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

Q1 2012 Earnings Call

May 02, 2012 10:00 am ET

Executives

Dave Gardella - Vice President of Investor Relations

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

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

Analysts

Charles Strauzer - CJS Securities, Inc.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Hale Holden

Scott Vogel

Ted Shiung

Operator

Welcome to the RR Donnelley First Quarter 2012 Results Conference Call. My name is Monica, and I'll be the moderator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dave Gardella. Mr. Gardella, you may begin.

Dave Gardella

Thank you, Monica. Good morning, everyone, and thank you for joining us for RR Donnelley's First Quarter 2012 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 the 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 reconciliation of GAAP measures to which we will refer on this call.

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

Thomas J. Quinlan

Thank you, Dave, and good morning, everyone. During the first quarter, our revenue trend improved sequentially as compared with the fourth quarter of 2011. This reflects a favorable shift in customer demand as well as new account wins that were added to our platform during the quarter. During our call in February, we told you that in the back half of the fourth quarter of 2011, we saw customers abruptly defer spending on marketing promotions. In the latter part of the first quarter, we saw that trend begin to reverse itself. During that discussion, we also identified an ongoing challenge that has continued into 2012. This is the imbalance in our capital markets business between the IPOs that are being announced versus those that are being priced. Though we are continuing to win a very sizable share of the work associated with IPOs, invoicing for our services that are connected with each IPO occur only as the deals or pricing closed. We saw an uptick in IPO pricing activity late in the first quarter, so we are encouraged about the outlook.

Based on the first quarter results and what we are seeing in terms of customer wins that will further ramp up this year, we are comfortable in our expectation that revenue for the full year will be flat to slightly up. And as noted in this morning's release, we reaffirmed full year 2012 guidance for both non-GAAP earnings per diluted share and operating cash flow less capital expenditures. Dan will take you through all the numbers in more detail shortly.

Before he does, I will briefly highlight a few of the actions that we have been taking, placing them into the context of the 5-pronged strategy that we discussed during our conference call this past February. We said then that the first pillar of our strategy is to win share by aggressively pursuing all appropriate print opportunities across a diverse range of vertical segments and by using the comprehensive range of our integrated offering as a key value added differentiator.

Let me share 2 examples of how the breadth of our offering serves to create integrated solutions that differentiate RR Donnelley. The Audit Bureau of Circulation, Game Informer closed 2011 as a top 4 title in print. We produced a significant share of the print run. As you might imagine, the world's #1 videogame magazine appeals to a youthful demographic that is also comfortable in the virtual world. In fact, this title is all about virtual worlds. While it is a top 4 print title, a recent article in Adweek identified Game Informer as having the highest digital circulation of any title. RR Donnelley prepares this enhanced digital version for electronic distribution to more than 1.5 million subscribers through our strategic Creative Services offering, which provides a host of premedia resources. Preparing the #1 title for digital circulation reflects our ability to bridge content across channels. This capability is extremely attractive to our customers.

Going forward, we see customers looking for integrated solutions that enable content to be created, managed, produced, distributed and monetized in print and digital versions. RR Donnelley is uniquely equipped to provide this capability across the broadest range of vertical segments, including retail and financial services, technology, health care and more. Whether it is an enhanced digital version of a print publication or an XBRL presentation of financial data, we are the single source that helps content connect across media platforms. Visibility is a key differentiator as customers consider where to place their printing contracts. We offer sole source convenience and control in this emerging environment, which is something that other printers cannot as broadly accomplish and that pure e-providers cannot do at all.

A second example offers an illustration of 2 important points. For a major nationwide retailer, we just handled the premedia work, print production kitting and fulfillment for all of the in-store merchandising for a major promotion.

These materials included retail standees, end-caps, posters, buttons, rectangular signs, shopping basket liners, counter mats, banners, window labels and pallet wraps. Part of the print production was done by the Genesis Packaging business whose acquisition we completed during the third quarter of 2011. All of the kitting assembly, much of the printing and the entire fulfillment was done in the new facility that we opened in the Chicago area last summer. This operation brought 2 RR Donnelley plants under a single roof with room to grow to create a leading print and fulfillment center.

Two key points are worth making about this kind of ongoing work. First, it provides an example of how seamlessly we have been able to incorporate the additional packaging and retail display capabilities we acquired late last year into our marketing channel. As we said, we have laid the track in the packaging space directly to our existing customer base, making for very fast integrations. Second, this kind of end-to-end solution delivers exceptional value to customers in terms of both cycle time reduction and operational efficiency. Again, this is an edge as customers consider where to place their print work. This also positions RR Donnelley with decided advantages in the retail merchandising segment, which is one that is particularly resistant to electronics.

The second element of our strategy is leveraging our unmatched operating expertise, procurement scale and customer relationships. Everyone at RR Donnelley understands that doing so is a standing order for sales, sourcing and operations. Building on our relationships with customers to sell more services that can diversify and increase our revenue base is the third element of our strategy. As an illustration, during the first quarter, we continued to see strong growth in our Logistics segment, with revenues up approximately 12%. Although we offer leading print-related logistics capabilities, continuing growth in our Logistics revenue is also being driven by our 3PL or third-party logistics services. These involve helping customers move products other than print, and again, we are driving this growth without requirements for capital expenditures in this space.

During the quarter, our Logistics revenue growth was mirrored by an 11.2% increase in our business process outsourcing or BPO platform. As with Logistics, driving revenue growth in this space does not require substantial capital expenditures or a substantial fixed cost infrastructure. We are seeing this service revenue grow as our global print management offering continues to win new business as we become the choice for processing content, often as part of a larger relationship that has a print component. We are continuing to reduce the exposure of impacts to RR Donnelley by new media by enhancing our service offering. In the services arena, we have just opened a substantial warehousing and fulfillment center in Central Indiana that focuses on fulfillment for book publishers. This is part of our ongoing transformation that is taking RR Donnelley from being merely a producer of printed books to a provider of complete supply chain services. These include print-on-demand capabilities that use our own ProteusJet digital presses, expanded fulfillment services and digital distribution through our LibreDigital offering. In LibreDigital's virtual warehouse, we have digital renditions of nearly 0.5 million different electronic versions of books and counting. Consumers have viewed a 0.25 billion pages of fiction and nonfiction content through our book previewer. There is tremendous secular change occurring in the book segment, and RR Donnelley continues to respond by expanding the scope and scale of our offering to ensure that we continue to be the leading resource to publishers.

The fourth element of our strategy is to internally develop and acquire technologies that serve important communication and supply chain needs for our customers, and that continue to diversify our product and service mix as we serve a growing portion of our customers' communication and supply chain needs. I want to illustrate this strategic element with 2 examples. First, during the quarter, we took an equity stake in the maker of the CoffeeTable iPad app. CoffeeTable enables consumers to browse and shop more than 100 consumer catalogs, with a unique in-app checkout. The app also supports comprehensive data analytics. Now this is a key as direct response is a data-driven business in which catalogers make their media mix decisions on the basis of quantifiable results. As have our other acquisitions in the digital space, the CoffeeTable offering further expands the range of our capabilities, making it easier for direct mailers to choose RR Donnelley as a single source for services that range from product and lifestyle photograph for the images that go in to the catalogs to logistics and digital delivery on a distribution end. The second example has to do with how we are continuing to deploy our ProteusJet presses. We had previously installed them for statement printing in TransPromo, print-on-demand books and direct mail applications. Now we are putting in place ProteusJet multi-web configurations for enhanced direct mail applications. I want to amplify the game-changing nature of this RR Donnelley innovation. What we're doing is creating an entirely new way of printing and personalizing direct response communications. The engineering in this is more than we can describe over the phone, so let me boil it down to 4 key benefits that customers will be focused on.

First, this will deliver superior image quality, and again, we're talking about full variable color, not just black and white names and addresses being printed. The word piezoelectronic inkjet may not mean a lot to you, but to our customers, they mean more ink coverage than ever before and at high speeds.

Second, ProteusJet multi-web means more variable imaging on the paper. This provides greater design flexibility for customers as they develop their direct mail packages. This is extremely attractive to direct marketing professionals because increased personalization typically leads to increased return on investment.

Third, this delivers more flexibility. We can start at one end of an RR Donnelley press with a blank roll of paper and deliver on the other a fully finished, highly personalized piece that is already inside a highly personalized envelope without the very difficult and time consuming kinds of press setup that other manufacturers have to include in their processes and costs.

And fourth, these multi-web deployments provide the firepower required to offer innovative variable imaging for long-run rollout applications.

In printing, a key measure of throughput is the number of impressions that presses put onto paper. Customers' adoption of the ProteusJet solution drove up the number of impression from the units by 134% during 2011. We're onto something great, and with the multi-web configuration, we're scaling to take advantage of all growth opportunities. Drupa, the huge graphic communications show, is taking place in Germany this month. And the KBA Digital Press featuring our Apollo technology is debuting.

Our R&D pipeline is continuing to deliver innovations. The final leg of our strategy is to work to drive free cash flow and margin through continuing aggressive cost compression. As we said before, this is not a wake up one day and start paying attention to cost event. It is based on ongoing relentless attention to matching costs with forecasted revenues.

Taken together, these strategic pillars have helped us get off to a start in 2012 that enables us to reaffirm our guidance. And now I'll turn it over to Dan to take you through the numbers in detail. Dan?

Daniel N. Leib

Thanks, Tom. As Tom mentioned earlier, we started the year on a positive note, consistent with our expectations. GAAP earnings per diluted share for the quarter were $0.21, $0.05 or 31% higher than the first quarter of 2011. Non-GAAP earnings per diluted share were $0.44, $0.11 or 33% higher than the $0.33 we earned in the first quarter last year.

First quarter revenue of $2.5 billion declined 2.3% from the first quarter of 2011. On a pro forma basis, adjusting for the impact of 2011 acquisitions, revenue declined 2.7% in the quarter. Unfavorable changes in foreign exchange rates accounted for $19.7 million or 76 basis points and offset the impact of the $19.8 million adjustment that was related to an overaccrual for customer rebates within our office products reporting unit that occurred during the 4-year period from 2008 through 2011. Year-over-year paper sales decreased $10 million. The remaining sales decline of 2.3% was primarily due to volume declines and the price impact across several of our U.S. and International offerings, partially offset by volume growth in BPO, Logistics, Asia and Latin America. The revenue trend improved in the quarter compared to the decline of roughly 3.3% on a like-for-like basis that we saw in the fourth quarter of 2011.

Gross margin in the quarter was 23%, declining 130 basis points from the first quarter of last year. Unfavorable product mix throughout several of our offerings, price erosion and the reinstatement of the 401(k) match more than offset lower pension and postretirement expense and the customer rebate adjustment. The largest gross margin declines were experienced in our International segment, primarily in Asia, Europe and Latin America, as well as in the financial print offering in the U.S. segment.

First quarter SG&A expense, as a percent of revenue, was 11.2% or 140 basis points better than the first quarter of 2011. Driving the improvement was lower employee-related expenses, as well as overall cost-reduction efforts in our selling and administrative functions and year-over-year synergies realized from the Bowne acquisition.

First quarter non-GAAP operating income of $171.7 million improved $11.1 million from the first quarter of 2011, resulting in an operating margin of 6.8%, a 60 basis point increase in operating margin from last year's first quarter. On lower revenue in the quarter, the operating margin expansion was driven by the rebate adjustment, lower employee-related expenses, lower D&A and savings from productivity initiatives that more than offset the impact of volume declines and unfavorable product mix, price erosion and the 401(k) match. Changes in foreign exchange rates did not have a material impact on the quarter-over-quarter margin comparison.

Our non-GAAP effective tax rate in the quarter was 29.3% compared to 32.7% in the first quarter of 2011. The current quarter reflects a release of valuation allowances on deferred tax assets in Europe, which drove the decline in the tax rate from the first quarter of '11 and will result in a reduction of cash taxes in future years.

From a segment perspective, revenue in our U.S. Print and Related Services segment of $1.9 billion declined by 3.1% from the first quarter last year. Reduced paper sales in the quarter roughly offset the benefit of the rebate adjustment. Absent changes in paper, our book and directories offering declined 9.3% from the first quarter of last year. We expect the decline on the book offering to improve in the latter part of the year. Likewise, our magazine, catalogs and retail inserts offering was down 1.6%, an improvement over the fourth quarter 2011 year-over-year decline. Also improved was our financial print offering that declined 6.8% from the first quarter of 2011 as we saw the financial markets begin to improve in the back end of the quarter with a pickup in the number of IPOs priced. Logistics continued to experience robust growth with top line growth of nearly 12% in the quarter. Non-GAAP operating margin for the segment of 9.5% improved 20 basis points from the first quarter last year as productivity, the customer rebate adjustment, lower depreciation and amortization and lower variable compensation expense more than offset volume declines and unfavorable product mix, continued price erosion and a lower recovery on byproducts.

First quarter 2012 revenue in our International segment of $643.5 million was essentially flat to the first quarter of 2011, but was negatively impacted by a $19.7 million or a 307 basis point unfavorable impact from changes in foreign exchange rates. We experienced volume growth in business process outsourcing, Asia, Latin America and Canada. The financial markets continued to be sluggish internationally, with the exception of Canada where we began to see a rebound. Pricing pressure impacted all reporting units in the segment. Non-GAAP operating margin for the segment declined to 5.6% from 8.3% in the first quarter of 2011. The margin decline was caused by price pressure, wage and other inflationary increases, notably in Latin America and Asia, and an unfavorable product mix driven in part by increased low-margin business process outsourcing revenue, partially offset by lower depreciation and amortization and lower variable compensation expense.

Our first quarter 2012 non-GAAP unallocated corporate expenses were $43.2 million, a decline of $29.6 million from the first quarter last year. The improvement was driven by lower pension and postretirement benefits expense, targeted cost reductions and lower variable compensation expense, partially offset by the 2012 reinstatement of the 401(k) match and higher benefits-related expense.

Operating cash flow in the quarter was a use of $52 million compared to a use of $7.2 million in the first quarter of last year. Consistent with 2011, we expect to generate the majority of our free cash flow in the second half of the year, with the fourth quarter generating the largest quarterly operating cash inflow. On a trailing 3-month basis, controllable working capital, which we define as accounts receivable plus inventory less accounts payable, as a percent of net sales, was 13.7% in the first quarter this year, an improvement of 150 basis points from the first quarter of last year.

Due to normal seasonality, our trailing 3-month working capital, as a percent of net sales, was 40 basis points higher than at December 31 of last year, resulting in a use of cash of $105.6 million, $40 million more than the first quarter of 2011.

As noted in this morning's earnings release, we continue to expect full year operating cash flow less capital expenditures of at least $500 million.

Total debt as of March 31, 2012, was $3.8 billion, an increase of $94.8 million from December 31, 2011. Our leverage ratio at the end of the first quarter was at the high end of our targeted range of 2.5 to 3x. Given the seasonality of cash inflows, we would expect the leverage ratio to begin to decrease in the back half of the year.

During the quarter, we again improved our already favorable liquidity profile by issuing $450 million of 7-year 8 ¼% notes due 2019 and retiring an aggregate amount of $441.8 million of our 2014 and 2015 notes. Our next scheduled term debt maturity of $258 million is not due until April 2014 and we do not have a maturity greater than $350 million until 2017.

As of March 31, 2012, our term debt is 72% fixed at an average interest rate of approximately 7.4%. At quarter end, we had borrowings of $327 million under our $1.75 billion unsecured committed credit facility, $159 million of which was used to pay off our January 2012 maturity. Our liquidity is supported by cash holdings and our credit facility that expires in mid-December 2013. At March 31, 2012, we had net available liquidity of $1.6 billion.

One quarter into the year, we want to provide some slight updates to our full year guidance for 2012. We continue to expect revenue to be approximately flat to slightly increasing over 2011, excluding any impact of changes in foreign exchange rates and pass-through paper. As we mentioned on our last earnings call, we expect our growth to be more heavily weighted towards the latter part of the year. We expect our non-GAAP operating margin to be in the range of 6.9% to 7.1%, an increase of 10 basis points over previous guidance and an increase of 20 basis points to 40 basis points over 2011. Included in this range are corporate expenses of approximately $190 million to $210 million. Depreciation and amortization expense is expected to be approximately $500 million to $510 million, $5 million to $15 million lower than our previous guidance. Interest expense is estimated to be in the range of $250 million to $255 million. The $10 million increase from our previous guidance reflects the impact of our first quarter debt issuance, swaps and unwinds and tender offers.

Our full year non-GAAP tax rate is expected to be in the range of 29% to 32%, with the low end of this range being 100 basis points higher than previous guidance. Note that while our first quarter tax rate was at the low end of this range, we expect our second quarter rate to be above the full year range at 34% to 35%, substantially higher than the non-GAAP tax rate of 19.5% in the second quarter of 2011.

We project the full year fully diluted weighted average share count to be approximately 183 million shares. We have not repurchased any shares under our current authorization that expires at the end of this year since the completion of the accelerated share repurchase plan in November 2011. As such, we continue to expect full year non-GAAP earnings per diluted share to be in the range of $1.84 to $1.92. Further, we continue to expect operating cash flow less capital expenditures of at least $500 million, which is inclusive of approximately $251 million of cash contributions for our pension, 401(k) and postretirement plans. Also included in this assumption are capital expenditures in the range of $200 million to $225 million. From a capital deployment priority perspective, we intend to fund our $1.04 per share annual dividend and pay down debt to remain within our targeted range.

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

Thomas J. Quinlan

Thank you, Dan. And with that, operator, we will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Charles Strauzer of CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Tom, let's talk a little bit about – you’ve reaffirmed guidance here and I think you said in your prepared remarks that you have seen some positive customer trends. You kind of look at the mag/cat retail only down 1.6% versus, I think, ad pages were down 8-plus percent. What's driving kind of the better results there and kind of giving you the confidence for the rest of the year?

Thomas J. Quinlan

Our responsibility here, we look at it as twofold. One is driving the business on a daily basis, making sure that we optimize sales and operations and make sure we have a safe working environment. And then two, positioning the company for the future. Who do we need to be tomorrow to meet our customers’ needs? We are driving the business on a daily basis, that I can assure you. And what gives us confidence in the first quarter, our sales force achieved over $900 million in contractual renewals and wins. And these wins are across every vertical, financial services, travel and media, automotive, retailers, publishers, health care and so forth. And each one of the companies in these industry verticals are utilizing our products and services offering. I talked to you about in-store signage, forms, bag tags, tickets, labels, it includes direct mail logistics, aluminum products, our statements, commercial work, the BPO. So this gives us some confidence to say, okay, look, as we look at the rest of the year, what is it going to look like. Again, our guidance is based on that the rest of the year is going to continue to operate as the first quarter did, which was obviously choppy for everyone. The things that are out there, from a negative standpoint, the fiscal cliff that we fall off of at the end of the year unless a comprehensive debt reduction plan can be put into place. Hopefully the Bowles-Simpson Plan, there’ll be some legislation passed on that or at least brought forward. Doubt that anything will happen in -- prior to the election and it's probably -- well, probability anything will happen after the election. But the tax cut expiration, the number of other expiring provisions that hit, the sequester that takes place, my belief is that's greatly going to damage the United States consumer spending and have the same impact to the rest of the world's consumers if we don't do something there. And if they punt or kick the can down the road, the impact to the credit markets this time could be disastrous. So I think with -- as we see things today, we feel good about what the rest of the year is, and that's why we reaffirmed the guidance from that standpoint.

Charles Strauzer - CJS Securities, Inc.

Got it. And is it safe to say that maybe you're taking a little bit of share maybe from some competitors as well?

Thomas J. Quinlan

Yes, it is. I mean, look, this market that we live in, and I think people -- the Mark Twain line that my death has been greatly exaggerated again, I mean, this is still a huge marketplace. Just in the United States alone, the estimates are, at the end of 2011, it was $149 billion marketplace. If you exclude newspapers, it's $119 billion. We don't have 10% of that in the United States. So I mean, I think, there is a lot of opportunity for us there. As you think about what our customers are doing, which is the fun point for us, I mean, our customers wake up and are communicating with their customers, employees, suppliers and investors in a completely different manner today than what they did even a year ago. And we are providing them with solutions to communicate with all of their stakeholders. As we sit here, we know customer -- companies are looking at all sorts of ways to communicate, many of which are built around mobile devices. Companies are looking for integrated communication programs that take advantage of what mobile does well, what websites do well and what print does well. RR Donnelley is positioning great to compete in this evolving digital world, all the things that I talked to you about today in the prepared remarks. The CustomPoint Solution Group that we created with technologies that we acquired in 2010 and 2011 are a perfect overlay to the global print management initiative that we put in place. And you talk about market share. I mean, those in the marketplace are trying to emulate us in this area. And look, imitation is the highest compliment one can give someone, and it's happening here. We created CustomPoint Solution Group in response to our customers' needs and we're having success with these new capabilities. As I said, Charlie, the deal structures are changing. Conversations are not about price or a direct mail campaign. They’re now about campaign management. We're helping our customers get the right communication out at the right time, on the right channel. We're assisting our customers in leveraging their brands more consistently. We're assisting our customers in keeping their brand integrity across all channels. All of this is making us, again, to -- we believe to be the partner of choice for companies that are looking to go ahead and get a message out to their companies, to their customers.

Charles Strauzer - CJS Securities, Inc.

Great. That's very helpful. And just one quick follow-up. If you look at the $500-plus million of free cash flow that you basically expect to produce this year, remind us again of kind of the near-term priorities of that cash. Is debt kind of now the top priority and focus?

Thomas J. Quinlan

Look, we were pretty emphatic last call in February that we're going to be between a 2.5 and a 3x leverage ratio. Obviously because of seasonality, at this point, we're closer to the right end of that number, closer to 3, but our goal is to continue to look to take the deployment of capital and pay down debt. And that's going to be -- continue to be where we're going to be focused on.

Operator

Our next question comes from Scott Wipperman of Goldman Sachs.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

I guess just on the capital market side, I think, everyone on the phone is obviously hopeful that the market activity improves. But could you comment as to how you're thinking about the financial print business? And I know you guys did a lot of restructuring and cost actions on Bowne last year. I was just curious as to how you're thinking about that going forward. Is there more steps you might look to take if things don't improve? And then second, somewhat related question, just on the restructuring expenses in the first quarter. Of $40 million, Dan, was just hoping you could just help us think at how that should go over the course of the year. $40 million was a little bit higher than I was expecting, so just curious as to what the outlook is there.

Thomas J. Quinlan

Scott, I'll take the first one and then Dan can come back with the second one. Look, the top line here, no matter what product line you're looking at, is we're transforming RR Donnelley. We've been doing it for the last couple of years. It doesn't go quick. We’ve said in the past that 2/3 of the revenue in 2000 were driven by domestic magazines, catalog, retail, inserts, books and directories. In 2011, those products domestically constitute less than 1/3 of our revenue. We're still one of the largest and best players in these products. But we have done a great job in diversifying our revenue with the same customers. Top line is going to be GDP. That growth combined with our continuing focus on managing costs is going to yield outcomes that all of our stakeholders are going to appreciate. Going back to the financial that you talked about there, our customers, no matter what vertical they're in, continue to expect us to improve and innovate. And if you look at the announcement that we made yesterday with our Venue suite, that product offering here allows us to be more efficient for our customers. And that's something that we're excited about. The digital solutions offering that we've got in place, that can go across, again, any product line, any vertical. Content plus digital enhancement equals new revenue opportunities for all these customers. The challenge is to get their customers to open up and to engage with that content, and our solutions have been helping making this happen by some of the wins that we continue to have. We're building a solution that develops a brand ecosystem that encourages and allow customers’ customers to define how they want to interact, and that could be whether it's a financial customer, whether it's a consumer, whether it's a retailer. So again, we're hitting all those points on a daily basis here. And as you look at us, and I know from talking to some of you over the last quarter, the concern on the digital electronic substitution path is, I think, if you think about some of the things that we've done that we have on place, we processed in 2011 $12.5 million orders, orders that we processed on our platform from that same point. We did $3.5 million kits that we processed through the system in 2011. We moved 18 million pallets in logistics, okay? Not print related. We went ahead and co-mailed annually north of $700 million -- 700 million pieces. The on-site mail that we processed is almost 0.5 billion. It goes on and on what we're doing for our customers as it relates to additional services that we're bringing forward to them. That again, we get because of the relationship that we have with the print. Our customers is our biggest asset, and as the -- whether it's the financial vertical, whether it's the capital markets coming back, we're finally bringing all the products and services that the RR Donnelley platform has to each one of those customers.

Daniel N. Leib

Yes. And just as a follow-up on your question on cash restructuring. So if you look historically and obviously in periods following an acquisition, cash restructuring is a little bit higher. So last year, we spent about $104 million in cash restructuring, and that was compared to in periods without acquisitions. If you look at the average over the past few years or several years, you're in the 70 to 75 range of cash expended. And if you look at first quarter this year, we spent roughly $28 million on cash restructuring, which compares to last year of about $26 million. So our view on a cash restructuring in 2012 is it's somewhere between the normalized level and what we spent in 2011.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

That's helpful. And then just last one for me. Just on the debt reduction comments. Should we expect it to be just paying down the revolver or might you guys look at going after some more term debt?

Thomas J. Quinlan

It completely depends on where the markets are. But right now, obviously, the revolver is front and center for us and would be the easiest thing for us to go ahead and do.

Daniel N. Leib

Yes, exactly.

Operator

Our next question comes from Kannan Venkateshwar from Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

I had a question on the margins in Asia. If I recall correctly, you said that there was roughly a 300 basis point drop in margins in that business. Just wanted to understand what that was on account of.

Daniel N. Leib

No, that was International in total. And so if you look at -- there's a couple of components that impact margin. Most of it is product mix within the region. We did have some startup activities for a couple of product lines, specifically in Asia that had some impact, but it's mostly just product line mix within each of the regions.

Kannan Venkateshwar - Barclays Capital, Research Division

And in terms of the degree of price and volume pressure, could you help us through which businesses are more of this versus others?

Daniel N. Leib

Yes, so price -- it's a combination of price and then volume mix. And we've historically, and we've been on the phone with you and have talked about the 1% to 2% price impact, and that's the price impact that comes through on contractual work. And that's been relatively consistent over time. We continue to see on the contractual side and then you do see shifting mix, which you can call a piece of that price, but that's really the -- what puts pressure on the gross margin line.

Thomas J. Quinlan

And understand too, and it's not a secret as everybody looks at everybody's performance, especially in the public domain, margins are under pressure, a lot of our competitors in the graphic arts industry. If you were selling on price alone, it is not going to be a good day for you. And I think the initiatives that we put into place are benefiting us. And again, I keep harping on the global print management, but there's significant opportunity for organic growth there for us. It redefines customer relationships, it creates long-term scale, transactional revenue becomes contractual revenue. The greatest thing on our platform standpoint, it improves our productivity and asset utilization across the operating platform. And we shift the sales organization from product-focused selling to enterprisewide selling and product specialist. This is what our customers are looking for. They want us to become the infrastructure for the Fortune 1000. So as we sit here today, and as you see some people that are having some fun, there are people that pricing is, in certain products, maybe getting a little tougher because of where people are situated. So having the [indiscernible] service we have allows us to continue to go to our customers and win this work.

Kannan Venkateshwar - Barclays Capital, Research Division

So is it fair to say that some of this pricing pressure is because you're trying -- because of competition and it might be temporary and might go away over the long run? Are you competing on price near term is the question, I guess.

Thomas J. Quinlan

I think every day we’ve competed on price. I mean, in this industry, that's been the case forever. But again, how are we going to improve their return on the investment? What are you going to do as a partner with that particular customer, not only to give them a great price but also improve the return that they're going to see from whatever campaign that they've got, whatever contact that they're going to have with their customers. Those are the things that we're able to identify and show examples of how we're able to do it for customers. And I think that's where you're seeing us make a difference.

Daniel N. Leib

Yes. I think cost advantage platform, both from just overall scale as well as where we have production resources, has been very helpful. Ability to sell, as Tom mentioned, breadth of products and global print management that are driving out supply chain costs, which are overall delivered cost to the customer is the important factor.

Kannan Venkateshwar - Barclays Capital, Research Division

Okay. And in the book segment, basically, the number was slightly lower than what I was marking at that. So I wanted to understand, did you guys see any impact on account of Hunger Games at all or that did not flow through this quarter?

Daniel N. Leib

Yes. I think the numbers we gave were book and directory combined, was the 9.3% on the top line, excluding paper. And then we do expect an improvement in book, specifically towards the latter part of the year.

Thomas J. Quinlan

And as some of you have seen, look, there's some authors now that are coming out, that's exciting. The states still have their pressures on them from a budget standpoint, how much money they're going to put into education and then when they put the money into education, is that going to go for new curriculum, those questions are still out there. But as you think about RR Donnelley, and we talked about the warehousing and fulfillment center that we've put in place into Indiana, we are the single source solution. We offer an integrated manufacturing fulfillment and distribution service capability with our proprietary technology. The LibreDigital acquisition and bringing them onboard with us allows us to bring further value to our customers. We're making the supply chain more efficient and we're the best ones out there to help customers get their content distributed to whatever form they want it to go to. Having us as a closed-loop partner in this whole thing, we convert all the formats to all devices and we cast a broad net for all their customers to receive this information. So again, we feel good about what we've done and hoping again that we're going to see those seeds start to grow in the back half of the year.

Kannan Venkateshwar - Barclays Capital, Research Division

Okay. And one last question is on LibreDigital. How big is that relative to the rest of the eBook market in terms of the business that they get and also in terms of the difference between the margin for your print business versus that for LibreDigital? Could you guide us on that as well?

Thomas J. Quinlan

I'll take the LibreDigital question first. LibreDigital acts as a content -- receives all the content in and then delivers the content out, and it could be -- it's more than just books. It's magazines and it's other products as well that comes into LibreDigital and then goes ahead and gets sent out to whether it’s your iPad, your BlackBerry, your cell phone, whatever electronic device, your laptop, that you have, puts it into format so it's readable there and to see. It makes it more efficient for the customer not to go ahead and to have 4 or 5 different partners that are going to go out to whatever medium that people are looking to have for that to go out to.

Daniel N. Leib

Yes, so digitizing the content and then getting it into the right format to sit on different platforms, it's a relatively small size relative to our book business and would expect that it’s a service that's wrapped within the book business and, as Tom mentioned, in our other offerings as well.

Operator

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

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

First off, if you just talk about the drivers behind the rebate hitting now and kind of how that came up and didn’t deploy in the quarter?

Daniel N. Leib

Sure. Yes. If you think about that business, it's a gross net business, which is pretty unique within Donnelly in any great scale. And so it's -- the customer rebates and the accruals that are made for those that it's largely set up at the time of contract signing. And we determined this late in the quarter and this is just the adjustment that comes through from, as I mentioned, a couple of years or 4 years of accrual history that we found and so made the adjustment now. Obviously, its size relative to the company size is not material to any prior period and not material to this year.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just following on that, the operating margin guidance up 10 basis points, but down 10 basis points excluding the rebates. Just help us understand what changed in the dynamics there.

Daniel N. Leib

Yes. I'd say sort of nothing. As we sit here in the first quarter, on a P&L basis or throughout the P&L, we reaffirmed the full year EPS guidance as slightly higher interest cost. Clearly, the stock products helps the full year, but we sit here early in the year, we'll see how the next few quarters come out and we'll update guidance along the way.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. I know you're going to continue doing a great job on the working capital side. How much more room do you think there is to improve those metrics?

Daniel N. Leib

There is certainly room. We spent last year and a lot of last year's effort was brute force and just a tremendous dedication of time across the organization. We continue to have that same level of dedication, but we've obviously took the time to supplement it with systems and process. And so as that's being built in, and there are some diminishing returns. Our $500 million is not predicated on a similar improvement that we saw in 2011. But we do expect some improvement, and we do think there's more room to go on the working capital front.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Great. And then last one for me, just on the CoffeeTable app. Could you just give us some details around the kind of the size of the equity stake and the cost for that?

Thomas J. Quinlan

It was insignificant from the standpoint of impacting the platform on a total basis, but what it does for us is it allows us to come in and bring that for our customers to their platform. That technology is something that, again, as you think about data analytics and you think about why people are making decisions to buy or not to buy, and we believe that, that technology there is going to be something that's going to, again, help us from a print standpoint, help us from a distribution standpoint, help us to sell more products and services to our customers by having that onboard. We've completely recognized the value of developing targeted software solutions that solve business problems for our core customers across key vertical markets that's led us to explore ways in which we can accelerate that process. CoffeeTable allows us to do that. Then you're going to be hearing more from us in the coming weeks as we need to identify and develop and deliver unique digital solutions to our customers that can positively impact their business operations. CoffeeTable is just one example of what that can do. And again, as you think about us, you think about our 150-year-old business and the steps that we're taking for the future, as I talked about earlier, what's our mission in life. We want to make this company a 300-year-old business, and these technology capabilities that we're bringing onboard, the new media that's taking place, how we're adding value to our customers and making them more efficient is really starting to take place. So there’s some good stuff going on there, too.

Operator

Our next question comes from Edward Atorino of Benchmark Company.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

On the CapEx pension and other, to get to a free cash flow number, your CapEx was 250, 200 to 250? Is that right?

Daniel N. Leib

Yes. CapEx was $200 million to $225 million.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

$225 million. And the pension?

Daniel N. Leib

The pension cash with the 401(k) and OPEB was 251, pretax.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

And there's really no other, I guess. That's it. Two other questions. Are eBooks sort of now a meaningful revenue chunk of the book business? And second, have you looked at nonprint as a total of the company, what it would be, say, this year, last year?

Daniel N. Leib

I think services business that we talk about is probably about 12%, 13%. ebooks are not a main revenue generator in the book side.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Okay, got you. And is financial getting better in the quarter this year, last year?

Daniel N. Leib

Yes, we did see improvement in the quarter, so the fourth quarter saw a falloff. We did see less deterioration heading into -- it was down in the first quarter. We did see that was improved on a rate of change in the first quarter of this year relative to the fourth quarter of last year. And we did see some positive developments on IPOs. We've been doing very well on winning IPO business. We did see some positive developments on IPOs being priced in the first -- end of the first quarter.

Thomas J. Quinlan

And the IPO pipeline does remain -- I mean you see it as, and everybody on the phone sees it as well as we do. I mean, it remains robust. Again, the Venue announcement that we made, the virtual data room business, that continues to grow. The release of the Venue 4.1 allows us to go ahead and enables localization in 5 different languages for mobile capabilities and other enhancements. And that's been very well received on a global basis as you might have seen some of the announcements.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Balance on the revolver?

Daniel N. Leib

Yes, it was $327 million.

Operator

Next question comes from Hale Holden of Barclays Capital.

Hale Holden

I just had 2 quick ones. There were some headlines in the press 2 or 3 weeks ago on Amazon potentially printing their own books in their own warehouses, sometimes it's hard to tell from the outside if that has an effect or if it’s a risk or something you could participate in.

Thomas J. Quinlan

Yes. Look, there's many, many people that are out there in the marketplace today that are touching what used to be a space that no one wanted to go anywhere near, whether it was printing, distribution or warehousing. So look, there's always opportunities in our minds as things unfold and as things take place. And we are the largest by far, we're the most efficient in the marketplace. As I talked to you earlier about, we can have a closed loop for any of our partners as we go through things. So again, we think there's some opportunities out there in the marketplace.

Hale Holden

Okay. Second, when you think about your International businesses broadly, are you at scale in the geographies that you want to be in? Are you in the geographies you want to be in? I mean, we've seen good growth out of Latin America, Europe has obviously been soft. But just holistically, are there parts of the business that are less strategic or more strategic?

Thomas J. Quinlan

I would tell you we are in the locations that we think we need to be in. I think if you look at the economies, the literacy rates, the political stabilities of where we're at, we feel pretty good that our predecessors’ predecessors have set up shop in great areas for us that we think serve us well.

Operator

Our next question comes from Scott Vogel of DK Partners.

Scott Vogel

Could you just provide a little bit of color on the impact of paper pass-throughs on your top line growth?

Daniel N. Leib

Yes. So in the quarter, it was $10 million and so that's $10 million less. And that is -- no margin attached to that.

Scott Vogel

Okay. And then in your guidance, you mentioned the impact of certain tax issues or the resolution of certain tax issues. Can you provide some further details on those and if those are going to be cash inflows or outflows?

Daniel N. Leib

Yes, in the quarter, we had resolution, a favorable resolution, which will be cash in future years. In the guidance, I think, we noted that last year second quarter had a couple of positive discrete items that drove the rate down. And that's what causes the difference between the last year's rate and this year's rate, which is a more normalized rate.

Thomas J. Quinlan

And second quarter this year isn't as friendly to us as it was last year. But no excuses, we know what we've got to do and we got to overcome it.

Operator

Our last question comes from Ted Shiung of Archview Investment.

Ted Shiung

Can you guys just talk a little bit about the pension cost and what happened there? I think you guys have said that was favorable to you. And if you guys can quantify it as well as just the offset that you said around the 401(k) match.

Daniel N. Leib

Yes, sure. So if you look at what we disclosed in the K when we filed, we expected pension to be roughly $100 million or so better than the prior year, obviously an offset on the 401(k) match. And then we had, for a full year, a replenishment of the incentive plan. And those roughly offset one another on a full year basis.

Ted Shiung

They offset one another. Okay. And then on the rebate side, just to dig in a little bit more, is that cash that's coming back or is that just, I guess, an accrual that you reversed?

Daniel N. Leib

Yes, it's the latter. It's an accrual that we reversed.

Ted Shiung

Okay. And does that ran through revenues or is that a negative cost item?

Daniel N. Leib

It's through revenue. It's a contra account receivable.

Ted Shiung

Got you. And is that in your EBITDA? Is that -- would that be a onetime item or is that...

Daniel N. Leib

It's an EBITDA number.

Ted Shiung

It's an EBITDA number. Okay. And then the last thing, just the margin pressure on International. I understand you're probably working on that, but is there any guidance you guys can talk about a little bit as how that progresses through the year?

Daniel N. Leib

,

Yes. I mean, I think, I would say we're working on it. There is, on the overall gross profit line things, and if you look quarter-to-quarter sequentially, there was improvement in the first quarter this year relative to Q4. There's some seasonality that flows through the numbers. But as we look going into Q2 through Q4, we do see some improvement on a year-over-year pace of change.

Ted Shiung

On the year-over-year pace of change.

Daniel N. Leib

So first quarter was down 130 basis points, and as you get through the year, we expect that to start to moderate and be better moving through the year.

Ted Shiung

But for the full year, is it probably down a little bit?

Daniel N. Leib

I haven't broken out guidance on it. I think if you look at it in 2011 versus 2010, gross margin was down about 30 basis points. So we obviously saw a bigger decline in the first quarter. And a lot of that is mix, as we talked about.

Thomas J. Quinlan

Appreciate everybody joining the call today. Thank you, and we look forward talking to you in no later than 90 days from today. So thank you.

Daniel N. 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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