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Executives

Thomas Quinlan - Chief Executive Officer, President and Director

Dave Gardella - Vice President of Investor Relations

Daniel Leib - Chief Financial Officer and Executive Vice President

Analysts

Charles Strauzer - CJS Securities, Inc.

Daniel Leben - Robert W. Baird & Co. Incorporated

Craig Huber -

Scott Wipperman - Goldman Sachs Group Inc.

Unknown Analyst -

Edward Atorino - The Benchmark Company, LLC

R.R. Donnelley & Sons (RRD) Q2 2011 Earnings Call August 3, 2011 10:00 AM ET

Operator

Welcome to the RR Donnelley Second Quarter 2011 Results Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call to Mr. Dave Gardella. Mr. Gardella, you may begin.

Dave Gardella

Thank you, John. Good morning, everyone, and thank you for joining us for RR Donnelley second quarter 2011 results conference call. Earlier this morning, we released our earnings report, a copy of which can be found on 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 the 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're joined this morning by Tom Quinlan, Dan Leib and Drew Coxhead. I'll now turn the call over to Tom.

Thomas Quinlan

Thank you, Dave, and good morning, everyone. During the quarter in the face of challenging headwinds, pro forma revenue increased by 30 basis points as compared with the same period a year ago. GAAP EPS was $0.06 and non-GAAP EPS was $0.53. We remain on track to deliver approximately $600 million of operating cash flow less CapEx for the full year.

Dan will take you through the quarter in detail shortly. But before he does and before we open it up for questions, I will briefly address 4 topics: First, the continuing progress of our global print management initiatives. Second, what we're doing to address the shifting landscape in the trade book publishing segment. Third, the introduction of our new CustomPoint Solutions Group. And fourth, additional expansion of opportunities that we see emerging out of our research and development efforts.

I'll begin with our global print management initiative. Global print management is a consultative service offering that brings a number of RR Donnelley's industry-leading competencies together in order to help customers achieve their goals for communications effectiveness and cost compression. You're seeing and hearing us use the term global print management more frequently, and you should expect that to continue. For example, we announced a couple of weeks ago a $300 million print management agreement with Meredith Corporation, the media and marketing company.

To illustrate what we mean by global print management, let me quickly walk you through another agreement we have recently been awarded, this time with an international healthcare products supplier. We will be serving this customer with a team of specialists located in 2 U.S. locations, 1 location in Latin America, 1 in Europe and another in the Pacific Rim. Working across 10 languages, this team will use our online print management system as they engage with the customer's staff to equip their sales organization with marketing collateral and other promotional materials. This team will be involved in projects early in the content creation process as specifications are being developed, providing us with an opportunity to deliver additional value to our customer and to develop a deeper and more tightly integrated relationship with their teams.

Similarly during the quarter, a leading pharmaceutical company awarded RR Donnelley another global print management agreement. This puts us in a collaborative and consultive relationship involving the management and production of marketing communications materials.

Two key points are worth noting about print management relationships like these. First, they lift RR Donnelley out of a mere bid-to-print role in a way that draws on our consultative capabilities. And second, print management involves serving customers with our own production platform as well as leveraging our considerable procurement scale when appropriate. This combination provides us with the unique ability to manage a customer's entire print procurement function, producing much of the work in our own platform and expanding the range of products that we can provide for our sourcing network without requiring additional capital expenditures.

From the customer's perspective, RR Donnelley is a trusted set of hands to manage this process. And given our many long-term relationships that cover a variety of offerings, we understand the level of service that our customers require. Our success in winning and quickly ramping up global print management relationships helped to drive an 8.5% increase in our commercial printing revenues during the quarter. And our unique ability to serve customers internationally is reflected in our double-digit revenue growth in Latin America and continued growth in Asia. Further since 2007, we have consistently increased the number of customers buying 7 or more products and services at an average annual rate of 8%. For RR Donnelley, the word global in global print management refers to both the comprehensive nature of these agreements and to our ability to serve our customers on 4 continents. We continue to pursue a significant number of other global print management deals and continue to see this service as one that differentiates RR Donnelley from commodity producers.

The second topic I'll address involves a significant headwinds that we encountered during the quarter in our book and directory offering. There continues to be a significant shift underway in the trade book publishing business. You see that reflected by the ongoing liquidation of the country's second largest retail bookstore. As we have said before, we are not naive to these changes and we have been taking actions that will help our publishing customers adjust to the altered landscape. For example during the quarter, we jointly announced with HarperCollins a breakthrough supply chain management agreement. Beginning in the fourth quarter, we will become the fulfillment provider for all of HarperCollins' new releases. In 2012, we will take on fulfillment for all frontlist and backlist titles of one of its major divisions. In addition, we will be HarperCollins' global Print on Demand provider.

As the publishing model changes, we were at the forefront of helping customers achieve new economies, and we are also helping them open the door to fresh revenue opportunities. Our capabilities include our unique ProteusJet digital book production line. In combination with our unmatched logistics resources, this gives us the capabilities to produce each title in optimum quantities throughout each stage of the demand cycle from 1 to millions. We also see educational publishers join on our production capabilities to meet their requirements for the K-12 and college segments. For example, some of the first applications to run on our ProteusJet line were teacher's editions, as well as samples used to evaluate textbooks for adoption. The capabilities we offer to educational publishers position us to take full advantage as new adoptions occur as they recently have in Texas.

Leveraging our services offering is a core element of our growth strategy, which we will continue to pursue around the globe. This was reflected by revenue growth in our logistics business of nearly 15% during the quarter. Please note that this increase substantially outpaced what happened in the overall magazine catalog environment to which logistics offering used to be tied to. While we continue to offer exceptional service to catalogs and publishers, we are also expanding our logistics service to drive growth and diversify our revenue base.

Our broad-based service strategy is also reflected by RR Donnelley being prominently named in the 2011 Global Outsourcing 100 list. For instance, we were named among the 5 best providers of legal support services and among the 20 best for providing financial management services. Again this quarter, more than 10% of our revenues were derived from services.

The third topic I'll address is related to an announcement that we made late last month when we introduced our new CustomPoint Solutions Group. This group comprises a suite of content creation, management and delivery services. All of these service and technology-based offerings are designed to help customers increase revenues and compress costs. Included in this organization are our recent acquisitions of Nimblefish, 8touches, Press+ and Helium, our most recent acquisition, which we closed during the second quarter. The group also includes premium resources in our flagship CustomPoint online self-service ordering system. Among the capabilities in our CustomPoint Solutions Group are creative and editorial content development, multichannel marketing, proven e-subscription models and self-serve direct marketing.

Gathering these collaborative capabilities together into a single organization gives us 3 important benefits: First, it will provide an even more streamlined path for efficient new product development and introduction. Speed to market, as you know, brings special advantage with technology offerings like these. This grouping will allow our talented IT developers to more quickly and cost-effectively bring new capabilities to our customers. Second, this group lays the track for even faster integration of future technology acquisitions into our portfolio. And third, tightly coordinating our marketing efforts will help us accelerate the rate at which we match these capabilities to the best opportunities with our existing customers and with prospects. This last benefit is especially important.

We see our CustomPoint solutions offering as a set of difference makers, as customers continue -- consider who can best help them achieve their goals during the cause [ph] of the comprehensive multiyear contracts. For example, a competitor might say, we can produce a portion of your printing requirements. RR Donnelley can say, we can help you create and design you communications. We can prepare, produce, process and deliver virtually all your printing requirements and also help you put your communications online on mobile devices and on tablets. As we create and deliver physical and digital content, we can even help you generate more income from these communications.

I would like to be clear on this. As stand-alone, the capabilities of Nimblefish, Helium, Press+, 8touches and the other components of our CustomPoint Solutions Group are compelling. However, we believe that they are far more compelling when they function as part of an end-to-end supply chain solution that leverages all of RR Donnelley's resources. Our CustomPoint solutions team has a straightforward job description: drive growth across the entire RR Donnelley platform.

The last topic that I want to address is our continuing need -- new product development efforts. RR Donnelley has already staked out a very large space in the digital service world. We continue to expand that. During the quarter, we also announced that we have taken an equity position in Solicore. This investment represents an opportunity to utilize the printing process technologies that we have mastered in order to produce entirely new applications. This creates a development path that will allow production of embedded batteries in other power products using group viewer and other printing process. These integrated power solutions are used by manufacturers of products such as smart cards, RFID devices, medical products and electronic sensors. Again, we are aggressively continuing to expand the range of our capabilities merely beyond putting ink on paper.

And with that, I will turn it over to Dan.

Daniel Leib

Thanks, Tom. Non-GAAP earnings per diluted share in the second quarter of 2011 were $0.53 or 12.8% higher than the $0.47 delivered in the second quarter of 2010. Relative to the prior year, a lower tax rate benefited EPS by roughly $0.04. This was more than offset by an increase in corporate expenses, which resulted in a drag on year-over-year earnings of $0.05. While changes in foreign exchange rates increased revenue by $46 million or 191 basis points on the top line, the impact to the bottom line was a reduction of EPS of $0.01.

In addition, we're beginning to see the benefits of the share repurchase plan we implemented in mid-May. Assuming additional interest expense at our average interest rate on fixed-rate debt of 7.3%, the share repurchase plan contributed approximately $0.01 of EPS growth in the quarter.

Our second quarter sales of $2.6 billion represented an increase of $214.8 million or 8.9% over the second quarter of 2010, primarily as a result of the Bowne acquisition and inclusive of a $46 million favorable impact from changes in foreign exchange rates. On a pro forma basis adjusting for the impact of acquisitions, revenue increased by approximately 30 basis points. The favorable impact from foreign exchange rates and pass-through paper sales were almost completely offset by lower volume, particularly in books and directories where revenue declined $57.6 million or 15.6% and continued price erosion across most of our offerings.

Second quarter GAAP income from operations was $116.1 million compared to $175.3 million in the second quarter of last year. The decline was caused by higher restructuring, impairment and acquisition related charges, which increased $62.6 million year-over-year. This increase was primarily related to the integration of Bowne and the associated actions we have taken to achieve synergies. A full reconciliation of our GAAP to non-GAAP earnings is included in our earnings release.

Second quarter non-GAAP operating income of $192.7 million equated to a 7.3% non-GAAP operating margin. Non-GAAP operating margin in our operating segments of 9.6% was flat to the second quarter of 2010, inclusive of a 36 basis point unfavorable margin impact of changes in foreign exchange rates and higher pass-through paper sales. Improved productivity, lower variable compensation expense, a higher recovery on print-related by-products and the acquisition of Bowne offset the impact of lower volume price erosion and the unfavorable impact on operating margin related to the changes in foreign exchange rates mainly in our European and Asian operations that have export offerings.

In the quarter, corporate expenses increased by $15.7 million and negatively impacted consolidated non-GAAP operating margin comparisons to prior year by approximately 60 basis points. Our non-GAAP effective tax rate in the quarter was 19.5% compared to 26.2% in the second quarter of 2010. Driving the decrease in the rate was the release of reserves related to the resolution of certain state audits and the release of valuation allowances on certain deferred tax assets.

Our U.S. Print and Related Services segment sales of $1.9 billion grew by 6.2% from the second quarter of last year primarily due to the acquisition of Bowne. On a pro forma basis adjusting for acquisitions, U.S. print sales declined by 2.6% or $51 million. Strong top line performance in logistics and commercial print, coupled with improved performance in office products, was offset by significant volume declines in books and directories. Pricing pressure was consistent with recent history. Excluding restructuring impairment, non-GAAP operating margins expanded 20 basis points driven by continued productivity and lower variable compensation expense.

Second quarter 2011 sales in our International segment grew by 17.2% over 2010 to $702.5 million. Pro forma for acquisitions, revenue growth was 9.1% or $58.5 million with approximately 7.1% of the positive impact from favorable changes in foreign exchange rates. The remaining growth of 2% was driven by volume growth in Latin America and Asia, partially offset by price pressure in Asia and Europe and volume declines in our global turnkey offerings.

Our second quarter 2011 non-GAAP unallocated corporate expenses were $58.6 million, an increase of $15.7 million from the second quarter of 2010. The change primarily reflects an $8 million increase related to pension and other post-employment benefits expenses, Bowne corporate expenses that remained with the business primarily related to information technology and a tough comparable due to a favorable workers compensation adjustment recorded in the second quarter of last year.

Second quarter operating cash flow was $175.3 million compared to $193.5 million in the second quarter of last year. Year-over-year, we add an additional $20 million in cash payments to fund the Bowne pension plans and $15 million for an additional interest payment associated with last year's June debt issuance. These cash outflows were partially offset by a lower use of cash related to working capital. On a year-to-date basis, operating cash flow was down $100 million compared to last year, as a result of the second quarter factors that I just mentioned and the roughly $120 million impact from the year-over-year cash outflows for variable compensation that we discussed last quarter, as well as the seasonal impact of the Bowne acquisition, as the cash flow in that business is traditionally negative in the first half of the year, turning positive in the back half of the year.

As previously announced, we entered into an accelerated share repurchase agreement with JPMorgan in early May for the first $500 million of the $1 billion share repurchase authorization. Under the agreement, we paid the full $500 million in May, receiving 80% of the shares under the plan with the remaining shares due upon settlement at the completion of the buyback. Payment timing for the repurchase, coupled with only a portion of Bowne's operating results being reflected in our last 12 months earnings, resulted in our leverage reaching a high point for the year at 3.2x as expected.

Additionally, during the quarter, we issued $600 million of 7-year 7 1/4% fixed rate term debt maturing in 2018. Concurrent with the issuance, we tendered for our 2019s, 2017s and 2015 notes. The net impact of these debt transactions resulted in a reduction of debt of $200 million coming due through 2015, an increase in term debt of $284 million maturing in the out years and a lower average interest rate on our fixed debt, which decreased by approximately 25 basis points. We're very pleased with the outcome of these transactions as they strengthened our already favorable liquidity profile. As of June 30, 2011, our term debt is 73% fixed at an average interest rate of 7.3%, with only $159 million due through the first quarter of 2014. We had $475 million drawn on our $1.75 billion committed revolving credit facility, with nearly $1.3 billion of available liquidity as detailed on Page 14 of our earnings release.

We are targeting 2.5 to 3x leverage on a sustainable basis, recognizing that at times we'll operate outside of this range. We believe this capital structure will be supported by our ongoing ability to generate substantial cash flow. And we'll continue provide an appropriate level of liquidity to continue to invest capital into the business through both CapEx and acquisitions to help fund future growth. We do not foresee the need for significant increases in CapEx or larger M&A, given strong growth expectations in the service base and digital print offerings and the relative investment dynamics associated with each.

Before I turn the call back to Tom, I want to provide our updated guidance for the full year. We expect year-over-year revenue growth to be roughly flat to our 2010 pro forma revenue of $10.7 billion, excluding the impacts from changes in foreign exchange rates and paper prices. This guidance implies low single-digit growth for the back half of the year. We expect our non-GAAP operating margin to be in the range of 7.3% to 7.5%. Included in this margin is full year corporate expense of approximately $240 million to $250 million, which implies a reduction of between 10% and 15% in the back half of the year compared to our year-to-date results. This improvement is due to continuing cost reduction efforts, as well as various 2010 and 2011 non-comparable items that caused unfavorable comparisons in the first half of the year. The midpoint of the full year estimate for corporate implies that corporate expenses will be flat to second half of last year.

Depreciation and amortization expense is expected to be approximately $560 million. Interest expense is estimated to be in the range of $245 million to $250 million. Full year capital expenditures are expected to be in the range of $250 million to $275 million. Our non-GAAP tax rate is expected to be in the range of 28% to 31%.

We expect income attributable to noncontrolling interest to be in the range of $2 million to $4 million. We assume the full year fully diluted share base to be approximately 198 million shares. And lastly, we continue to expect operating cash flow, less CapEx, of approximately $600 million.

I would also like to point out that from a timing perspective, we expect the back half improvement in both revenue and profit to be more heavily weighted toward the fourth quarter as the Bowne synergies continue to ramp up and some of the non-comparable corporate items to which I referred earlier, in particular the significant bad debt expense recorded in 2010 related to a customer bankruptcy, as well as the inventory step-up associated with the Bowne transaction will impact the year-over-year comparisons more significantly in the fourth quarter.

And with that, I will return you to Tom.

Thomas Quinlan

Thank you very much, Dan. John, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Dan Leben from Robert W. Baird.

Daniel Leben - Robert W. Baird & Co. Incorporated

Just first in the press release, you've made a comment about things picking over -- up over the last month. Could you give us a little more insight into some of the areas where you're seeing strength and greater customer commitment?

Thomas Quinlan

Sure, Dan. A couple of things there I want to talk about. Number one, obviously the other comment I made was that in the quarter, we saw headwinds by our customers and saw customers having some difficult times. That pertained more than just to the transactional business because we're on path to have a real good quarter there. In addition to that, obviously the book business took a big hit in the second quarter as compared to last year and compared to what we were seeing. State of Texas, I think as you've seen most of our customers in the publishing industry talked about already on their calls, those that are public, moved from the second quarter to the third quarter. So as a result of that, so did our production move with that. And again it's book during the quarter, as you'll see later on when we file the Q and as Dan talked about here, had a big impact in the quarter. But when you think about book for us, it's still -- we knew 2011 would be weaker adoption cycle than prior years. We know that there's less federal money and stimulus coming into that area. The funding pressure for local and state governments as we witnessed in the United States just this last week are at pretty high levels. And quite frankly, the educational system in United States is still trying to figure out whether or not we're going to go with core standards. With all that said and done and onto that the liquidation of -- what I'll say, of Borders, which obviously isn't good news. But there may be a silver lining there, too, as you go through it because we know the book supply chain and our customers know it's an inefficient supply chain. Someone like Borders leaving the supply chain obviously is going to impact units. But at the same time, it gives the publishers the opportunity to re-brand themselves and get closer to their customers and know who their customers are, which was never the case. As you saw the HarperCollins announcement that we made, we're going to make the supply chain -- in the process, we're making the supply chain more efficient for people like that. And we think that's going to be one of the first of many announcements that we're going to hope to make here. The book content is going to stay in its present form. It's going to continue to be the mainstay product, we believe, for years to come. But it's going to be at reduced volume levels for the entire industry. Content is morphing from primarily income paper product to multiple media product, distributed through a variety of channels and we're there. For customers that are seeking a single-source solution, we have an integrated manufacturing platform. We have fulfillment distribution service capability with proprietary technology. So as we opened up this third quarter, we saw the book business that wasn't there in the second quarter come back in the third quarter. We did see, and it started off to where we saw our customer prospecting and branding by companies from a transactional side to be pretty good. So as we sit here today with you, we know some of you had your own numbers that are out there compared to the guidance that we've given you. We are still very optimistic on this year, in spite of everything that's taking place out there in the marketplace that you're seeing over the last couple of weeks. We think we're off to a good start for this quarter. We've got good cost containment programs in place, and we think we're going to hit the guidance that we told you we are going to do.

Daniel Leben - Robert W. Baird & Co. Incorporated

Okay, great. Could you just talk a little bit more about a couple of your larger segments in mag/cat retail, and variable print? What you saw in the quarter?

Thomas Quinlan

Sure. I mean mag/cat retail quite frankly as you'll see is flat, which given all the bad news is that this -- that, that particular product line has had and all the electronic substitution that's going on there, we're happy with where that's coming. And we think we've got some opportunities down the road that are going to help that part of the business in the back half of the year as well. As far as the variable -- as you think about variable in digital, think about commercial for a second. Our commercial and logistics businesses product lines offering, the team is just doing a fantastic job in that area. With what you'll see and again when you see the quarter come out here, commercial is up I believe in the United States 8.5%. Logistics is up 15%, and that's across every single product line from third-party logistics, co-mail, co-tray, palletization. With the uncertainty that's going on in the United States Postal Service today, what we've got going on, on a logistics standpoint, we think we are well positioned to take advantage of anything that occurs there from a logistics standpoint. So again, good news coming out of there. Our sales force is doing a great job with our customers. We're adding prospects on to the platform. Book and directory, no excuses, that was a tough one in the second quarter. But we expect that to rebound here in the third quarter.

Daniel Leben - Robert W. Baird & Co. Incorporated

Great. And just 2 more royalty questions for me. First, when you're thinking about guidance and thinking about the macro environment, kind of what type of GDP environment are you thinking about when we're [ph] growing in the back half? And then just related to that, help us understand the impact of paper sales both in the quarter and how you're thinking about that for the rest of the year?

Thomas Quinlan

I'll let Dan take the paper sales then I'll come back to you on the macro question, which will be a lot longer of the question. I mean regarding paper, just so to let you know, those good paper mills have done a great job in taking capacity out of North America. And really as things -- as the economy has gone down, haven't -- in the old days we used to be able to go ahead and drop pricing. But that has not been the case. I think they've curtailed probably 20% to 30% or more, with all the shuts down that they've done. So we feel that paper, we've got good relationships with the mills. We know we're going to be able to get paper. But as you'll see in the release that we did for the second quarter, paper prices rose during the second quarter.

Daniel Leib

Yes, I mean the impact on the top line is about $22 million or so and very little to no impact in the first quarter.

Operator

Our next question comes from Charles Strauzer from CJS Securities.

Charles Strauzer - CJS Securities, Inc.

So picking up a little bit on some of the commentary, Tom, and look at your confidence in the second half. Beyond books, is some of the confidence coming from your ability to maybe take some share from some of your competitors? What's driving some of the confidence that you have there?

Thomas Quinlan

Yes, it is that. Look, there is still more printing in this world than we can put on our platform. So from that standpoint, there's still a lot out there for us to go ahead and get. I think perception is that it's completely going away, it's not here. That is not the case. I mean the framework that we built at RR Donnelley, we continue to feel good about. We continue to make sure that we drive out costs and enhance productivity. We need to continue to create integrated solutions for our customers that draw on multiple product and service offerings. We have to maximize in the value of our geography, the product and service diversity that we have. As customers change communication mix or pursue growth in a different area, we're there for them. We're developing innovations. We were value-added -- in a value-added position that is going to help us help our customers achieve their goals. It's getting to be no longer a fit-in-print mentality out there. And in this economic environment that we're living in, I mean we're not expecting GDP. And beginning of the year, we went along with everybody. We felt good like the rest of the world did, that GDP would be high single digits. We tracked to that. We're coming in a little less than that. And now given where the world is and how people are looking at it, we're probably going to be right along where GDP is. So that is something that we're going to continue to battle through. We're going to continue to go ahead and look to show current customers what we can do for them and at the same time, look for -- continue to look for prospects on broad to what we've set up. But the operating environment that's out there right now that we're competing against, could be teeing us up for something good because of the fact that our mantra is to reduce your overall costs and at the same time, improve your return on your investment with your customers. I'm not smart enough to tell you whether or not we're going to have a double-dip recession. But I can point to how we acted, how we behaved, how we performed during 2008 and 2009. If anything, if you can go back there and if that's what we are in for, someone wants to take that as the next step. I do not believe -- I think I am smart to tell you, we're not going to get back to that level. But if we are going to bounce lower here, we were there for our customers. We paid our obligations to our suppliers. We did not declare bankruptcy like some other people. We continued to pay our dividend, when the dividend got to its 20% yield and in fact, we came out of there stronger. Because of the vision and the strategy that we had, we became more successful. So we're in value to our customers. Our sales force is energized. Wins are starting to gain momentum here. Other people in certain verticals, when they see what we're doing and they see that we're in value to their competitors, are quite frankly coming back and say, "Okay, what is it that you can do for us? Now can you help us?" So we're not going to change anything. We're going to continue as I said earlier from a costs containment standpoint, which we've done forever, to continue to do that. And no matter what the economic conditions are in the back half of the year, we're prepared to go ahead and deliver on what we told you we'd deliver on.

Charles Strauzer - CJS Securities, Inc.

And Tom, picking up on the cost containment. Obviously in the media, you've seen some articles written about plant closures in the recent months. And clearly, it looks like you're being kind of proactive to kind of get in front of some of the economic volatility there. And I know you don't typically like to talk about closures because there's obviously some pain that's associated with that. But are you still prepared to take additional capacity offline, if you don't see the economy behave the way you like to, to help offset some of that softness?

Thomas Quinlan

Yes. Unfortunately, you're correct. I mean in the United States and obviously being in 37 countries, I mean right now in the United States, our leaders continue to want to talk about job growth. But at the same time, there's not a lot that's being done from that standpoint to assist in that taking place. From our standpoint, quite frankly, we've announced 1,900 workforce reductions this year already, of which I think we've acted on probably 1,100 of those. So we don't have a big parade when we do that. It's not fun. It's not what we want to do. We know for the betterment of the platform, we have to make certain decisions and we make them. But again, our goal at the end of the day is to make sure that we're matching cost to revenues. And I think -- I know that we do that as well as anybody else in any manufacturing company that's out there.

Charles Strauzer - CJS Securities, Inc.

So Tom, if I could maybe sum up a little bit what you've been saying. It sounds like a lot of timing-related issues in Q2 from both the top line and expense related fact that you got the Texas timing kind of slipping into Q3, Borders shutting down in the quarter. You had some of the plant closures happened within the quarter, so you probably haven't had the full benefit of some of those lower costs hit in Q2. Should we start to see some of that kind of abate and some of the expenses coming off and benefit you in the second half as well?

Thomas Quinlan

No, we definitely would. In the first week of capital markets -- or I should say the first month of the quarter in capital markets activity, our teams have done a great job. The integration of the 2 platforms of Donnelly and Bowne, the leaders there have done a great job of pulling that together. We had great success in the quarter, with a number of the IPOs that were issued, a number of capital market debt-raising activities that took place. Obviously as you look forward right now, there may be some uncertainty in the IPO market. But we're now establishing ourselves to where we feel good that as soon as that does come back and it will, we're well positioned to assist our customers there. So it is -- we're feeling good about what we see right now.

Daniel Leib

Yes. And I think your characterization is a very good one given as we look at the different items, identified many of those through the call. But as you look at the incremental/decremental margin, we're still operating in the range of the 25% or so, to your point, on benefits in the back half. We've talked through benefit that Q4 will have some easier comp than Q3 will and certainly than Q2 did. So it's absolutely appropriate.

Charles Strauzer - CJS Securities, Inc.

And then just lastly, let's talk a little bit about free cash flow, the share buyback a little bit to me. Obviously, the market's giving you some attractive pricing. So that's been benefiting your buyback efforts. But when you look at the free cash flow and you look at the money you're taking on in terms of additional debt for the buyback, would you -- would it be safe to say that excess free cash flow will be used to kind of pay down that debt kind of going forward?

Thomas Quinlan

Yes, it definitely would. And obviously at these interest rates, which we believe now the inflationary pressures that the Fed might have been worried about, are not there. So the pressure on the upward movement of interest rates is not going to take place. We've got a great credit agreement with our bank. We went out into the marketplace. We did a bond deal that was more than well received. And when you think about that, we gave investors the ability, who wanted to get away from us, because we weren't rated an investment grade by the rating agencies. They had the opportunity to get out. That was taken care of. We've lowered our cost of borrowing. We've pushed out the debt requirements for us out a couple of years. So we've got some -- still got some good running room here. So again as we go through here with you on August 3, we feel good about what we've set up from a financial foundation standpoint and believe that we still got all the flexibility in the world to do what we need to do here to run the business.

Operator

Our next question comes from Edward Atorino from Benchmark.

Edward Atorino - The Benchmark Company, LLC

I have 2 simple quick questions. How many shares did you buy? Was it $500 million?

Daniel Leib

Yes. And so the ASR, the funding for the $500 million, went out in May. And we took the liberty of 80% of the shares, so 19.9 million shares.

Edward Atorino - The Benchmark Company, LLC

19.9 million shares, okay. And...

Daniel Leib

Although there's coverage in, and so our expectation for the full year is 198 million shares.

Edward Atorino - The Benchmark Company, LLC

Right. Could you go over the SG&A comments? Are you seeing about $240 million to $250 million a quarter now for the second half?

Daniel Leib

No, that's $240 million to $250 million for the corporate group for the full year.

Edward Atorino - The Benchmark Company, LLC

Corporate group, okay.

Daniel Leib

That was corporate for the full year.

Edward Atorino - The Benchmark Company, LLC

Total SG&A will come down in the second half, though, versus the first half?

Daniel Leib

Yes, it will. Certainly, yes, it will ratchet down. And specific to some of my comments on corporate, you'll see that come down as well. And I think as you look at a percentage of sales is the appropriate way to look at it.

Edward Atorino - The Benchmark Company, LLC

All right. So it will be down as a percentage of sales as well, second half?

Daniel Leib

Yes.

Operator

Our next question comes from Scott Wipperman from Goldman Sachs.

Scott Wipperman - Goldman Sachs Group Inc.

Sorry if I missed this earlier, but can you just discuss your expectations for pricing in the second half of the year? I recognize there's always a source of pressure. But curious as to how you guys are thinking about that in terms of your outlook, and any comments you have on any specific categories?

Thomas Quinlan

No. In general, Scott, and Dan mentioned it in his prepared remarks, we still see the same pricing pressure that we've historically seen. And on a bundled approach, we're still at 1% to 2% down on our platform. Some of those products are better, some of the products are worse. But in total, that's the way you should think about us. There has been no sea change or landscaping change in any products so far this year, and we don't expect any the back half of this year. And one of the ways, again as you think about us, and I talked a little bit today about the global print management the couple of wins that we have. We've got some good things that we're still working on there. But it drives -- it's a significant opportunity for us, that organic growth, especially within the Fortune 1000. It redefines the customer relationships for us because it creates long-term scale deals and converts transactional revenue to contractual relationships. That gives us the stickiness that changes the pricing dynamics over time. So we're excited about that. We're looking forward to it. It doesn't mean that we're getting away from dealing with the transactional business. It doesn't mean we're not going to print the high school prom invitations or the laundromat bills and slips that go forward. We're going to continue to go after all of that business. But this type of business improves or productivity and asset utilization across our entire operating platform. So we'd monitor it, we're keeping track of it. And we think we're having good days with it as well, that again eventually that will impact pricing.

Scott Wipperman - Goldman Sachs Group Inc.

That's helpful. And then, just on the comments on the revolver and $475 million outstanding. So is the expectation then that you guys are going to pay that down with cash flow? Or you think you might look to term that out in the coming months?

Daniel Leib

Yes, it certainly have the access that we have to the markets. We have a lot of options. We recently did the issuance. We will generate free cash flow in the back half, and we'll likely look to pay down the revolver with that cash flow.

Scott Wipperman - Goldman Sachs Group Inc.

Okay, great. And then just last one for me just on the cash flow guidance. Does that include the $20 million down pension and $15 million of additional interest expense that you noted, Dan?

Daniel Leib

Yes, it does. That does, yes.

Operator

Our next question comes from Craig Huber from Access 342.

Craig Huber -

My first question is a housekeeping question. Incentive compensation, I believe, in the first quarter is $29 million. What was it in the second quarter?

Daniel Leib

It was about the same level, $29 million.

Craig Huber -

Okay. And then, Tom, your comment on pricing. I'll be curious if right now what's the difference with the pricing pressure you're seeing in the U.S. versus your international markets? Expand a little bit, I appreciate it.

Thomas Quinlan

Yes, sure. Thank you, Craig. What I would tell you on an International standpoint, Europe is a battlefield. It continues to be a battlefield. And if you look over there, no matter what product you're in, there's tremendous pricing pressure over there. Asia, as you know as I've talked about, we are gaining, doing more and more from a revenue standpoint related to packaging over there for some of our electronic customers. And that seems to stabilize as you think about the Pacific Rim in Asia. Here, Latin America, again pricing pressures continue to exist and continue to, you know, that we continue to battle against. Nothing that I would tell you is, again, as I said earlier before, is dramatic one way or the other at either end of the bell-shaped curve.

Daniel Leib

Yes, I think in aggregate, there's not a meaningful difference between the 2 segments. And to Tom's specific comments on the regions that, that holds and then there are certain countries where you have inflationary pressure where there's a bit of an offset. But in aggregate, not a big difference.

Craig Huber -

Okay. And then also can you speak about the tax rate? It looked like in the first half of the year the adjusted tax rate was a little bit over 25%? I'm just having a hard time seeing how you guys can get to the top of your non-GAAP tax rate range. It gets for you to top the 28% to 31% that sort of implies you got to be at roughly 35% in the back half of the year, and you guys are typically have a lower tax rate in the fourth quarter. So are you being very conservative when you said 28% to 31% for the year on an adjusted basis?

Daniel Leib

No, we think the range is appropriate given where we see our forecast coming in, given the mix of where we see profit coming in, given tax rates always impacted by discrete items that occur in the quarter. And so a bit tough to look at it over in specific periods of time and try to calendarize it. So the 28% to 31% is a good range.

Craig Huber -

And then also this very strong performance in logistics, Tom. Can you just speak about what you guys are doing that business today versus what you're doing say 3 or 4 years ago? How has the business change for you?

Thomas Quinlan

Good question. I think when you think about us, the resources that we put there, the investments that we've made there, we knew going into this that we would have to mitigate costs that occurred in this area we also all of us felt strongly going back a number of years that the model that the United States Postal Service has in place is not a sustainable model. And we felt as if, if we get all the legislation, what they're trying to do down in Washington, they need to achieve fiscal stability and legislative changes are going to be needed to do that. Cut operating costs, improve services and fix the prefunding of the retirement, health benefits requirements. They're battling that. And we saw that early on in 2007, 2008 that, that was taking place. We wanted to focus because our customers aren't going to -- we need to mitigate those costs for customers. So we developed strategies to help them grow their business. And when you think about our co-mail production lines, when you think about our distribution capabilities including co-mailing of standards periodic on the tabloid, the co-buying programs that we have in place, we think we're -- if not the largest, one of the largest people with volume there and the highest participation. We do standard letter-size mailers, we offer to trade co-palletization. We've made substantial investment in this area. And when you think about our third-party logistics again, that is an asset like model for us where I think we've got a differentiator for our customers in that area. We're able to fill the trucks when they leave for a certain place and we're able to go ahead and make sure that they're not going back to another destination empty. There's a need for that, there's going to continue to be a need for that. We do move. We do transport. We do distribute on a physical basis some of our competitors' material, which again helps us at the end of the day. So we foresee that we're going to continue to make inroads here and continue to grow that piece of the business.

Craig Huber -

And then lastly, if I could just ask. Your operating profit margin guidance, if I heard you right, for the year is 7.3% to 7.5%. Looks like that was down about 30 basis points what you guys talked about 3 and 6 months ago. Is that just because maybe you think that there's extra economic pressure that's hurting the margin?

Daniel Leib

Yes. So in the quarter, we lost as I mentioned the 36 basis points from impact of FX. So it has a positive impact on the top line, negative impact on the bottom line. So a piece of that if that flows through, obviously the higher paper sales also have a negative impact on margin so it's reflective of that and also reflective of the revenue line.

Craig Huber -

Okay, but nothing on the cost, not from what [ph] you guys can control, right? You still feel pretty confident about your cost outlook for what you can do in the back half of the year?

Daniel Leib

Yes, we feel confident on cost side.

Thomas Quinlan

Yes. When we go through, Craig, I mean again being around for a number of years, you've been around in this. You know that we look from everything from real estate to shrinkwrap to safety shoes to goggles to workers comp. Everything that's out there we're looking. As you know, and I'm not the one who invented this line but pennies, nickels and dimes is what this industry is about and we got to continue to manage it that way. And we think we do it better than anybody else out there.

Operator

Our next question comes from Zach [ph] from DK Partners.

Unknown Analyst -

I was hoping you could help me understand liquidity a little bit better. Because it seemed like in the press release, you guys have about $40 million of cash in the U.S. right now. And I was just wondering how you guys fund your dividend and share buyback? I thought that was done primarily out of the U.S.?

Daniel Leib

Yes. So the liquidity we have, the $360 million, if you look at the schedule in the back of the press release, it lays that out the $363 million of cash. As we note on the bottom, there's the $40 million domestically. And then we have our revolving credit facility, which is the $1.750 billion. And so that $1.3 billion of net available liquidity is what we haven't used on the revolver plus the cash and then any restriction on the revolver due to covenant.

Unknown Analyst -

Got it. And do you guys feel pretty good about your ability to refinance your revolver on a unsecured basis?

Daniel Leib

Yes. So the revolver matures at the end of 2013, so we feel very good about the revolver.

Thomas Quinlan

And then if you look at the indention we just did with the bond deal, you'll see that there's no handcuffs or constraints that one would normally see in someone at our rating.

Operator

Our next question comes from [ph] from Barclays Capital.

Unknown Analyst -

Just on the share repurchase plan, obviously ASR was completed kind of 25% above where the current share price is. So can you walk us through what the plan is for the remaining $500 million? Is it sort of toward the plan through the end of 2012 on a quarterly basis? Or would you hold off given a little bit more uncertain economic outlook?

Daniel Leib

Yes. Just to make sure in terms of the mechanics of the ASR. So it will be based upon the WAP, weighted average price, and then a discounted premium reflective of the dividend during that carrying period. So the ASR hasn't been completed yet, it's still in the market from a pricing perspective. The ASR will complete towards the end of the year and a little bit after, a little bit before the end of the year. And that will be the $500 million of the $1 billion repurchase. And at that point in time, we'll look at all options on the next tranche as well as take a look at what's going on in the macro environment and company specific as well.

Unknown Analyst -

So there's no cash going out the door in the second half for buybacks? That's the sort of way we should think about it?

Daniel Leib

That's appropriate.

Thomas Quinlan

Operator, thank you. I'd like to thank everybody for joining us on today's call. Hope everybody has a good rest of the week, and we look forward to talking to you in 90 days. Thank you very much.

Daniel Leib

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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