supplementary information concerning the company's ongoing operations and are 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'll refer on this call.

We are joined this morning by Tom Quinlan, Miles McHugh, and Drew Coxhead. I will now turn the call over to Tom.

Thomas Quinlan

Thank you, Dave, and good morning, everyone. One of the themes that we have consistently communicated is the importance of a disciplined approach to taking cost out of our business, particularly during times of economic uncertainty. We told you that we were working very deliberately to strike the right balance between reducing cost and ensuring that we would be ready to benefit immediately when general economic conditions improved.

The importance of maintaining this discipline was illustrated during 2009, when we responded to the fast-changing economic environment by taking out significant costs particularly during the first half of the year. We did not, however, compromise our ability to take advantage of fresh revenue opportunities that emerged in 2010.

The effectiveness of this approach is reflected by our Q2 results. Q2 revenues were up 2.2% versus the same quarter a year ago. However, GAAP EPS of $0.42 more than tripled from the same quarter in 2009, and non-GAAP earnings per diluted share of $0.47 were up more than 27% from Q2 last year. Miles will walk you through the numbers in more detail in a few moments but before he does, I will briefly address three topics.

First, I'll discuss benefits that we are seeing from our One RR Donnelley strategy; second, I'll point out some examples of initiatives that are creating new revenue opportunities; and third, I'll highlight some important achievements during the quarter that reflect our employees' continuing commitment to excellence.

Let's begin with our One RR Donnelley strategy, which we see as having three important dimensions. The first dimension refers to the way that we approach our customers. During the second quarter, we were awarded customer contracts whose aggregate value approached $2 billion. These long-term agreements won on four continents reflect the unique breadth, depth and geographic reach of our product and service offering. Many of these agreements are for multiple product and service lines that draw on several RR Donnelley capabilities. In essence, the One RR Donnelley strategy means that we, as the leading global provider of integrated communications solutions, are uniquely able to provide differentiated services to our customers. Let me share a few examples.

We have an extensive pre-media offering which grew out of our traditional relationships with catalogers and publishers. However, as One RR Donnelley, we are applying our unique pre-media technologies to traditional segments that we serve. ShareStream is our online workflow management system used as designers and others create and collaborate on materials that can be both printed and published on the Internet. We recently won all of a major healthcare institution's extensive forms and labels products because we applied ShareStream to the complex task of managing the hospital's documents, which number in the thousands. The before and after solution for the document review and approval workflow that our sales team created is striking. We did not earn this business just by bidding against other printers. We earned it by providing an expanded service offering that saves our customers remarkable amounts of expensive cycle time. The key is that this value-added service is not confined to a traditional silo or niche. It's expanding into applications across our platform.

Another example, we are a leader in using digital imaging to help our customers talk to their customers in a one-to-one voice. You most frequently see this kind of personalization in direct response and TransPromo communications. But we're expanding our offering by bringing it into the catalogers' world. In short, this digital imaging solution lets a cataloger tailor offers based on their customers' prior purchases. Now when you receive a catalog, choose what to buy and place your order, that information can wind up shaking a unique offer you'll receive when your next catalog arrives. In the past, the number of options for personalizing catalogs was less extensive than those available for conventional direct mail. One RR Donnelley is narrowing that gap.

The second dimension of our One RR Donnelley strategy is technology development and utilization. Here's an example of what we mean by applying a One RR Donnelley approach to emerging technologies. Quick response or two-dimensional barcodes are creating links between printed and online content. Download a free app, point your smartphone at a printed 2D barcode and you're immediately taken to the appropriate web or mobile Internet site. In essence, these codes make print instantly interactive.

We believe that we are positioned to help the broadest range of customers apply this emerging interactive technology across the broadest range of applications, including product packaging, in-store signage, direct mailing, magazines, catalogs, [ph] (22:11) directed of in industrial labels and many, many more.

Earlier this week, we officially opened a new research and development center, which features expanded engineering, printed electronics, inks and materials labs. Our own in-house technological and material innovation are supplemented by our external activities such as our sponsorship arrangement with the MIT Media Labs. This sponsorship gives us special access to the latest in a range of innovations. As our internal and external R&D functions continue to develop new products and services, we will add them to our industry-leading platform and sell them into the industry's broadest range of applications. We do not believe that any other company in our industry can take advantage of as many ways to benefit from innovations as RR Donnelley can.

The third dimension of our One RR Donnelley strategy is performance consistency across our global platform. Whether we are sourcing components and packaging them with the hottest consumer electronics in Europe, producing guides in China that are being distributed at the Shanghai World Expo, managing over 35,000 rail moves a year through our logistics operations, or designing, photographing, printing and distributing the supplements you take with you shopping on Sunday afternoon, our facilities are applying common standards for safety, quality, service, sustainability and more. This performance consistency ensures that our brand is associated with excellence around the world, enables us to maximize our leverage advantages in every aspect of our business. One RR Donnelley is not merely a slogan. It makes a crucial difference.

The second topic I'll touch on is the increasing number of initiatives that are creating new revenue opportunities. Let me use RR Donnelley's innovative ProteusJet system as an example. A recent PrintWeek article highlighting our proprietary ProteusJet digital printing unit said, "RR Donnelley has been ahead of the curve in all aspects of digital printing." One of the factors that we see as unique is our ability to apply R&D innovations to multiple applications across multiple customer segments, each of which can lead to new revenue opportunities.

For example, we began by using ProteusJet to drive enhanced TransPromo value for the telecom, financial services and other customers for whom we print and mail billing statements.

Next, we moved it into the book-publishing world. We have integrated our ProteusJet digital presses with in-line binding equipment for exceptionally efficient digital book production. This is how publishers open up their backlist to create new revenue. It will allow us to help them to get at the fundamental supply chain inefficiencies that tend to prevent publishers from matching the most efficient production method to consumer demand.

Just a few weeks ago, we announced another first involving ProteusJet. It is the first high-resolution high-speed digital web offset press combination. This modular installation enables digital color imaging across the full width of the press to give direct marketers exceptional design and production flexibility. Again, our One RR Donnelley strategy continues to drive innovative solutions for our customers and provide new incremental revenue streams in areas as diverse as financial services, publishing, fundraising, telecommunications, retailing and more.

Finally, before I turn it over to Miles, I want to highlight some important achievements during the quarter that reflect our employees' continuing commitment to excellence. Though we talk a great deal about technology, ours is still a business rooted in craftsmanship and service. Working to accurately bring our customers' brands to life in their communications, even as they present us with an endless series of time-sensitive deadlines is an everyday challenge for our employees. They consistently rise to that challenge, as illustrated by the awards that we received.

Our performance continues to be recognized by our customers. For example, AT&T Advertising Solutions recognized our employees' efforts with its Gold Supplier Quality Alliance Award and Best Buy named our Lancaster, Pennsylvania operations as its top-performing print facility.

Fewer than 2% of printed samples that producers submit for judging are recognized with Sappi North American Printer of the Year silver awards. Yet, RR Donnelley took home several that were earned across different segments of our platform. Out of the silver award winners in each of the 10 finalist categories, one is selected to receive recognition with a gold award. RR Donnelley's craftsmanship was recognized with two of those gold North American awards. No other company received multiple gold honors.

Our people make a qualitative difference for our customers. We believe that these important recognitions reflect the fact that as we take out cost, we do not compromise our ability to deliver the quality and innovative services that differentiates RR Donnelley from our competitors.

Similarly, we do not take shortcuts with regard to sustainability. During the quarter, another of our facilities earned the ISO 14001 environmental certification, and we continue to pursue a number of important sustainability initiatives.

Most important, we never compromise employee safety. A number of facilities achieved important safety milestones during the quarter, including our operations in Dongguan province in China, which reached 10 million consecutive working hours without a day away injury. Our experience is that safety is the first and most important measure of operational excellence. The formula we continue to follow, our One RR Donnelley strategy, which we believe is resulting in an expanding range of new revenue opportunities, plus our company's commitment to performance excellence, equate to results that we are very, very proud of. Miles?

Miles McHugh

Thanks, Tom. Our second quarter results showed substantial improvement as GAAP earnings per diluted share of $0.42 exceeded our second quarter 2009 earnings per diluted share by $0.30. And our non-GAAP earnings per diluted share of $0.47 exceeded second quarter 2009 by $0.10. Top line growth, a favorable tax rate and a few other key factors, all of which I will discuss in greater detail, contributed to this improvement.

We are pleased to report that we achieved year-over-year revenue growth of 2.2% in the second quarter. The first quarter with positive revenue growth since the second quarter of 2008. Furthermore, June has been our fourth consecutive month of year-over-year top line growth. And while comparables become more challenging, we are optimistic that we will continue to achieve positive revenue growth in the back half of the year.

Increased volume in most of our operating units was the primary driver of our 2.2% sales increase over the second quarter of 2009. Similar to the first quarter, lower paper sales did a lower paper prices and the mix of paper used by our customers negatively impacted sales growth. The unfavorable impact in the second quarter was approximately 109 basis points.

GAAP income from operations was $175.3 million in the quarter, $40.3 million higher than in the second quarter of 2009. Included in these amounts were $10.7 million of restructuring and impairment charges and $3.3 million of acquisition-related expenses in the second quarter of 2010, compared to $48.2 million of restructuring and impairment charges and $1.4 million of acquisition-related expenses in the second quarter of 2009. The full reconciliation of our GAAP to non-GAAP earnings is included in our earnings release.

Non-GAAP income improved as well. We generated $189.3 million in non-GAAP income from operations, $4.7 million more than we generated in the second quarter of 2009. In addition to volume growth, an increased recovery on print-related by-products and lower depreciation and amortization expenses were only partially offset by price erosion and higher incentive compensation and benefits-related expenses, including a $10 million increase in pension and post-retirement benefits expense. Changes in foreign exchange rates did not materially impact our year-over-year earnings comparison.

Our non-GAAP effective tax rate in the quarter was 26.2% and was significantly lower than the comparable rate of 37.5% in the same period last year, primarily due to the release of a valuation allowance on certain deferred tax assets in Latin America in the second quarter of this year.

Now I'll discuss our operating results by segment. Year-over-year sales in our U.S. Print and Related Services segment improved 1.6% to $1.8 billion in the quarter, including an unfavorable impact of approximately 130 basis points related to lower paper prices and the mix of paper used by our customers. We saw revenue growth in seven of the nine reporting units, with the exceptions being Magazine Catalog and Retail Inserts and Office Products.

Within the Magazine Catalog and Retail Inserts Reporting unit, the majority of the revenue decline was due to lower paper sales and work mix, as unit volume was essentially flat. Most product offerings continued to be impacted by price erosion, in line with historical trends although we expect these operations to benefit from our One RR Donnelley focus and the growing momentum behind the enterprise selling initiatives that Tom discussed earlier.

Our International segment's reported sales were $599.3 million and grew 4.3% from the second quarter of 2009. The segment sales growth was driven by higher volume from all reporting units except Canada and Business Process Outsourcing units.

The volume decline in Business Process Outsourcing was due to the decision we made last year to terminate a significant long-term customer contract, enabling us to exit from certain unprofitable operations in this area. Continued price erosion partially offset the volume growth in the second quarter. Changes in foreign exchange rates did not materially impact the year-over-year revenue comparison.

Our non-GAAP unallocated corporate expenses of $42.9 million increased by $19.2 million from the second quarter of 2009. Pension and other benefits-related expenses, including healthcare as well as our non-cash LIFO inventory provision, increased year-over-year, partially offset by a favorable reduction in our workers' compensation expense.

Capital spending was $54.6 million in the quarter, $17.4 million more than in the second quarter of 2009. This year-over-year increase supports the several digital initiatives and new customer wins and renewals that we have announced and will continue to announce going forward. As such, we are revising our full year capital spending guidance to a range of $200 million to $225 million.

Interest expense in the quarter was almost $53 million and was $7 million favorable to the second quarter of 2009. Our May 2010 debt maturity and August 2009 tenders were the primary drivers of the year-over-year decrease in net interest expense.

We continue to maintain and improve upon our already favorable debt maturity profile. In the quarter, we issued $400 million of 7 5/8% senior notes due June 2020, on which the first interest payment is due in December of this year. The proceeds from the offering were used in part to repay borrowings under the revolving credit facility that were drawn to repay the May 2010 maturity. The remaining proceeds will be used for general corporate purposes, which may include funding a portion of the purchase price of the Bowne acquisition, which we expect to close later this year.

As of June 30, 2010, our debt was $3.4 billion, with the next scheduled maturity of $159 million not due until January of 2012. Our total debt is approximately 82% fixed at an average interest rate of 7.4%. 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 maybe at or above the high end of that range.

Based on our second quarter results and our view for the second half, we are refining our full year guidance. Let me share with you some of these key expectations, all of which exclude the impact of the Bowne acquisition.

We expect year-over-year revenue growth of approximately 1%. Compared to our previous guidance of low single-digit growth, this change is solely a reflection of the revised impact of expected foreign exchange rates on our top line. For the full year, we now expect foreign exchange rates to have a slightly negative year-over-year impact on revenue. Our previous guidance assumed foreign exchange rates consistent with the rates we saw early in 2010, which would have had positive year-over-year impact on revenue. However, this revised assumption should not have a material impact on earnings. In fact, we now expect our non-GAAP operating margin to be in the range of 7.3% to 7.5%, an increase of 30 basis points from our previously communicated range. And while we're not providing details on how this revenue and margin guidance will specifically impact each of the third and fourth quarters, I would like to remind everybody that the third quarter year-over-year comparison will be impacted by a few items that favorably impacted the third quarter of 2009 and are not going to repeat again this year.

First, we recognized a $13.1 million benefit in the third quarter of last year related to a reduction on our LIFO inventory provision. This year, we expect a $3 million expense in the third quarter related to LIFO. So the expected year-over-year unfavorable swing is $16.1 million.

The second item is related to a fee we received for a contract transition in the third quarter of 2009. The fee amounted to $12.5 million, with operating margin of essentially 100%. Together, these two items negatively impact the third quarter year-over-year earnings comparison by $28.6 million.

We expect full year depreciation and amortization expense to be approximately $540 million, $15 million lower than previously estimated. Interest expense is now projected to be approximately $225 million, an increase of $15 million from our previous guidance. The increase is primarily due to the recent $400 million bond offering.

Our non-GAAP tax rate will be in the range of 29% to 31%, 100 basis points lower than previously communicated, largely due to the valuation allowance release recognized in the second quarter. This estimate could continue to be impacted by business trends affecting different countries in which we do business or by changes in tax laws.

We continue to expect the fully diluted share base of approximately 210 million shares. As I noted earlier, our CapEx will be in the range of $200 million to $225 million. And finally, we continue to expect our free cash flow or operating cash flow less CapEx to be in the range of $600 million to $650 million. And with that, I'll return you to Tom.

Thomas Quinlan

Thank you, Miles. We continue to view the back half of the year with tempered enthusiasm. During the second half, we expect our acquisition of Bowne & Co. to close, and we will move at our usual speed to leverage the value that adding its respective resources will offer. We will also continue to manage cost with discipline and relentlessly pursue each customer opportunity. What tempers our enthusiasm about what we control is that which we do not control. I think Fed Chairman Bernanke put it well when he said recently that these are unusually uncertain times. So we will continue to focus on maintaining the liquidity that gives us maximum flexibility to take advantage of the emerging opportunities. And with that, operator, we'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charlie Strauzer with CJS Securities.

Charles Strauzer - CJS Securities, Inc.

So, Tom, you guys have done a great job in kind of managing your cost structure to the point now where you're starting to see the operating leverage flow through from incremental volume. Give us a sense of what you're seeing that's kind of driving some of the better volumes that you're seeing kind of early on here. And what are the trends that could continue as the rest of the year kind of unfolds?

Thomas Quinlan

Yes, I think twofold, Charlie. One, I don't think I know our One RR Donnelley strategy is really resonating with customers. The product and platform that we've got today is nothing near what -- go back 10 years ago with what Donnelly had. And Donnelly's customer profile back then was publishers, catalogers, retailers, capital markets, financial, compliance, directories. Today, our customer profile is what I've just said, plus it's the Fortune 1000, plus it's government, education, healthcare, medium, large, small businesses. We have about 65,000 customers that spend anywhere between a few hundred dollars with us on an annual basis to a few hundred million dollars with us on an annual basis. So as a result of that, the value creation that we bring to our customers is the ability to continue to compress their costs by leveraging all of their purchases and improving their return on investment. And in order to bring this value proposition to customers, which we don't believe anybody else can, you need to have that supply chain scale. And you need to have the expertise to meet the customers' needs. We have all that. And again, if somebody wanted to try and replicate that right now and compete at the scale that we're at, they're going to have to spend hundreds and hundreds of millions of dollars, maybe even billions of dollars, in order to go ahead and build the platform that we've built. The resources that we have, as you know, we've got the financial strength. We've proven beyond a shadow of a doubt that we can integrate strategic acquisitions seamlessly. We've got proprietary technology. I've talked to you about geographic. We've got a great workforce. We've got procurement leverage. We're now really hitting our stride on the consultative sales organization. And we've got the ability to demonstrate to adapt to changing times. So our organic growth that you saw this quarter, we're very excited about. We're very excited about what we can still do with our existing customers, as well as what we can do with prospecting in customers. And we think we've still got a lot of value that we can bring to our stakeholders.

Charles Strauzer - CJS Securities, Inc.

But branding aside, obviously you're saying basically, and to sum it up, is that you're getting a bigger share of their print spend. And that's been kind of the Holy Grail for a number of years now. So you're starting to see some of that kind of trickle through.

Thomas Quinlan

We are, and look, logistics is a great example. Logistics in the quarter, I think, Miles, was up over 30% in the quarter. That is a differentiator for us with our customers. And that is something that we're going to continue to build upon that scale. And as we go to talk to our customers, we've got that ability to go ahead and compress their cost in that area, which again in this day and age is going to be very, very important.

Charles Strauzer - CJS Securities, Inc.

And that weighs into my next question was basically, with the merger of Quad and World Color kind of complete now. What are your thoughts there on the competitive environment with them and some of the others on the long-run side?

Thomas Quinlan

Yes, I think, it would be probably the same answer I just gave in a way. Look we're more than just long-run printing now, which hats off to -- as we built this thing, had the foresight to see transactional print right now is very, very important to us. And we can go ahead and as you just said, we can grow our top line by just dealing with the same customers we have. On the long-run side, you may be limited to what you can do because you don't have those additional products and services or the scale. So as we like to think about ourselves as we go through this, we think our product offering for our customers clearly is a different offering than what they make get in some other areas. If you have that one product or service or two products and service even, you're not going to be able to bring that cost component, we believe, to the customer that lowers their other communications needs. Being an integrated print communications provider is a lot more than just being a printer.

Charles Strauzer - CJS Securities, Inc.

Got it. And then just lastly speaking of transactional, anything new on the Bowne front in terms of the [ph] (44:21) settle for closing?

Thomas Quinlan

No, as we said in the script, we expect it to close in the back half of the year. We've been saying that since February. And we're looking forward to welcoming the Bowne into the One RR Donnelley family sometime during the second half of the year.

Charles Strauzer - CJS Securities, Inc.

Have you gotten any comments back there from the government in terms of the second review?

Thomas Quinlan

No, we're not going to comment on that. But I would tell you that again, we feel that we're going to close this thing in this part of the year.

Operator

Next our next question comes from the line of Craig Huber with Access 342.

Craig Huber -

One, a question I like to ask a lot. The pricing environment, can you just quantify how much the pricing is down now? Is it down roughly 1% to 3%, more in line with historical norms I think you said? And if you quantify that if you would. And then could you -- basically what you were dealing with a year ago? And then I have follow up questions.

Thomas Quinlan

Sure, I think pricing trend it's down maybe 1% to 2%, depends on the product, depends which product you may be referring to. And again, that's sort of where when you talk -- what we saw last year was -- I would say that I don't think anyone really had experienced in the business field what was going on in the first half of last year. And that's sort of where when I talk about the tempered enthusiasm that we've sort of coined the phrase. You've got significant high corporate earnings right now. You've got leverage that's lower. Companies that are flush with cash. You've got inflation at almost zero. Interest rates are basically zero. And normally, we would say, "Hey, this is the perfect environment for growth." But unfortunately, the lack of clarity over taxes, ordinary income, capital gains, dividends and the uncertainty that happened that we feel surrounding public policies, whether it's still around healthcare, financial service companies might outweigh what the above tailwinds that I just mentioned that we have. That is why going to the back half of the year, we're optimistic about 2010 but at the same time, we want to be realistic. Last year, the U.S. consumer -- and even though we're a global company, the key for us is still the U.S. consumer. How much less discretionary income are they going to have as a result of taking into account the increases in taxes and healthcare? Are lenders going to be willing to lend? Right now, we're seeing companies brand themselves. We're seeing companies compete for new customers. We're seeing companies want to stay in front of their customers via multi-channel approaches. This is something that wasn't happening last year. This is great news. If the U.S. consumer continues to respond, so will these companies, we believe, our customers in the back half of the year. If the U.S. customer pulls back or goes into hiding because they're having less discretionary income, then I think that is going to impact the back half of the year. With all that said, we're still going to stick to our plan which we believe is working very, very well. As I said earlier, it's resonating with our customers every day. And we've got organic growth this year in spite of year-over-year lower paper prices and with the impact of foreign exchanges. So we think we've sized ourselves correctly and are looking forward to what these next couple of months are going to bring in 2010.

Craig Huber -

And then, Tom, speaking about the economy, obviously, you can't control it but I mean given you have 65,000 customers worldwide, there's been enormous amount of talk out there among the pundits and the economists, et cetera about a potential double-dip recession here that you've heard over the a few months out there. People are talking about that. What is your general sense, Tom, based on your business, based on your outlook? Do you think we're going into a double-dip recession here or not?

Thomas Quinlan

I mean look way above my pay grade as I sit here. So I don't want to be the one that's giving economic information, but what we would tell you, look our industry or communications that we've set up here on integrated communications, some could say is a good barometer indicator of what's taking place in the marketplace. We are seeing companies spend dollars on communications. We have multi-channel approaches, whether it's digital, Internet, hardcopy, we get the ability to sit there and be sort of at the lead of what's taking place. Back-to-school's coming up. Obviously, the holiday season's coming up. Tough to say where things are going to go again because the acceleration of change is just so quick. But we're optimistic about what we think could take place in the back half of the year. And again to us, to me, it's the U.S. consumer that's going to drive the global efforts that are going to take place. So if U.S. consumers are there, unemployment is still high, but we seem to be plowing through this particular quarter, despite what the unemployment numbers are, we'll see.

Craig Huber -

You highlight before incentive compensation. Would you mind just quantifying for me so I can understand the numbers better what your incentive compensation accrual was in 2Q of 2010 I guess versus what it was a year ago and maybe also what it was in the first quarter of this year?

Miles McHugh

Basically overall for the full year for 2010, we expect incentive comp to be slightly higher, a little bit higher than it was last year. But the big difference is going to be, we had more incentive comp in Q2 of this year, and we had more incentive comp in Q3 of last year. So there's going to be a timing difference. But quarter-over-quarter, we saw about $17 million more incentive comp in Q1 of this year and Q2, about $33 million. So all in, about $50 million more, but again, timing-wise, there'll be less in the second half of the year.

Craig Huber -

About your overall margin of roughly 7.9% operating margin this quarter adjusting for the items you highlight in your press release. What was holding the margin only up roughly 10 basis points here versus a year ago? You gave us some nice detail on the third quarter of '09. But what was holding the margin, basically flat to slightly up here in the second quarter?

Miles McHugh

The bigger drivers are in addition to all the volume increase that we had this quarter, we had higher by-products pricing and lower depreciation and amortization. The drags were the price erosion in the way Tom described a little bit earlier, as well as the incentive comp timing that I just called. But the other big ones are, and I mentioned them a little bit earlier here in the call, were the increase in non-cash pension expense year-over-year and the increased LIFO, non-cash LIFO inventory expense. So we're raising our guidance about from -- our guidance range on margins from 7.0% to 7.2% where we were earlier to 7.3% to 7.5%. So we're seeing some of the benefits of all that through improving margins.

Thomas Quinlan

And then, Craig, I mean, obviously, those are significant numbers that we're overcoming. I mean, we don't make excuses. We never have. But that's what so exciting about what we've seen in first half of the year, in spite of again having these huge roadblocks that we've got to get past. We've more than done that right now. And that's again I think hats off to everyone here at RR Donnelley to overcome that and get beyond that.

Miles McHugh

And that year-over-year swing in pension and LIFO is about $76 million. So it's not a small number.

Operator

Our next question comes from the line of Dan Leben with Robert W. Baird.

Daniel Leben - Robert W. Baird & Co. Incorporated

On logistics, very nice quarter there. Could you talk about kind of some of the drivers you have there, to the extent there's any kind of new products you're working with or if it's just continuing to gain traction on the current products?

Thomas Quinlan

Well from a logistics standpoint, your choice of words is good, we're getting traction. We are getting traction there. Our sales force continues to beat the field and customers to explain the offering that we have. And as we look at it down the road, we're pretty excited as far as what we can do from a scale standpoint related to logistics. So I would tell you, it's the ability by having the skill with our other products and services, the transactional print, the long-run print, the tonnage print, however you want to phrase it, with what we're able to move. I think I talked about over 35,000 logistics moves on an annual basis we have. We touch, we believe, more than 50% of the standard mail still in this country from the last numbers that we saw. So we're a pretty significant player in that marketplace. And again, I think technology and what we've been able to do from that standpoint is going to continue to help us drive in those areas. And again, for our sales force, it's a big differentiator for when we go in to talk to people.

Miles McHugh

And Dan, our year-over-year growth for the quarter in logistics was over 25% on the revenue line. So you're actually seeing the flow through the numbers because of the way we can penetrate those products and services into more and more of our customers. So it's really helping us in a lot of ways.

Daniel Leben - Robert W. Baird & Co. Incorporated

Great. And then just a follow-up on that. With the U.S. Postal Service, the postage rate increase proposal that's out there. Could you talk about how that will potentially help the business going into 2011?

Thomas Quinlan

Sure. I mean RR Donnelley is a significant partner with the United States Post Office. We continue to assist the Post Office in their efforts to reduce costs Co-pal, [ph] (54:30) Co-tray, other ways that we've brought technology in for the Postal Service. Jack Potter, again, the interesting thing there for the United States Postal Service is it's the only government agency that is being asked to be run with the P&L. So it's sort of -- it's unique from that's standpoint in D.C. We need a postal service in this country that can maintain rates that are fair to all delivery categories, keep the service level high. Reward those like RR Donnelley who helped perform considerable cost avoidance. We're not only the United States Postal Service but obviously, that should roll through to the citizens of the United States. Operate efficiently and just make sure they have the latest technology. So I think this being a midterm election, the debate that will take place as it relates to the rate increase, the [ph] (55:26) existing rate increase over the price cap is going to be very, very interesting. We think it's going to be highly debated. There's the opportunity where we understand that USPS and Postal Regulatory Commission believes that they've overpaid into the Civil Service retirement system $50 billion, which look, it's got to come from someplace. So if you move it from there, it should help the USPS with their cost structure. But obviously, it's going to hurt someplace else. So I mean that is going to be a long debate. But again, this is an opportunity for us because of our skill here, because of how we can penetrate into the postal system, we look at that in 2011 as a way we've got to mitigate those costs for our customers. And through our ability of our logistics and be able to deliver in the places where we're located in the United States, we feel good about what that's going to mean as we look at 2011.

Daniel Leben - Robert W. Baird & Co. Incorporated

With the new ProteusJet with the offset press, do you already have some customers lined up that were asking for that, that you've kind of got on board? And could you talk about that as well as kind of the pricing of that product? How much you're able to get additional in pricing because of the additional level of customization?

Thomas Quinlan

Yes, as you get to know us, you'll know that we never build something unless we know we've got somebody coming. And we won't spend money unless we know that our customers are going to have a use for it. So that's sort of part one to that. Technology from us again brings opportunity. It's clear that's the complexity and volatility have become permanent, not only in our industries but in other industries. And our job is to keep it simple for our customers. Technology can be both a positive and a negative when you talk about print. You're going to be impacted no matter what, it just depends on which way. Us having the ability to be innovative and as I talked about on the call, ProteusJet being one of the ways that we're going about this. We can do runs now or we can do jobs for customers as low as one, go to 50, go to 100, we can go to up to millions. So what this technology's enabled us to do, we become channel-agnostic, if you want to look at it that way, to whether or not we're getting the digital files in, we can go ahead and put that back over the Internet. We can go ahead and put it into hardcopy. Not a lot of people can do that. So technology for us, again, we look at it as it's going to make the supply chain more efficient. Technology is not going to kill print. It's going to evolve print, which again, John and Dan like to point to the television, whatever it was, 60, 70 years ago. That was going to kill magazines, books, directories. If anything, it became more of a product offering there. The Internet was going to kill catalogs. If I look around right now, we know that the good catalogers know that they have to print. We've got to mitigate their cost as they do that for them but they know if they don't put things in the mail, they're not going to be as successful. We continue to look at print that way. Print's not going to go away. We're going to evolve it. We're going to help evolve it. Our customers are going to evolve it and it's going to be here. So it's exciting times from that standpoint. We've got to continue to stay ahead. We've got to continue to help our customers, help them reduce their costs and get a bigger return on their investment. And I think as you've seen in this front half of the year, we've been able to do that.

Operator

Our next question is from the line of Gene Fox with Chronicle Capital Management.

Eugene Fox - Cardinal Capital Management

Did you all specifically give the number of that tax allowance that you took in the quarter, Miles?

Miles McHugh

No, we didn't give the specific number.

Eugene Fox - Cardinal Capital Management

Is that something you could share with us?

Miles McHugh

Well, we'd rather not but we have done. And if you look at the change in the overall effective tax rate that we are giving guidance on, you'll be able to back into it that way.

Operator

Our next question comes from the line of Sachin Shah with Capstone Global Markets.

Sachin Shah - ICAP

I just wanted to kind of backtrack here on the Bowne acquisition. So we're just basically waiting for the FTC approval. I just want to get some color on where things kind of stand. I know there's divestment cap of 5% of Bowne's 2009 sales, I believe, which it comes out to about like $34 million, $35 million. Just without disclosing too much, you probably don't want to, but I just want to understand are you in a situation where you feel very comfortable that the deal is going to be completed even with the divestment cap as it is?

Thomas Quinlan

Yes, I appreciate the question but again, we're looking forward to closing it in the second half of the year. And we're excited about the Bowne coming on board with RR Donnelley. I know you obviously must be holding Bowne shares and asking those questions related to that but that's where we're at and we're excited about it.

Sachin Shah - ICAP

I think the [ph] (1:01:10) termination is, I think, the end of October are you kind of expecting, and I think, to be extended until sometime next year or early next year. Just wanted to find out, I mean, are we kind in those guidelines of between now and end of October timeframe?

Thomas Quinlan

It's another way to ask the question and I apologize for giving you the same answer back. But we're going to close at the second half of the year and we'll go from there.

Operator

Our next question comes from the line of Scott Wipperman with Goldman Sachs.

Scott Wipperman

First on the volume improvement that you mentioned during the quarter. Are you seeing that continue in the third quarter? I mean, I thought that was a positive but I just was curious if you could give any color as to how things are turning early on here in the third quarter.

Thomas Quinlan

Yes, what I would tell you is obviously, yes, we're one month through. We're seeing things, we're back to school. You got the holiday time. I mean, the back half of the year in our industry is usually slightly better than the front half. And if you don't make in the front half, there's no way you're making it up in the back half. So we feel good going into the back half where we're situated. But again, what our customers have gotten so good at is turning the faucet on and turning it off. That never used to be the case, Scott, in what we did. We would lag going into a downturn. We'd lag obviously coming out of an upturn. Now, what we're seeing is that people have the ability to put events into place immediately, cancel events within a short notice, as we experienced back in 2008 and early 2009. So I would tell you, again, sort of the same theme to the earlier answers that I gave was that I think everyone is proceeding with caution. Everyone is looking to make sure that they don't get caught. Inventory levels, where they're at, I think we'll start seeing our banks starting to lend to not only consumers but small businesses. Where does that come into play? Leverage is down. Are we going to continue to bring leverage down in the United States? That's one of the areas we continue to watch. Europe continues to be a battlefield in what we're doing. They're more stable. Latin America, some parts are going well, some parts are under pressure. And Asia for us is still performing well. So I know I'm not answering your question specifically but I think that's where we're at.

Miles McHugh

Maybe I can add a little more numerical flavor to that. Our guidance for the year is 1% top line growth and Tom talked about continuing the historical trend of 1% or 2% price decline. That indicates continuing underlying volume growth. So implicit in our guidance is a continuation of that kind of growth that we've seen.

Thomas Quinlan

And, Scott, just the thing that really also gets us excited is when you look at cash flow from operations less CapEx. If you go back over time, we've been able to generate, on average, almost $600 million since the team got here in 2004. So I mean, to us, in this industry, we're very excited about that no matter given obviously, the cyclicality that we've had to deal with over that time period. We've been pretty consistent from that standpoint.

Scott Wipperman

On the Bowne acquisition, recognize the cash on the balance sheet, but is there a chance do you think we see you guys back in the debt markets in the second half of the year to fund that?

Thomas Quinlan

Well, I wouldn't say for any specific reason, we'd go back to the debt markets as it relates to the Bowne transaction. But again, we continue to look at the marketplace. And where it makes sense, we'll get out there and get there. I think we've got great -- from a fixed income standpoint, I think investors there are starting to appreciate what we've been able to do for them, how we treat them as stakeholders. And I think that's been a good relationship.

Miles McHugh

And in addition to that cash, we have a lot of liquidity on our revolver. So all that continues to give us plenty of options there. And really, the importance of us keeping the guidance we described, again of keeping debt-to-EBITDA in the range of 2.0x to 2.5x. So we'll be balancing all of those as we look at capital markets versus other funding sources.

Scott Wipperman

On the M&A front, is it safe to say that the Bowne acquisition, you'd like to wait for this to get cleared up and then essentially look elsewhere? Or does this purchase of Bowne preclude you from looking at other things? Any color you could provide as to how you're thinking that would be helpful.

Thomas Quinlan

Look as you know, we don't comment on M&A or even dispositions. But I would tell you, our strategy regarding capital deployment is not changing. We're going to look to where we can, pay down debt. We always look at the dividend, look at the stock buybacks. We look at investing back into the business internally, and we also look at acquisitions. So that is going to continue to be the mantra that's paid dividends for us. We're not going to change that. We're going to stick to our knitting.

Operator

Our final question is from the line of Edward Atorino with Benchmark.

Edward Atorino - The Benchmark Company, LLC

You mentioned in the press release a lot of product lines. Could you talk about the Catalog and Magazine business, whether that has started to strengthen a little bit? Ad pages look like they're coming back. And I wonder what's going on in those two categories.

Thomas Quinlan

Again, how the economy goes, there's two parts to that, Ed: one is from a technology standpoint; the other part is from an economic standpoint. Catalogs, as I said earlier, the good ones know that they have to go ahead and be in the mail to really, really hit the targets that they're looking at. They would love for you to go to whatever electronic device you have unprompted. But that's not the way people usually do things. People take what comes in the mail to them and then that drives them to go order online or do things there. So I think again, as we talk about Fin Reg and talk about some of these other policies that are out there, if we start to see lending start to pick up a little bit more, I think that will be good for everybody. If unemployment comes down, that will be great. And if the U.S. consumer has this discretionary income, I think again, that will help all of us in every single industry vertical. Magazine pages are up slightly but again, it's not anywhere near where they were. We're having good days because we're with good titles, good publishers. But again, I think when you look at what is that industry going to be down the road, I think everyone's still looking to see how things shape out and how things come back. Will it come back to the levels that it was earlier in the decade or late in the decade, I should say? I think that, that's a tough call to say. But again, if it does, we're ready for it. We have the ability and the scale to take advantage if they do.

Edward Atorino - The Benchmark Company, LLC

Any fallout from the Quad World deal?

Thomas Quinlan

No. I tried to address that earlier without going there. And just to do it again, I mean we're...

Edward Atorino - The Benchmark Company, LLC

You addressed it earlier, that's okay. I understand.

Thomas Quinlan

Operator and everyone, I appreciate everyone taking the time to listen to us today. I appreciate the support. Hopefully, everyone has a great August, and we look forward to talking to you in about 90 days. Thank you.

Operator

This does conclude today's conference call. Thank you for your participation. At this time, you may now disconnect.

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Source: R.R. Donnelley & Sons Q2 2010 Earnings Call Transcript
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