R.R. Donnelley & Sons Co. Q1 2008 Earnings Call Transcript

May. 6.08 | About: R.R. Donnelley (RRD)

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

Q1 FY08 Earnings Call

May 06, 2008, 10:00 AM ET

Executives

Daniel N. Leib - Sr. VP, Finance and IR

Thomas J. Quinlan III - President, CEO, Director

Miles W. McHugh - CFO, EVP

Analysts

Matthew Troy - Citigroup

Charles Strauzer - CJS Securities

Piyush Sharma - Longbow Research

Edward Atorino - The Benchmark Company

Operator

Good morning. My name is Nickisha and I will be your conference operator today. At this time, I like to welcome everyone to the First Quarter 2008 Financial Results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you. Mr. Leib, you may begin your conference.

Daniel N. Leib - Senior Vice President, Finance and Investor Relations

Thank you, Nickisha. Good morning and thank you for joining us for R.R. Donnelley's First Quarter 2008 earnings 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 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 provide you with useful supplementary information concerning the company's ongoing operations and are an appropriate way for you to evaluate the company's performance. They are however provided for informational purposes only. Please refer to the press releases and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We have also posted to our website in the Investor's presentation section a description, as well as reconciliations of non-GAAP measures to which we will refer on this call.

We are joined this morning by Tom Quinlan, Miles McHugh, Drew Coxhead, and Sue Bettman.

I'll now turn the call over to Tom.

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

Thank you, Dan. Good morning, everyone. I would like to frame our review today of the first quarter's results and our take on the balance of 2008 by briefly revisiting a discussion that we had last year. When we convened in August of last year, one of the issues that we talked about was the rationing of credit and the impact that we foresaw this and other emerging trends having on our industry, our customers, and business conditions in general. We saw it coming and we quickly reacted.

Economic conditions have turned out to be generally consistent with what we anticipated. Going into 2008, we budgeted for these conditions, we redoubled our selling efforts, and we even further tightened our cost controls. As a result, we were prepared for what we encountered during the quarter. We worked through it successfully and we feel very good about how we are positioned to achieve our full-year guidance.

Before Miles takes you through the quarter in detail, I will touch on our performance and then briefly address three topics. First, what differentiates R.R. Donnelley and how what we have built here positions the company to perform in even the most challenging economic environments. Second, our strong financial performance and the business discipline that we practice every day. And third, our ability to deliver continuing long-term results and what this means for our expectations for the balance of the year and beyond.

With regard to our performance during the quarter, hats off to our employees for a great job. In the first quarter, non-GAAP earnings per diluted share from continuing operations were $0.69, up from $0.66 in the first quarter a year ago. You will recall that we were going up against a very strong 2007 Q1, a quarter in which we identified some one-time gains.

Revenues were up 7.3% versus the year-ago quarter. Despite the difficult overall business environment, we posted pro forma organic revenue growth against the same quarter a year ago and achieved solid operating margins of 9.2%. We are certainly not immune to the impacts of border economic conditions, but as our results demonstrate, we have been working hard to build our resistance.

During the quarter, we completed the strategic acquisition of Pro Line Printing, whose capabilities for producing offset retail inserts and in-store circulars expanded our geographic footprint and better positioned R.R. Donnelley to serve national advertising programs. Without missing a beat, our experienced team began to integrate Pro Line Printing's outstanding facilities into our platform. We also announced approximately $1 billion in multi-year contracts that continue and expand important customer relationships around the world. We are especially proud that our employees earned these results by delivering exceptional value to our customers, while continuing to make a real difference through corporate citizenship.

For example, Hormel Foods presented R.R. Donnelley with its Spirit of Excellence Award, recognizing our people's active role in supporting the company's continuous improvement process. MedAssets, which serves more than 125 health systems, 2,500 hospitals, and 30,000 non-acute care healthcare providers, recognized R.R. Donnelley with Platinum Award status, a designation honoring results that provide cost-savings and improve customer satisfaction. These awards for print-based relationships were echoed by another supplier award that illustrates the diversity of our offering.

DuPont presented R.R. Donnelley with its Challenge Award in appreciation for the work that we have done to provide them with a full suite of litigation support services. In particular, DuPont noted R.R. Donnelley's combination of U.S. and offshore resources for providing sustained cost effectiveness and seamless collaboration with other providers. In an article in Time Magazine, DuPont credited R.R. Donnelley's outsourcing services with providing $500,000 in savings.

We also continue to develop proprietary capabilities that deliver savings for our customers. Our logistic services encompasses a broad range of capabilities from co-mailing operations that help customers to mitigate postal cost to coordinating expedited deliveries of time-sensitive materials. We are the single largest provider of print-related logistics in the United States.

Yesterday, we announced our new Variable Trim Binding or VTB technology. VTB is a real breakthrough that will enable us to allow catalogers and other mailers to co-mail variable-sized products. This creates a significant advantage. Today, co-mailing pools can include only same size pieces. Our innovation opens the door for more customers and more pieces to enter our co-mail pool. This powerful new capability will help to mitigate postal costs for our customers and will drive additional revenue into our production and logistics platforms.

We recently joined the Environmental Protection Agency’s SmartWay Transport Partnership. This is a volunteer partnership between EPA and the freight industry. Its goal is to increase energy efficiency, while reducing air pollution and greenhouse gas emissions. The EPA scores participants and I'm happy to report R.R. Donnelley will enter the partnership with the highest possible score. Again, this demonstrates our approach of blending cost effectiveness and environmental responsibility. Our scale, proprietary Internet-based systems, global network, and end-to-end capabilities can create measurable savings that are especially attractive to customers when economic conditions tighten.

During the quarter, Printing Impressions magazine described some of the many ways that R.R. Donnelley is demonstrating that sustainability, does not have to involve a choice between being cost-effective and being conscious of environmental impacts. We believe that the best practice is to pursue these goals simultaneously. For example, we were very pleased that our 1.3 million square foot printing operation in Willard, Ohio was recognized with a Water Pollution Control Industrial Pretreatment Award. Similarly, our facility in Greeley, Colorado, one recognition from the Environmental Action Stewardship partnership for actions taken to reduce emissions and use natural resources wisely.

The underlying strengths that allowed our employees to deliver these strong financial results, to integrate acquisitions without taking their eyes off the ball, to expand long-term customer relationships, and to be responsible corporate citizens, point to the first topic that bears discussion. How the diversity of our offering, our scale, and our management approach differentiate R.R. Donnelley.

Our approach has been to build scale across a diverse platform that serves a diverse and geographically dispersed customer base. This strategy is paying off. The 10-K and our Annual Report shows that every one of our U.S. Print and Related Services and International reporting units grew revenue in 2007. In terms of product diversity, you can also see in the 10-K that our largest single products and services offering, magazines, catalogs, and retail inserts, represented less than 27% of our revenues worldwide. And even in the magazine, catalog and retail inserts category, we serve two distinct groups of customers, multi-channel merchants and magazine publishers.

Another way to illustrate our platform diversity is by looking at our customer base. Our 100 largest customers in North America alone last year comprise organizations in a wide range of different market segments. Our diverse customer base includes organizations in healthcare, consumer packaged goods, government, non-profits, business and consumer services, telecom, logistics and entertainment, as well as our usual stronghold in publishing, retail, and financial services.

Within these accounts, our relationships are anchored by a wide variety of products and services. In 78% of those accounts, we have significant positions in three or more product categories. And in 42%, we have strong positions in five or more product categories. There is definitely room to grow. We can increase our wallet share in every single one of these account relationships and we focus on that every single day.

The second topic I want to address is the strong financial performance enabled by the business discipline that we practice. R.R. Donnelley offers a unique combination of scale and agility. As I just described, R.R. Donnelley has scale advantageous across the breadth of our platform, but our size does not diminish our ability to be responsive to our customers, to take advantages of opportunities for the right acquisitions, or to respond quickly to emerging business conditions.

Our people get it when we indicate that we have to sit on discretionary spending. They understand the difference between spending that can be avoided and not which is urgent and mission critical. They also understand how imperative it is to increase the top-line in the right way. Our talented sales professionals focus on gaining wallet share with the right customers in the right deals. Since 2003, all of this has enabled us to achieve compounded non-GAAP EPS growth of 22%, provide compounded growth in EBITDA of 32%, and deliver compounded growth in EBITDA less CapEx of 35%.

Now I'd like to address what we see for the balance of the year. As I mentioned, we haven't been seeing any surprises. We plan for the conditions that the economy is experiencing. We have engineered right into the business the ability to make fixed cost variable, and our employees have consistently shown an ability to maintain financial discipline and to drive increased sales and earnings. All of this enables us today to raise the lower end of our full-year 2008 guidance for fully diluted non-GAAP earnings per share from $3.05 to $3.08 and to reaffirm the higher end of our guidance at $3.15. And while non-GAAP tax rates may change a bit from year-to-year, with tax rates equalized, we are projecting non-GAAP EPS growth of between 11% and 12% in 2008.

Our long-term goal is to increase EPS on an equal tax rate by 10% or more per year, and we expect to consistently deliver strong cash flow. We intend to achieve this through organic growth and investment, through acquisitions, and through the deployment of capital, while maintaining our investment grade ratings. We have ambitious operating objectives, but I'm confident in our employees’ ability to achieve these goals out of the advantages that we take to market every day. When you look at the breadth and performance excellence of our platform, the relationships that we are establishing, expanding and sustaining, the diversity and upside potential of our customer base, the scale advantage that we enjoy, and the innovations that we are deploying, it is clear that we've been building a lot of momentum during the past four years, and we are ready to keep it going.

And now Miles will take you through our results in detail. Miles?

Miles W. McHugh - Chief Financial Officer, Executive Vice President

Thank you Tom, and good morning. Overall, we are pleased with our first quarter performance as non-GAAP earnings per diluted share increased 4.5% to $0.69 in the first quarter of 2008, compared with the prior year’s first quarter non-GAAP earnings per diluted share of $0.66. You will recall that in last year’s first quarter we had a one-time expense reversal of $5.8 million or $0.02 per diluted share associated with the forfeiture of accrued post-retirement benefits due to the voluntary retirement of our former CEO. The integration of our recent acquisitions Banta, Perry Judd's, Von Hoffmann, and Cardinal Brands has proceeded well and these acquisitions have had a positive impact on our results. Additionally, in the quarter, we announced and closed our acquisition of Pro Line Printing and welcomed their employees to R.R. Donnelly.

Our consolidated non-GAAP operating margin of 9.2% represents a 44 basis point decrease from the first quarter of 2007 reported results. The inclusion of the acquired companies that collectively carried historically lower margins negatively impacted our combined margins. On a like-for-like basis though, adjusting for the acquisitions, operation margins declined only 1 basis point. In addition, foreign exchange negatively impacted operating margins by 28 basis points, and the one term reversal of CEO compensation in last years' first quarter benefited that quarter’s margin by 21 basis points. The benefits of our productivity efforts were offset in part by pricing pressure and less favorable product mix.

Consolidated net sales in the first quarter were $3.0 billion, an increase of 7.3% over first quarter 2007 net sales. This increase was due to acquisitions and favorable foreign exchange rates, offset in part by continued price pressure and volume declines. Pro forma growth, which presents the acquisitions on a comparable basis, was 1% over the first quarter of the prior year. Favorable foreign exchange comparisons accounted for a 187 basis points of our pro forma first quarter growth. Paper prices and their changes did not significantly impact our revenue. So, on a like-to-like basis, our net sales were slightly down in the quarter, mainly driven by the slowdown in the U.S. economy and some unfavorable trends for us in our European operations. I'll discuss those factors in more detail when I review the segment performance in a few minutes.

Our gross margin was 26% in the first quarter compared to 26.4% in the quarter for 2007, due to the inclusion of the acquired companies that in aggregate carried a lower margin historically and unfavorable business mix, as lower-margin international growth exceeded domestic growth more than offsetting the benefits from productivity efforts and lower incentive compensation expense. On a like-for-like basis, adjusting for the acquisitions of Banta, Perry Judd's, Von Hoffmann, Cardinal and Pro Line, gross margins decreased approximately 11 basis points.

Our SG&A, as a percentage of revenue, decreased to 11.5% in the first quarter from 11.6% in the first quarter of 2007, due to the benefits of our productivity initiatives, lower incentive compensation expense, and additional sales volume. On a like-for-like basis, adjusting for acquisitions, SG&A, as a percentage of revenue, decreased by approximately 7 basis points compared to the prior year's first quarter. Depreciation and amortization expense in the first quarter was $157.6 million, a $15.4 million increase over the $142.2 million reported during the comparable period a year ago, primarily reflecting the impact of the acquisitions.

GAAP operating income, including restructuring and impairment charges, was $269.7 million in the first quarter of 2008, compared to operating income of $258.5 million in the first quarter of the prior year. As I mentioned, excluding restructuring and impairment charges, non-GAAP operating margins decreased 44 basis points to 9.2% from the first quarter of 2007.

Net interest expense was $57 million in the quarter versus $53.4 million in the comparable quarter one-year ago, primarily due to the incremental borrowings associated with our 2007 acquisitions. We recognized GAAP income tax expense of $35.4 million. The tax rate on GAAP earnings decreased to 16.3% in the first quarter of 2008 from 32.8% in the first quarter of 2007, reflecting a $38 million benefit from the favorable settlement of certain federal income tax audits for the years 2000 through 2002.

Our non-GAAP earnings per diluted share from continuing operations increased in the first quarter of 2008 by 4.5% to $0.69 per diluted share compared to 2007. Non-GAAP earnings from continuing operations exclude impairment and restructuring charges and in 2008 exclude the benefit of the favorable settlement of the federal tax audits.

Now, let's turn to first quarter results by operating segment. Our U.S. Print and Related Services segment reported top-line growth of 6.6% to $2.2 billion. Pro forma sales decreased 1.2% as downward price pressure and volume declines in commercial print, directories, and forms more than offset sales increases of logistics services, labels, and catalogs.

Commercial printing sales decreased following a record first quarter in 2007, due to volume declines resulting from the economic slowdown. Label sales increased due to new customer contract, while sales of forms decreased due to increased price pressure and lower demand for consumable forms products. Sales of variable printing products, which include statement printing and direct mail, grew due to higher volume of mailings for non-profit customers. Sales of financial printing remained consistent with the prior year.

Non-GAAP operating margins decreased 43 basis points to 12.1% in the first quarter of 2008 as the benefits of our productivity efforts were offset by the inclusion of the acquired companies than in aggregate carried a lower operating margin historically. On a like-for-like basis, including these acquisitions in both periods, operating margins increased 17 basis points from the first quarter of 2007 to the first quarter of 2008.

Our International segment’s reported sales grew 9.5% to $756.4 million, primarily due to the favorable impact of foreign exchange rates, the full-quarter impact in 2008 of our acquisition of Banta, and increased sales of our offerings in Asia, Latin America, and Global Turnkey Solutions, partially offset by continued price pressure. Pro forma sales increased approximately 8.1% of which foreign exchange accounted for 756 basis points. Non-GAAP operating margins decreased 126 basis points to 6.8% in the first quarter of 2008.

On a like-for-like basis, non-GAAP operating margins were down 109 basis points, due to foreign exchange rate changes that accounted for approximately 100 basis points of the margin decline, an unfavorable product mix, and continued price pressure.

Finally, excluding restructuring charges, our unallocated corporate expenses decreased $3 million to $47.2 million in the first quarter of 2008, due to cost reductions from productivity efforts and decreases in employee benefit cost that more than offset an approximately $9 million increase in bad debt expense in the first quarter 2007 reversal of post retirement benefits for our former CEO.

During the first quarter of 2008, we spent $71.9 million on capital expenditures, a decrease of $37.5 million from the first quarter of 2007. We expect 2008 capital expenditures to be approximately $400 million, an $80 million decrease from 2007, as we leverage the capacity that our acquisitions have provided and we continue to realize the benefits associated with optimizing our platform.

This $400 million expectation represents a reduction of approximately $25 million to $35 million from the full-year 2008 capital spending guidance that we gave you earlier in this year, as we have been carefully adjusting our planned spending to match the changing needs of our customers and our business in these more challenging economic times.

In the first quarter, we generated $125 million in cash from operations compared to last year's $221.4 million. The decrease of $96 million is comprised of an additional $37 million scheduled semi-annual interest payment in Q1, 2008 versus Q1, 2007 on our $1.25 billion bond issuance in January 2007, the timing difference in payment of planned level incentive compensation and a larger decrease in accounts payable and accrued liabilities due to the timing of lender payments and others. All these are first quarter only items and we expect operating cash flow for the remainder of the year to track more closely with last year's pattern.

Our balance sheet and liquidity continue to be very strong. Our debt is approximately 81% fixed at an average cost of 5.5% on our fixed-rate debt. Our next long-term debt maturity is $400 million in April of 2009, and we maintain strong investment grade credit ratings. Net debt at the end of the first quarter was $4.1 billion. As of March 31, 2008, we had a $1.1 billion of available liquidity under our committed revolver and $398 million of cash. Our revolver is a fully committed facility that extends through January of 2012.

Our non-GAAP EPS guidance from continuing operations in 2008 is in the range of $3.08 to $3.15 per diluted share. Regarding earnings seasonality, we expect to realize a larger bottom line benefit from Cardinal Brands and Pro Line Printing in the back half of the year, as we more fully integrate those recent acquisitions. So, earnings growth will be higher in the second half of 2007 than in the second quarter.

Underlying our full year non-GAAP EPS guidance are the following assumptions. We expect softer economic conditions to continue throughout the year, generally consistent with what we saw in the first quarter. With our broad product line and service capabilities, we continue to expect top-line growth, adjusted for acquisitions, to be in the low-single digits, producing total revenue in a range of $12.35 billion to $12.45 billion. We also continue to expect our 2008 non-GAAP operating margin to be slightly better than our 2007 margin, based on sales growth and productivity initiatives offset in part by continuing price pressure. We expect $640 million in depreciation and amortization expense, inclusive of our approximately $130 million in estimated purchase accounting amortization. We expect net interest expense of approximately $235 million during the year and a non-GAAP effective tax rate of between 33% and 34%.

We continue to employ a balanced approach to capital deployment. Since our last conference call, we completed the Pro Line acquisition for $122 million, we purchased 2.7 million shares at a total price of $78.7 million, paid our dividend, and invested in our platform, all while maintaining strong investment grade credit metrics. Through a combination of solid earnings growth and disciplined capital spending, we expect EBITDA less CapEx to grow by greater than 15% in 2008.

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

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

Thank you, Miles. Nickisha, now we'll open it up for questions.

Question and Answer

Operator

[Operator Instructions]. Your first question is from the line of Matt Troy.

Matthew Troy - Citigroup

Good morning. Couple of questions. Given the slower economic and macro environment, and obviously [ph] always when you hit low watermark, externally, good time to look at the business from a portfolio basis. It's an opportunity, are you guys examining potential dispositions? I know with Banta you picked up some international forwarding or distribution operations. I know that with Astron there were some non-core businesses there. Just curious, if you are looking at the portfolio and view the current environment as an opportunity potentially to just limit the margin where some business may not be carrying the water?

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

Thanks, Matt. What I would tell you is that, Matt, no matter what the economic conditions are, we look every day at the portfolio. What I will say products and services that we have both from an acquisition standpoint, as well as from a disposition standpoint. And obviously our goal here is to serve customers and have that translate into return for our stakeholders, both you as a shareholder and others. Again, we look at it every day and we see what we can build on, what we can… maybe by some subtraction give us addition, and… you know that's something we are cognizant of.

Matthew Troy - Citigroup

Thinking about some highly publicized troubles at one of your larger competitors and frankly across a smattering of mid-sized competitors as well. I was wondering if you could help us put some of these struggles into competitive context? Are you seeing an influx of inquiries, are you hearing from customers that are looking to expand share of print wallet with R.R. Donnelly because concerns of stability elsewhere? If you could just put it into context, I think the market rates it two ways, one, struggles and troubles at a competitor might mean bad thing for pricing, on the negative side, but two, opportunity for share gain, intermediate and longer term. Can you just help us put it to competitor perspective, what some of these struggles might mean for Donnelly? What are you seeing?

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

Sure Matt, I think one of the… the theme to I think, sort of my speech today was try to get across the things that differentiate us from other people. And I won’t talk about, again what's going on with people that are in our industry, that are form… tough times financially or about to go to bankruptcy, in bankruptcy, whatever it maybe, but the thing we wanted to get across today, to emphasize to everyone is to make sure they understand why we are different and what differentiates us. Pricing has always been tough. So, whether we have people that are out there that are in conditions that they are or not, that's always the case. The niche printers that you see out there that maybe have one product or two products, these are times when someone like us with the platform that we have, we can bring so much more to our customers’ business, that this is the time to where we should actually look to shine. This is a time where sales operation supports that, this is where we can truly… people can see the difference of what we’ve built and what we can do for them. Just on the logistics end. Now, the co-mail that we talked about, the press release that we did yesterday, because of our scale, we will be able to go ahead and bring savings to our customers that are there. I think we're seeing more than ever before people being receptive to asking us what can you... what more can you do for us. And it's not just on pricing, it is how can you make our processes better, how can you make us more efficient. It's almost as if a consultative type of arrangement where we walk in now with all the things that we have. And it maybe stuff to that we don't currently print. I mean we do… it's kind of funny when we see some people out there that are acting as print brokers. We do approximately $1 billion in what I'll call buying a print for our customers and that number dwarfs whatever anybody else has gone on out there, and that gives us the ability again to take our scale to them, for us to go ahead and bring savings to them. And it gives us another opportunity, the offshoot of that is, as John Pollen [ph] recognizes, that gives us an opportunity to figure out, is there an acquisition that we want to make because of the fact that we are dealing with another particular printing company. So, a long-winded of answering. But, I would tell you look, we are seeing... we are in good shape obviously by the metrics that we talked to you about today, by how we feel about the rest for the year, by the way we go about managing this business, which I think again we try to keep it simple, we put the customer first, it's always about the customer, we've got to go ahead and improve their ROI, we got to make their communications with their employees, their customer better than what they were before. Our goal is to help them achieve objectives. Again putting them first on our minds has enabled us to continue to do what we were doing and continue to see where we can have a… you know fight through this storm for 2008 and come out even stronger when the economic conditions change.

Matthew Troy - Citigroup

Thank you. And last question on that front. If I look at your EBITDA less CapEx, it was up I think close to 20% and the cash flows are strong. You talked about capacity on your balance sheet, certainly ample there. If I look back over the last 10 years, Donnelley and the current management team, the M&A cycle typically for you guys ebbs and flows over a 12 to 18 month period. Banta was about somewhere between 12 and 18 months ago. We are in an environment where arguably valuation should be more reasonable as printer struggle with the macro environment. I reconcile that with your cash flow and your appetite and the historical deal cycle, is it unreasonable to assume that you might see a re-acceleration in your M&A strategy over the next, let's call it, six months as the industry starts to feel the pinch more acutely from the macro slowdown, are deal evaluations more attractive now?

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

Again Matt, let me take you a little bit off course here, but just again, what we've done with capital in the last four years, we have used it for acquisitions without a doubt over the last four, 4.25 years. But, we've purchased close to 19 million shares at $661 million, we’ve paid dividends of over $930 million, we have given back about $1.6 billion to shareholders in the forms of repurchase of shares or dividends in the last four years on top of what I'd call interest payments in excess of $600 million and capital expenditures were $1.7 billion from an organizational standpoint, while not stopping the business. When we look at the acquisitions that are out there it always comes down to, what does it do for the customer and where do we see ourselves with the customer. And the valuations that are out there that we see, some of them may be in line right now, some of them may be what we think are a little too high, but at the same time, we need to look at, odes it further ingrain us into our customer, does it offer a new product or service for our customer, does the cost structure allow us to come in there and make an impact to it, and then, third, does it have capacity. We have been disciplined in the print acquisitions that we have done, and I don't think you are going to see us change from that standpoint. And again, as the customers, as we look at what we call the master plan that John and Dan put together, in three years out, we see what contracts are coming due, that are out that we want to be part of, where our customer is going. The big thing for us is being with the right customers. We're with customers that are doing no acquisitions, we're with customers that are growing organically. We can bring the whole value of the platform from pre-media to logistics to bear when in fact we have got customers like that, which again I don't think our competition has the luxury of having people like that as a customer base.

Matthew Troy - Citigroup

Got it. Thank you.

Operator

The next question is from the line of Charles Strauzer.

Charles Strauzer - CJS Securities

Hi, good morning.

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

Hi, Charles.

Charles Strauzer - CJS Securities

Matt asked most of the general questions I was going to ask. Touching up on the last point in the M&A cycle, when you kind of look at the... the world of printing over the last recession back in post 9/11 and now coming into this current recession, you typically have seen printers who are kind of in more of the totally [ph] consolidated role become more active there and I think that's [inaudible] that brings up, I think utilizing your balance sheet and saving your powder to… keeping you dry for these kind of occasions as probably been a choice in your part. But. I think some would argue that you are still probably under levered for the size of the company you are and the cash flow that you generate. Are you seeing more activity on the pipeline side in terms of people coming to the deal and saying, we're more willing to talk now that we might have been say six or 12 months ago.

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

Our pipeline has never been as big as it is today. But, you go back to the recessions Charles that you quoted, don't forget customers have consolidated. There has been consolidation with vendors, so that the... what I would say for the recessions that if one wants to go back and look at, it is different from this standpoint that there obviously is less supply out there than existed previously. But, the company that we’ve built here is completely different. We've got great things going on in financial services. We have got great things going on in our book and directory marketplace. But, as I talked about, we're not dependent upon any one product line. So then, if you take that and go forward and look and see what opportunities are out there from an acquisition standpoint, we will make sure that we continue to be disciplined at this point in time. We've got the ability again to look at certain properties, I will call it, that can make us stronger, make us better, and those we’ll continue to look at. But, again, you have to have a willing seller and some of these people again are at the point in their careers and their lives where they don't want to go ahead and re-mortgage the business. And that's what some of them have to do to stay up with the technology that's out there. Their second, third generation family members that own these printing companies that are, what I'll say, interested in monetizing them and their children or their heirs don't want to be a part of it. So, now that puts in the problem that you go ahead and re-mortgage the business and you are going to be... that's going to be yours now on a go-forward basis, you don't have an opportunity to pass it down and that's where we have conversations with people as far as what we can do.

Charles Strauzer - CJS Securities

That's great. Picking it from there, if the negotiations take longer or maybe you just don't find willing sellers in the near-term, are you going to continue to buy back stock, or maybe need to get more aggressive in buying back stock?

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

I would continue to say I would hope after this period of time with people that we built up enough trust and confidence in us as far as the way we're managed this business that we will look to pull all the levers as we see fin [ph]. Obviously, as I sit here personally today, look at the stock price where it is and obviously feel that it's under valued and at the same time I know what our pipeline is, I know what we've been able to do from an organic investment standpoint. And just to stay there for a second, I mean if you take what we've got going on, that Miles talked about capital, we went to One R.R. Donnelley last year. And when we went there, one of the things, the benefits that we're seeing this year is that we were able to go ahead and have a centralized approval process for the whole platform on a worldwide basis to look at capital, so that we're able to go ahead and take sheeters [ph], blanket washers, inserters, poly bags [ph], whatever it might be and we're able to put those where they needed the most without spending the capital or with having that capital than go towards other particular projects. And when we went… when we were looking at, it's probably over 100 presses from offset, rodo, to, what I'll call, installations of co-mailers, binders, stitchers, that we never missed a beat here in going ahead and putting those in, and hats off to all of our operational people and planners for being able to do that. But, we have been able to do those installations, while again growing the top-line, growing the bottom line, and with our safety record, improving each and every time. So, when somebody comes on to our platform with the experience, with the acquisitions that we've did in 2007, 2008, those people feel good because they know they are empowered. We empower them to go ahead and be printers again. We fill those plants up. So, if you are a seller of your business with us, there is a great opportunity that the people that you have working that have worked there for years that again I have the ability to continue to have employment and be part of a growing platform that is exciting to be around.

Miles W. McHugh - Chief Financial Officer, Executive Vice President

I will add to that, that all that Tom said, we want to continue to do within an investment grade credit boundary just because we found it very important and very rewarding for our customers and in growing our business, and that's another differentiator between ourselves and some of our competitors. So, all of that Tom said within that boundary makes a lot of sense for us.

Charles Strauzer - CJS Securities

I think you've done a very good job of keeping a good balanced approach in terms of capital deployment. Thank you.

Miles W. McHugh - Chief Financial Officer, Executive Vice President

Thanks.

Operator

The next question is from the line of Piyush Sharma.

Piyush Sharma - Longbow Research

Good morning, gentlemen.

Miles W. McHugh - Chief Financial Officer, Executive Vice President

Good morning, Piyush.

Piyush Sharma - Longbow Research

Double questions. Firstly, on your international business that decelerated meaningfully from about mid-single digit growth last couple of quarters to almost flat ex FX, just maybe if you could give some color on that?

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

Sure, I think the same thing that applies here in the state is applying overseas. I mean we are not losing customers, we are not losing business, but people are reducing page counts, people are pulling in some instances, what I’ll call, some of the events that they had planed, because everyone is going ahead and taking a look at their business in general. So, I think… hats off again to what we've been able to do to achieve the targets that we've been able to achieve. Our sales engine is still running, which is huge for us. We are not sitting by, we are getting new business in, and have been able to deal with the times that we've got going on right now.

Miles W. McHugh - Chief Financial Officer, Executive Vice President

Even in the international realm, the diversity of our products, businesses, customers and also geographies has really served us well, because certain areas of the world are doing better than other areas of the world, we've been able to keep a good balance on that. We are not immune from the ups and downs throughout the world. No different that we are here in the U.S., but the breadth of our... breadth and diversity of our business throughout the world really helps us work our way through these tougher times.

Piyush Sharma - Longbow Research

Tom, just a thought here, we have been hearing Chinese imports decelerating significantly as the Chinese economy reconciles with continued wage inflation and rising raw material and shipping costs. Have you guys noticed maybe any internal cannibalization as some volume maybe gets printed in the U.S. versus previously getting imported from China?

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

No. What I would tell you though that we see there is just… sort of again this is an aside or maybe a digression from the question, but I mean one of the things, containers that have left this country and gone over to China, they are not making their way back here to some extent because some of them are going over to Europe and as people get ready to order for the Christmas holidays, that is going to start to take place. But, I would tell you that we are not seeing any significant fall off in the numbers that we have right now that we are looking at. And don’t forget, by a book standpoint, which obviously doesn't effect China, as you think about what we are up against and when we try to compare… Harry Potter was something that I think we amongst many other people, a couple of people had participated in last year, that is an event that’s not taking place this year. So, as you think about comparables for this year, that's something that obviously we would have loved that you kept him alive and had another book. But, that's something that we are not going to make any excuse over about not having as we go through the rest of the year.

Piyush Sharma - Longbow Research

Okay. And could you provide some more color on growth drivers for logistics and catalogs in the quarter?

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

In the quarter?

Piyush Sharma - Longbow Research

Yes.

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

In the quarter… magazines are still... would... an important role in influencing consumer behavior. I think what you are seeing with the magazines, magazine publishers are looking more at social network promotions and more brand expansion, which again the type of magazines customers that we have, they are participating in that. Catalogs, there is still consolidation taking place, again postal cost, paper, petroleum cost, all those we’re helping mitigating for our catalogs that we were working with and they again looking to co-brand and brand expansions. They are looking at strategic relationships, with not only the Internet people, but with other retailers that they can piggyback off of. Again the printing costs, the printing component to our customers is the smallest piece and I think as we’ve talked to you about mitigating cost, we look to go ahead and mitigate what I’ll call the main manufacturing material costs, the warehouse and kitting fulfillment. Our catalog users and magazine publishers really appreciate what we were able to do because of our scale.

Piyush Sharma - Longbow Research

One housekeeping question for Miles. I mean... I know that you guys give your weighted-average interest cost on your fixed rated, but would you know what is the weighted-average spread over LIBOR on your variable debt?

Miles W. McHugh - Chief Financial Officer, Executive Vice President

The CP market has been very favorable lately and we have seen rates in the CP market at 3% or so... 3% to 3.5%.

Piyush Sharma - Longbow Research

That's it from me guys. Thank you so much.

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

Thank you. The next question?

Operator

Your next question is from the line of Edward Atorino.

Edward Atorino - The Benchmark Company

Yes. Good morning. Looking at the pro forma growth given the world out there, would it be too much to expect pro forma growth to hold even to be up a little bit for the year? Number one. Number two, interest expense $57 million, is that sort of a run rate? I know '09 is hundreds of years away, would interest expense sort of stay at that level? Thirdly, your tax rate over the balance of the year, would you comment on that? And then lastly, do you think you can squeeze some more out of SG&A as a percentage of sales as you continue to integrate the acquisitions?

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

Thanks for your questions. I'll take the last one first. Look, every day, every day that we are at this, we look to take costs out of this platform, but at the same time make us more efficient and lend that to helping our customers. So, if anybody ever tells you, you can’t out in ways that don't necessarily have to mean workforce reductions, we think that differentiates us from other people, us being One R.R. Donnelley, so that everybody, the silos have broken down. I don't have people worried about I have to get this job, you can't get it. We had 65,000 people here act as one. When we started this last year with what we were looking at, with what we saw in common. The fact that we were able to move this $12 billion entity in lockstep just says so much about our senior managers and our employees that we are at a point where we operate like that, which again I don't think is an every day occurrence in companies our size or even in companies less our size.

Miles W. McHugh - Chief Financial Officer, Executive Vice President

Your question about sales growth, I think for the full year, we're still anticipating the $12.35 billion to $12.45 billion estimate that we gave earlier. I think throughout the course of the year we're going to see the same dynamics that went on in the first quarter, where certain products showing growth, others a little bit slower as the economy impacts, some offset by price decreases that we've been seeing for years. So, I don't see any change from that. The tax rate that you mentioned, we're looking at 33% to 34% for the year on a non-GAAP basis and interest, we don't expect trends to be a lot difference than the $235 million that I mentioned earlier. So, it's pretty much what we expect.

Edward Atorino - The Benchmark Company

Thank you.

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

Thanks Ed. Operator, we’ll take one more question.

Operator

Your last question comes from the line of Robert [inaudible].

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

Good morning.

Operator

Robert, your line is open.

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

Operator, could you go to the next question?

Operator

There are no further questions at this time, sir.

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

Operator, we appreciate your assistance and appreciate everyone’s support and hopefully everybody has a good day and rest of the week. Thank you.

Operator

This conclude today's conference call. You may now disconnect.

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