Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

R.R. Donnelley & Sons (RRD) Q2 2012 Earnings Call August 1, 2012 10:00 AM ET

Operator

Welcome to the RR Donnelley Second Quarter 2012 Results Conference Call. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dave Gardella. You may begin.

Dave Gardella

Thank you, Christine. Good morning, everyone, and thank you for joining us for RR Donnelley's Second 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 useful, supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website, in the Investors section a description, as well as reconciliations of non-GAAP measures to which we will refer on this call.

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

Thomas J. Quinlan

Thank you, Dave, and good morning, everyone. During the second quarter, we posted GAAP earnings per diluted share of $0.49, up from $0.06 from the same quarter a year ago. Our non-GAAP EPS was also $0.49 and was driven by higher operating margins compared to a year ago. As we announced our results this morning, we also reaffirmed our 2012 full year guidance for non-GAAP earnings per diluted share in the range of $1.84 to $1.92, and we expect full year operating cash flow, less capital expenditures, of approximately $500 million. We have been clear and precise during our conference calls this year in outlining the 5 elements of our guiding strategy. While I will touch on all 5 today, the continuing implementation of 2 of these is particularly reflected by the improved operating margins and operating earnings that we posted during the quarter. These 2 are working to increase margins through continuing aggressive cost compression and leveraging our unmatched operating expertise, procurement scale and customer relationships in order to drive efficiencies and create revenue opportunities. As I have said before, these are core everyday activities, and we will continue to match our cost to our expected revenues.

Dan will take you through the results in more detail but before he does, I will touch briefly on how we are pursuing the other elements -- other 3 elements of our strategy as well. The first of these is our focus on winning share by aggressively pursuing all appropriate print opportunities across a diverse range of vertical segments and by using the comprehensive range of our integrated product and service offering as a key value-added differentiator. One example of these competitive advantages is the unique combination of our unmatched geographic reach and our advanced technology offering. I'll share an example. For a U.S.-based global industrial manufacturer, we used our exclusive self-service CustomPoint interface to win an opportunity to serve their locations in Canada, the U.S., Western Europe and Asia. Now for this customer, more than 2,000 users order any of 18,000 custom SKUs for either release from inventory or print-on-demand. Each of the 6,000 to 8,000 of this customers' orders each month are processed through CustomPoint and promptly routed to the nearest RR Donnelley service facility internationally.

The next pillar of our strategy is building on our relationships with customers internationally to sell more services that diversify and increase our revenue base. We are aggressively pursuing growth opportunities through our service offerings to help mitigate the impact of the secular changes occurring in some of the product categories we provide, and our services revenues are growing. During the second quarter, our services revenues grew 27.2% as compared with the same period a year ago. For the quarter, services represented 13.4% of our total revenues. Through the first half, service revenues are up 14.3% versus the same period in 2011 and represented 13.2% of our total revenues. We have a broad services portfolio. For example, we have more than 10 million of our customers' pictures, logos and other elements in our proprietary digital asset management system. We believe that we are one of the top 20 providers of translation services in the world, with an offering whose revenues are approximately 360% larger than they were in 2009. One very significant factor in the growth of our services revenue has been our ability to expand relationships with our customers to include more of our logistics offering. During the quarter, our logistics revenues increased 11.3% as compared with the same period a year ago. A number of factors are driving this. As I mentioned before, RR Donnelley has been named a top third-party logistics provider. We are leveraging our logistics scale to help customers move far more than printed materials through the lanes that we routinely run: Pet food, ketchup and mustard, golf clubs, car and tractor parts, vending machines, plastic school lunch trays and even locomotives are all example of freight moves we have managed. We are attractive to customers in 3PL space because of our scale and financial stability. Our scale, for instance, helps us to ensure availability of transportation resources during peak times, which can occur at different times in different shipping lanes throughout the year. For RR Donnelley, 3PL is a especially attractive because it requires no capital investment in fleets or ongoing expensive fleet maintenance.

Another factor underlying the success that we have been enjoying in the logistics arena has to do with proprietary software solutions that we have developed. For print customers, the total cost of ownership includes more than ink and paper. Transportation and postage are significant factors, usually accounting for more than 50% of the total costs associated with putting a finished piece into a consumer's hands. So helping to minimize transportation costs create significant competitive advantage for us. Our solution development professionals have created unique software programs that give us that edge. For example, we produced a number of long-run jobs involving catalogs or other types of mail. These projects might bind, address and ship from one or more multiple facilities over the course of 1.5 months. These finished pieces don't ship out of our plants all at once or on a single day. In the past, we produced mail projects like these in zip code sequence. But our proprietary software goes an extra step. It looks at a large job from a standpoint of minimizing postal costs and the cost of shipping the materials to the various postal processing centers around the country. It enables us upfront to load, plan the entire production run from a logistics standpoint. For just one recent project, this RR Donnelley software created logistics efficiencies that reduced the number of trucks required to deliver the project by 150. And by 150 trucks, I mean over-the-road tractor-trailers, not vans. Using 150 fewer truck shipments to deliver the same amount of freight on a single project creates a material cost advantage. These added efficiencies also make a contribution to sustainability by significantly reducing the number of freight runs required to accomplish the same distribution. Our developers are working to take the software and use it to create speed-to-market advantage for smaller productions that have to be executed within very tight windows. So our development pipeline for logistics solutions remains robust.

Another proprietary RR Donnelley system further automates and streamlines a logistics process called co-palletization of trade mail or co-pal trade. This involves consolidating letter mail provided by multiple customers in order to achieve more significant postal discounts. Without our co-pal trade solution, it is not unusual for a large mailer, such as a leading credit card provider, to find that 20% to 50% of their mail does not qualify for the lowest postage rates. With our co-pal solution and our significant mail volume scale, our customers can enjoy flexible mailing dates and be assured that they are obtaining the lowest postage rates. Now again, in addition to creating a logistics advantage, these innovations are helping in the change of the ROI for these communications. When you lower the cost of communication, you boost its value, making it more attractive for our customers to repeat and expand the program. We see these unique RR Donnelley logistics capabilities as the characteristics of our approach to every services segment: Develop proprietary solutions that create competitive advantage in a game-changing way.

The final pillar of our strategy that I'll touch on is the development of technology that serve important communication and supply chain needs for our customers. We have talked about the role our internally developed ProteusJet presses are playing in allowing customers to create more sophisticated, direct-response pieces to implement on-demand book production strategies and to take advantage of TransPromo opportunities. Let me share an example of what this RR Donnelley innovation means to customers in practical terms.

One of our large customers was using 2-color statements that were accompanied in the envelope by preprinted inserts. ProteusJet allowed us to help this customer make 2 significant changes to their communications process. It enabled the customer to move to a 4-color statement that uses printserts, which are marketing messages embedded in the billing documents themselves. This converted a supplied insert that we were placing into envelopes into a printsert that we produced ourselves. This drove revenue for us and cost savings for our customer. However, when it comes to selling via direct mail or TransPromo vehicles, which are transactional documents like statements that include promotional messages, the equation includes more than the cost of the printed piece. It factors in the piece's success in generating results. So what have the results been with -- the printserts been? As compared to the inserts? To date, these printserts have generated response rates 25x better than the inserts were yielding. As I said before, we are not naive to the impact of electronic distribution of documents. In fact, we are using e-services to create fresh revenue opportunities. For instance, last year alone, we used our PIVOT offering to e-deliver and archive more than 646 million pages of content on behalf of clients. However, we believe that when you deliver an innovative solution that yields a 2,500% increase in response rates for printed pieces, it helps to change the underlying economics of traditional statement delivery. ProteusJet is a difference maker, and we are continuing to develop similar game-changers in other segments as well.

Another area in which we are making quick advances in e-communications is our financial services business. We look forward to expanding our portfolio of solutions by welcoming the talented and innovative people of EDGAR Online to RR Donnelley during the coming weeks. This acquisition will add to the services that we can provide to customers as we help them meet their compliance needs and will also accelerate our product development initiatives. As always, we are preparing for fast-track integration, so that everyone can hit the ground running.

And now I'll turn it over to Dan to take you through the results in more detail. Dan?

Daniel N. Leib

Thanks, Tom. We are pleased with our second quarter results as we continued to see sequential improvement in both revenue and operating margin trends. GAAP operating margin of 6.5% in the quarter grew 210 basis points over the second quarter of last year, while non-GAAP operating margin improved 50 basis points in the same period. Both GAAP and non-GAAP earnings per diluted share were $0.49 in the second quarter of 2012. Our non-GAAP net earnings were driven by stronger margin performance, reflective of the cost management we discussed on last quarter's call, partially offset by a higher tax rate, as our second quarter 2011 non-GAAP earnings benefited from a lower tax rate due to 2 favorable tax adjustments, which I will discuss shortly.

Second quarter revenue of $2.5 billion declined 3.6% from the second quarter of 2011. Adjusting for 40 basis points of growth from the impact of 2011 acquisitions, $43.3 million, or 164 basis points, of impact from unfavorable changes in foreign exchange rates and $14.1 million, or 53 basis points, of unfavorable impact from lower sales of paper, organic revenue declined 1.9%. This was primarily due to volume declines and price pressure across several of our U.S. and International offerings, partially offset by volume growth in BPO, office products, global turnkey, logistics, premedia and Asia. The 1.9% organic revenue decline represents sequential improvement in the revenue trend compared to Q1 of down 2.3% and the year-over-year decline in the fourth quarter of 2011 of 3.3%. Second quarter gross margin was 23.5%, declining 100 basis points from the second quarter of last year. As with revenue, the gross margin trend improved in the quarter compared to the year-over-year decline in the first quarter of 2012 of 130 basis points, which included a 61 basis point positive impact from the customer rebate adjustment and a year-over-year decline in the fourth quarter of 2011 of 130 basis points. Unfavorable product mix throughout several of our offerings, unfavorable pricing on byproducts and price erosion more than offset cost reduction and lower pension and postretirement expense. The largest gross margin declines were experienced in our International segment, as well as in the book and directories offering in the U.S. segment.

SG&A expense in the quarter as a percent of revenue of 10.9% was 90 basis points better than the second quarter of 2011. Driving the improvement was lower pension and postretirement expense, as well as overall cost reduction efforts in our selling and administrative functions. Second quarter non-GAAP operating income of $198.4 million improved $5.7 million from the second quarter of 2011 and reflects a 50 basis point increase in the margin rate versus the second quarter of last year. Driving the margin improvement were lower employee-related expenses, savings from productivity initiatives, lower depreciation and amortization expense and a lower LIFO inventory provision, which more than offset the impact of volume declines and unfavorable product mix, price erosion, unfavorable pricing on byproducts and the reinstated 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 33.9% compared to the unusually low tax rate we experienced in the second quarter of 2011 of 19.5%. In the second quarter last year, our tax rate reflected a release of reserves related to the resolution of certain state tax audits and the release of valuation allowances on certain deferred tax assets.

From a segment perspective, revenue in our U.S. Print and Related Services segment of $1.8 billion declined by 3.9% from the second quarter of last year or 4.5% on a pro forma basis after adjusting for acquisitions. Reduced paper sales in the tonnage print offerings of magazine, catalog, retail inserts and books and directories contributed 112 basis points to the decline.

While we continued to see lower volume across most product offerings, the year-over-year trend improved versus the first quarter in our variable print, catalog magazine and retail inserts, financial print and book and directories offerings. We continued to see strong growth in office product, logistics and premedia, consistent with the first quarter. Excluding the impact of reduced pass-through paper sales, our catalog, magazine and retail offering declined by 1.2% in the quarter.

Non-GAAP operating margin for the segment of 10.4% improved 10 basis points from the second quarter of last year as productivity improvements and lower depreciation and amortization offset the volume declines and unfavorable product mix, unfavorable pricing on byproducts and continued price erosion.

Second quarter 2012 revenue in our International segment of $682.6 million declined $19.9 million or 2.8% from the second quarter of 2011 due to the negative impact of a 616 basis point or $43.3 million unfavorable change of foreign exchange rates. Increased paper sales, primarily in Asia, contributed $7.5 million or 107 basis points to the top line in the quarter. Consistent with the first quarter, we again experienced volume growth in business process outsourcing in Asia. Additionally, our global turnkey offerings saw a year-over-year volume growth in the second quarter. Volume in Europe continues to be challenged. Pricing pressure impacted most reporting units in the segment. Non-GAAP operating margin for the segment declined 90 basis points to 6.7% from 7.6% in the second quarter of 2011, an improvement from the 270 basis point year-over-year decline seen in the first quarter. The second quarter margin decline was caused by an unfavorable product mix, driven in part by increased lower margin but capital-efficient outsourced revenue, price pressure and wage and other inflationary increases, notably in Latin America and Asia, partially offset by lower depreciation and amortization, the favorable impact of changes in foreign exchange rates and productivity improvements. The 180 basis point improvement in year-over-year trend from the first quarter of 2012 is driven by savings from productivity and cost reduction efforts, favorable mix and a favorable impact from changes in foreign exchange rates.

Our second quarter 2012 non-GAAP unallocated corporate expenses were $38.9 million, a decline of $19.7 million from the second quarter last year. The improvement was driven by lower pension and postretirement benefits expense, lower LIFO inventory and bad debt provisions and targeted cost reductions, partially offset by higher employee benefits-related expense and the 2012 reinstatement of the 401(k) match.

Operating cash flow in the quarter was $61.9 million compared to $175.3 million in the second quarter of last year. A higher use of working capital primarily led to the $113.4 million year-over-year decline. 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 percentage of net sales was 14.9% at June 30 of this year, an improvement of 80 basis point over June 30 of 2011. Seasonality drove our working capital higher in the second quarter, but we expect to see working capital decrease in the back half of the year, consistent with 2011. As noted in this morning's earnings release, we continue to expect full year operating cash flow less capital expenditures of approximately $500 million.

Total debt as of June 30, 2012, was $3.8 billion, an increase of $6.1 million from March 31 of 2012, and $315.9 million lower than at June 30 of 2011. Our gross leverage ratio at the end of the second quarter was 3x, at the high end of our targeted range of 2.5 to 3x. Given the seasonality of cash flows, we expect our gross leverage ratio to decrease in the back half of the year and expect to end the year within our targeted range of 2.5 to 3x.

As of June 30, 2012, our term debt is 73% fixed at an average interest rate of approximately 7.4%. At quarter end, we had borrowings of $325 million under our $1.75 billion unsecured committed credit facility. Our liquidity is supported by cash holdings of $369 million at June 30, and our credit facility expires in mid-December 2013. At June 30, 2012, we had net available liquidity of $1.4 billion, and our next scheduled term debt maturity of $258 million is not due until April of 2014.

As we look ahead to the back half of 2012, we want to share our updated guidance for full year 2012. We expect revenue to be in the range of $10.4 billion to $10.5 billion, including the unfavorable impact of changes in foreign exchange rates and pass-through paper sales of approximately $160 million. Approximately $86 million of these negative impacts are reflected in our year-to-date results, and our guidance includes an approximate $74 million unfavorable impact for the back half of the year. Excluding the impact of FX and paper, we expect revenue to be approximately flat to 2011.

We expect our non-GAAP operating margin to be in the range of 7.2% to 7.3%. At the midpoint, this represents an increase of 25 basis points over previous guidance and an increase of 55 basis points over 2011's full year margin of 6.7%. Included in this range are corporate expenses of approximately $170 million to $200 million. As we look at the back half of the year, we expect the revenue and margin comparisons to be more favorable in the fourth quarter given the relatively easier comparisons we have in that quarter.

Depreciation and amortization expense is expected to be approximately $485 million, $15 million to $25 million lower than our previous guidance. Interest expense continues to be estimated to be in the range of $250 million to $255 million. Our full year non-GAAP tax rate is expected to be in the range of 30% to 34%. At the midpoint, this represents an increase of 150 basis points over our previous guidance and approximately 850 basis points higher than our 2011 rate. From a quarterly perspective, we expect this year's third quarter rate to be in the range of 33% to 37% and this year's fourth quarter rate to be in the range of 29% to 32%.

We project the full year fully diluted weighted average share count to be approximately 183 million shares. 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. We expect capital expenditures to remain in the range of $200 million to $225 million. Further, we continue to expect operating cash flow less CapEx of approximately $500 million, which is inclusive of approximately $205 million of cash contributions for our pension, 401(k) and postretirement plans. We issued an 8-K last week noting that these contributions are approximately $46 million lower than our previous estimates, primarily due to legislation recently passed that included pension stabilization provisions. On an after-tax basis, we expect the net impact to be less than -- an approximate $27 million change from our previous guidance.

From a leverage perspective, we expect our gross leverage ratio to decline in the back half, ending the year within our targeted range of 2.5 to 3x. Regarding capital deployment priority, we intend to fund our $1.04 per share annual dividend and pay down debt to remain within our targeted leverage range. We have not repurchased any shares year-to-date through June.

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

Thomas J. Quinlan

Thank you, Dan. Operator, we'll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Charles Strauzer of CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Tom, if you could talk a little bit about the efforts you're doing on the cost front and the impact on operating margins. Obviously, you did a very good job in Q2 here of keeping costs under control. How is that expect to kind of progress throughout the year? And I know historically, Q3 and Q2 kind of look similar from a revenue and operating margin perspective, is it likely to kind of be the same this year?

Thomas J. Quinlan

Thanks, Charlie. From a cost standpoint, I would hope that -- just thinking about it, I mean, the people that are around this call here, we've been together about 8 years of doing these calls. Some of you have known us for a longer period than that from the senior management team that have been on these calls. From a cost standpoint, we continue every day no matter what economic environment is to make sure that we manage this business appropriately and that we match our costs to our revenue. So I think we got ahead of things earlier this year from that standpoint, because we actually -- we didn't think -- we knew the year, we thought the year was going to be choppy and that the last 2 weeks of June, if nothing else, proved that point unfortunately for us. We would have had a heck of a lot better quarter from a top line standpoint, which would have fell to the bottom line, if not for the back half of June there. And you've seen most of the other companies that reported top line for the second quarter. The latter part of June was very similar to the entire quarter -- entire fourth quarter 2008 where everything just pretty much stopped. Slowing consumer spending, softening overseas demand and less investment by corporations back into their businesses led to one of the weakest quarters across the globe in more than a year. I think as we talked about at the beginning of the call, the diversity of our product services offering to a wide range of vertical markets, coupled with our disciplined cost management, enables us to achieve the results we did in the quarter and gave us the confidence to reaffirm our guidance here. I mean, you look across the globe for the back half right now, the global economy has little momentum, has a lot of uncertainty attached to it and the employment outlook still looks soft. The economic environment is brutal for our customers, suppliers and us but this is where RR Donnelley can bring the most value to our customers. We have the industry-leading scale. We have the unparalleled breadth and depth and a stable financial profile, allows us to reduce our customers' overall total cost and improve our customers' return on their investment.

So as you look at this economic environment in the back half, this is where we should shine and add the most value. We have an integrated solution with multiple individual components that allow customers to choose from a diverse mix of available offerings. What's going to get in the way of that in the back half of the year? From a top line standpoint, is what's going to happen to the United States consumer specifically? I mean, if, in fact, the disposable income gets hit again whether it's because of food prices going up as a result of the drought in the United States or if the oil prices go up because of escalation in the Middle East, that's going to impact how consumers spend in the back half. But as we came out of a tough June, we see July being okay. What happened at the end of June did not carry over to July, so we feel pretty good about that.

Charles Strauzer - CJS Securities, Inc.

And then, Tom, picking up on that, July, you said it seems to be a little bit better. When you talk to your sales force and looking at bookings going into the back half of the year and scheduling for press times, are you encouraged by what you've seen there so far?

Thomas J. Quinlan

Yes, I think -- again, this is a good day to have a good call on all the craziness going on with postal and some other things throughout the world. But as you look at the customer and the prospect requests we look at, they continue to change what they're requesting, which is great for us. RR Donnelley, our management of -- print management has changed and evolved. We have more print management opportunities in the pipeline than we have ever had before. The capabilities needed to respond to the RPs that we're seeing have evolved dramatically away from what I'll call one-trick products and based on pure price, plays to be more about unique deal structures that will reward diversified capabilities such as we have. So given our brand in our global install base on our distribution channels, this allows us to bring the value to customers, and we see that continuing in the back half of the year.

Charles Strauzer - CJS Securities, Inc.

And finally, segueing into the postal issues that are going on there, what are you -- handicap for us what you think is going to happen with the postal service, and what do you think the potential benefits might be to you if they have to start shifting deliveries?

Thomas J. Quinlan

Unfortunately, you're above my pay grade with this one. I was the one who said, I think, late last year that this was going to get settled early in 2012. So I missed that. Senator Carper of Delaware, I think, said it best early this week. We've got an industry that -- mailing industry that basically supports or revolves around 7 million to 8 million jobs, and the fact that we can't go ahead and have this as a high priority to get it straightened out is disappointing. There's a $5.5 billion prefund retirement benefit that's due today. We all know the problems that the USPS is facing, finance structure and innovation. They continue to face that. The senate passed, S -- it was S.1789 in April and the House passed -- the House has enacted on their H.R.2309, and I don't think anything is going to happen with -- now until the lame duck sessions are probably even over. So you're talking about early 2013.

We talked a lot today deliberately about what we've got going on with logistics, because we're bringing innovated solutions to our customers that are resulting in reducing costs. The second quarter, we continue to see record volumes in most businesses, including co-mail, list services, expedited in the third-party logistics unit that I talked about at length. We operate the most full co-mail production lines in the industry. We offer unmatched distributions. This includes co-mailing of stands of periodical and tabloid products. Co-mail has the largest number of participants and the highest volume. Standard letter size mailers, we offer the co-pal trade to. But the U.S. changes that they've announced -- USPS that they have announced changes to their standard delivery, in a strange way, is going to help us. Because of our national footprint, we think this is positive news because we can deliver mail faster than our competitors can due to the national footprint. So when you think about our business communication services business and what they've got going on and how important it is to get mail at the doorstep at the appropriate time, in a strange way, there's opportunity for us here as the USPS tries to -- and the government tries to figure out what they're going to do.

Charles Strauzer - CJS Securities, Inc.

And then lastly, Tom, at the end, you highlighted uses of capital being the dividend and debt repayment. If you can give us a little bit more color on debt repayment side and given that you're seeing a little bit more relief from pension in terms of contributions in the next couple of years, talk about your priority for paying down debt and being opportunistic about taking advantage of market swings in your bond prices.

Thomas J. Quinlan

Yes, I'll start that and then turn it over to Dan. We've talked ad nauseam about the fact that we're committed to operating at 2.5 to 3x gross leverage, and obviously, we want to tend towards the lower end of that leverage. All capital decisions that we are looking at, we use that as the #1 criteria. If we have something in front of us that does not meet that criterion, we pass on it. So then, okay, that revolves around, okay, what about acquisitions? When you think about the single or double players that are out there -- product players that are out there -- they're going to continue to have a tough time. And that's going to be -- there's going to be more properties for us to look at. But again, go back to the point, what does it do from a leverage standpoint for us? I think our bond prices, as we've seen, are trading fairly well out there in the marketplace, even given the economic environment that's out there. And again, from an M&A standpoint in the industry, the single and double players don't serve the verticals that we serve. I mean, the industries that spend the most on communications are the industry verticals that we serve. We serve consumer brands, retail, automotive, financial services, media, telecom, health care, transportation. We're entrenched in each one of these verticals bringing value-add and unique solutions to our customers in these verticals. And these customers aren't completely dependent upon print. I get a chuckle out of when I see some of the asset-like companies P/E ratios are that are out there. They're pretty impressive but when you think about what we've got going on here, for years our procurement engine has been buying billions of dollars on behalf of our customers and no one, on one has that buying power, which in return helps fuel the growth of our print and communication management initiatives. We reduce cost, we improve your return. This enables us to become the infrastructure for the Fortune 1000 and places RR Donnelley's other 59,000 customers outside of the Fortune 1000 on equal footing with the Fortune 1000. So I think as you go through what we're talking about from a capital deployment standpoint, there's some good things going on here the way we have deployed capital. We still have great flexibility, we're still going to keep that flexibility, and it's going to serve us well as we go through these times. Dan?

Daniel N. Leib

Yes. The only thing I'd add -- and consistent with the prior message we've delivered on migrating to the lower end of our range -- on pension stabilization, the contribution this year inclusive of pension, OPEB and 401(k) at approximately $205 million and the expectation next year is for $100 million less than that. Our expectation over 3 years is we'll save about $150 million of funding due to the Stabilization Act. Other uses of cash -- and Tom hit it exactly in terms of the 2.5 to 3 -- are the guardrails. Capital is, as we've seen over the past few years as the business has migrated to a much less capital-intensive business, this year will be at roughly 2% of revenue, and our go-forward guidance longer-term -- which will change in any particular year -- but is 2.25% to 2.5%.

Operator

[Operator Instructions] And our next question is from Scott Wipperman of Goldman Sachs.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Dan, maybe just to drill in on the cash flow for a second. I guess, I would have thought with the news on the lower pension funding, you guys would actually maybe lift the estimate for the year? But the press release -- and I apologize if I'm reading too much into this -- but I guess in the press release, it's saying you expect free cash flow to be approximately $500 million versus the prior language of at least $500 million? So maybe I was just hoping you could walk through some of the dynamics there.

Daniel N. Leib

Sure. Absolutely. I think when we set the $500 million, it was in the context of our average over the past 8 years has been $575 million to roughly $600 million of free cash flow. And this year, expected roughly $100 million of incremental pension funding. It's still -- with the change here -- roughly $100 million. So the pickup that we get is $46 million and after tax, that's $27 million. But if you look year-over-year, you're still at roughly $100 million on an after-tax basis. That $27 million is tough to make additive just given that working capital at the end of a period can swing by much more than that as we saw last year when we exceeded our cash flow guidance by nearly $100 million. So we feel good about the $500 million, but to make the $27 million as an additive feature of it we just felt like let's see how the working capital plays out.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

That makes sense. And then just on the volume improvements you're seeing in BPO and in turnkey business, I guess, maybe if could you just give some more color on those segments. I know we don't talk about them a lot, just what you're seeing there -- is there contract wins -- would be helpful.

Daniel N. Leib

Sure. Yes, I'll give a little context. I think, Tom wants to jump in as well. It is mostly contract wins and expansion of business with existing customers. There was a little bit of -- from a historical loss in the turnkey business that had the run out that negatively impacted us this year, but that's been being covered by some incremental business with existing customers and some new wins. So the teams there have done a very nice job in both of those offerings in growing them.

Thomas J. Quinlan

Yes. And again, this goes back, Scott, to what is the economic environment like where we can add value and this is where people look to go ahead and outsource some of their, what I'll call, noncore competencies, which we've got great teams that are going ahead and doing that, and we make sure we again go to the most cost advantaged locations so that we can serve them and still get their products out on a timely basis. So I think we're hitting our stride in those 2 businesses. You're right, we don't talk about them a lot but again they've been good for us this year.

Operator

The next question is from Kannan Venkateshwar from Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

Just a couple of questions. One is the restructuring charges for the year, if you could just guide us on that? And the second is you had alluded to some market share gains earlier in the year. So if you could just give us some color in terms of the timeline, and how the book and the magazine segment looks for the latter part of this year.

Thomas J. Quinlan

Yes, I'll start off with book and market share. I think the great thing for us as you think about the transformation that we continue to go through here, you go back again to -- we were solely a long run printer in 2000 providing -- and changing this company to provide services and technology solutions around communications is what we continue to look to do. And our business spans the communications value chain. So every day, we still need to fortify the historic business while building another growth engine in the retail and brand communications. Our customers demand us to drive content across all channels, and I think we're doing just that. To give you an example of that and then to come back on the book side, our e-communications and the financial services business are going to greatly be enhanced, as I talked about earlier, with EDGAR Online coming on board to the platform. I talked about Venue last quarter, the virtual data room, and Venue continues to grow despite these economic environments. Our digital solutions offering where content plus digital enrichment equals new revenue opportunities, that's going well. CustomPoint where we set up a conduit that allows tens of thousands of document users in our customers' organizations to generate their own orders directly to RR Donnelley is going well. And again, this system includes guardrails so that people follow procurement policies. Our customers like that. So we're building a solution that develops a brand ecosystem that encourages and allows our customers' customers to define how they interact and consume the content across both digital and print media channels -- to cover the mailbox to the inbox. When you think again about the long run products right now. We are, we believe, having some success out there from a market share gain. Some of those you'll see late in the year. Most of those will be events that will take place in 2013 and quite frankly, 2014.

The book marketplace is still tough. When you think about K through 12 education in this country, there really still hasn't been the large state adoptions because of the state deficits that are taking place and when you think about what the children in the United States don't have in their textbooks, their science books because of what's happening politically, from an economic standpoint socially, the content that they're studying doesn't make any mention of what's taken place over the last 5, 6 years. So at some point in time, we still believe that the physical content of K to 12 material is going to come back there. LibreDigital, which obviously is playing in for the publishers, realized that they have to improve their direct customer relationships -- the publishers do. This represents an opportunity for us to capitalize upon that because of our unique tools and experience to power marketplace for books, both physical and E, the marketing, the sales and the fulfillment for publishers. So we're playing a role in the fulfillment for our publishers, and that's going to allow us to continue to look to maintain and grow that particular part of the business.

Daniel N. Leib

Yes. Can I just add a little bit on that and then address the restructuring question. So the back half if you remember in Q4, and we made comment that comparables are easier in the back half of the year, particularly in Q4. We did see the slowing down in the transactional business, and so when you look at what is inherent in our guidance is much more of a ramp and normalized performance in that area as opposed to any change in trajectory off of what we've been seeing on the tonnage print area. Similarly, on the margin side, we digested the Bowne acquisition. And so when you look at SG&A margins and progress that we've made over the past couple of quarters, we started to make progress in the back half of last year. So you start to see some of that change go, and along with my comments on Q4 being a stronger period, that's also where you see the better gross margin performance on a relative basis.

On your question of cash restructuring. Consistent with what we talked about last call, our longer-term averages roughly $75 million of cash restructuring, higher following an acquisition. So last year, we saw $104 million. This year, we expect to be somewhere between those 2 points. I think if use the midpoint, you'll be okay, which is roughly $90 million to $95 million.

Thomas J. Quinlan

Okay, and just to beat up a little bit more on the long run part of the business. I mean, magazines, I think, the statistics that came out was 133 launched in the first half and 48 closed. You want to make sure that you're with the content providers that have great content. No matter how they're getting that content out to their end-users, you want to be with those people. And fortunately for us, we've got customers that have great content, which again gives us the ability to look at our business the way we're looking at it.

Operator

Our next question is from Dan Leben of Robert W. Baird & Co.

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

Great job on the costs in the quarter. Could you help us understand how much of it, both sequentially and year-over-year was kind of volume FX and paper-related versus more longer-term structural-type changes?

Daniel N. Leib

From a cost standpoint, Dan?

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

Yes, please.

Daniel N. Leib

Yes, so on the FX side -- well, the paper side, I can give you those numbers. Let me pull up the sheet here. So paper was roughly $14 million. Foreign exchange was $43.3 million. And paper has no impact on -- it's a pass-through, so no impact.

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

Yes. I'm just trying to get a sense of -- you had volume declines in a lot of segments. How much did that in and of itself help the cost versus kind of long-term structural cost cutting that's not going to select [ph] with the revenue.

Daniel N. Leib

Yes, yes. So the paper, as we mentioned, so paper was up in Asia roughly $7 million and it was down in the U.S. And that was mostly in the magazine, catalog, retail inserts area. So we gave the number in the script on if you strip out the impact of paper on the catalog, magazine, retail, inserts number, it was down roughly 1.2%. And so in other areas, your impact was not that large. And then when you go to FX, there was a big piece in Europe as you would expect and Asia had some as well. But not a huge impact on the bottom line.

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

Okay, great. And then when you look out to the back half of the year and just given all the challenges you talked about in the economic environment, are you thinking forward to 2013, maybe a more proactive approach to try and get you some cost out, to set the base lower earlier in the year?

Thomas J. Quinlan

I would -- Dan, I mean, as I said earlier in one of the questions, we look at that on a daily basis. Obviously, it's the time of the year where all companies are looking at 2013, looking at their strategic plans that they have in place. We continue to do that on an everyday basis. So I think the guidance that we gave you this morning we feel comfortable with what we've got planned from a -- that will result in the EPS that we talked about. But again, this is an everyday occurrence. It is not something where, okay, it's budget time so let's figure out what costs we want to take out in '13. We go through that on a daily basis, on a weekly basis, on a monthly basis, quarterly just -- again to see where things are headed. What other opportunities we have as a result of the new capabilities that we brought on board that will enable us to go ahead and go to our customers and offer different solutions to them? What is that going to bring, what does that mean? Again, no one thought a couple of years ago that we would be sort of the -- one of the leading players for electronic device manufacturers in what they do. I mean, that wasn't even on the board as far as what would take place. But because of our relationships that our sales force has and senior management has, because of our global footprint and how we can go out and buy, because of our scale, leads to other opportunities that, that will take place. So trust us when I tell you that we feel pretty good, we know how to manage the cost side of this business and will continue to do that. And again, we think from a top line standpoint, we're positioned well out in the marketplace to take advantage of what's going on out there.

Operator

And our next question is from Edward Atorino of Benchmark.

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

Could you clarify the share base?

Daniel N. Leib

Yes, sure. Expectation is 183 million shares for the year.

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

So more shares are coming out this, what, options and stuff like that?

Daniel N. Leib

Exactly.

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

What would the quarterly numbers be?

Daniel N. Leib

The shares in the quarter?

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

Yes, third and fourth quarter. I want to see what my numbers look right here.

Daniel N. Leib

It's roughly 182.5 million and then in the last quarter, it's roughly -- just over 183 million.

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

It's close enough. Getting back sort of the tonnage business, the magazines, catalog, books, et cetera. It looked like, I mean, based on your view of the second half, is there any "improvement" on the horizon or is it just going to keep struggling along?

Thomas J. Quinlan

I would tell you that we are seeing market share gains in a lot of those products that you talked about. So we feel good about that. Catalogers, we believe, are going to continue to look to use the mailing system to get to their customers even though each one of them know that they'll go ahead and go to an electronic device. That forces them to get there, it sort of gets in front of everybody as opposed to hoping that you go to an electronic device and look for it. Our ProteusJet technology Mary Lee Schneider and [indiscernible] has put together for us is a game-changer for us -- more variable, more personalized content can be delivered to our customers' end customer. So again, we feel the long part of the business in the back half of this year is not going to be a surprise for us right now.

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

And speaking of the second half of the year, I just read a little of the few -- a couple of days ago, the bond issuance has sort of soared. IPOs are still struggling. How do you look at the financial business going forward, and what are your plans for EDGAR?

Thomas J. Quinlan

Let me start off with the first one. As far as the inventory that we have in the IPO marketplace again is tremendous. Hats off to our team there for what they've been able to bring in. The unfortunate part that I keep sounding like a broken record with everybody is, it's still sitting there. So the good part is it's there. When it comes out, it's going to be -- it will be great for us. If you remember the back half of 2011, it wasn't great for the IPO marketplace. So the hurdle or the bar that we've got in 2012, it's not that high. So if our government in the United States can come together and people can get more confidence in tapping the capital markets, it will be good. Don't forget, Facebook took $16 billion out of the marketplace from an IPO perspective. So that was a lot for one entity to be out there with. And I think, we're still -- I think, the marketplace is still recovering from that standpoint.

As it relates to EDGAR Online, we can't wait. We think again as we think about e-communications for that particular vertical that they serve today, it's going to be off the charts as far as when you think about the Bowne technology we brought on, the Donnelley technology, EDGAR Online, all of those ideas, thoughts and how to go to market are going to come together, and we think's going to serve us well. Where I and others get excited is what does those particular capabilities mean for the Fortune 1000? What else can we do with that which we've got some ideas and obviously plans for. And that's where we think that this goes from being a homerun to being a grand slam.

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

Last question. Getting back to the debt purchase. You're not buying any shares, you've got your capital budget set. Are you going to have sort of an organized debt reduction program at all? Disorganized?

Thomas J. Quinlan

Well, let me take that first and then let our CFO... There's only one thing that's organized -- but what I would tell you, what Dan and team here have done a great job of is giving us a runway to where -- for 2013, we obviously have the credit facility that will mature -- we've obviously, talking to our banks and we've got good things going on there. But we've got no real large debt payment in 2013, and I would tell you 2014. So the team has done a great job of giving us a nice runway here to operate within these economic conditions that are out there.

Daniel N. Leib

Yes, I think to answer your question without probably answering your question, we've been in the past, opportunistic on the issuance tender side, we've certainly gone in open market as well. And with the maturity profile that's spread out, we feel very good, to Tom's point, of nothing more than $350 million coming due until 2017. And we'll continue to look at how things trade and where we can make smart purchases when we have the cash to pay down debt.

Thomas J. Quinlan

Operator, we'll end it with Ed's question there. We appreciate everyone listening to this story, continuing to pay attention to what we're doing. Scott, appreciate you reading our press releases as you do. Feel good about that, and hope everyone has a great day. 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: R.R. Donnelley & Sons Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts