RR Donnelley & Sons Company Q2 2008 Earnings Call Transcript

| About: R.R. Donnelley (RRD)

RR Donnelley & Sons Company (NASDAQ:RRD)

Q2 FY08 Earnings Call

August 6, 2008, 10.00 AM ET


Dan Leib - Sr. VP and Treasurer

Thomas J. Quinlan III - President and CEO

Miles W. McHugh - CFO and EVP


Charles Strauzer - CJS Securities

Matthew Troy - Citigroup

Edward Atorino - Benchmark Company


Good morning. My name is Khadijah and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second 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. Dan Leib, you may begin your conference.

Dan Leib - Senior Vice President and Treasurer

Thank you, Khadijah. Good morning and thank you for joining us for RR Donnelley's second quarter 2008 earnings conference call. Earlier this morning, we released our earnings report, a copy of which can be found in the Investor section of our website at www.rrdonnelley.com.

During this call, we will refer to you 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 release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We've also posted to our website in the Investors Presentations section, a description as well as reconciliations of non-GAAP measures to which we refer on this call.

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

Thomas J. Quinlan III - President and Chief Executive Officer

Thank you, Dan. Good morning everyone. Over the last four years, we have demonstrated to you, our ability to deliver strong results in a good global economy. Today, I will spend 50 minutes or so, taking you through a compelling, simple story of how we continue to deliver strong results in more uncertain economic times.

When we announced our earnings expectations on July 16, we said that in the context of challenging global economic conditions, we continue to benefit from four factors: first, the scale of our platform; second, the breadth of our innovative product and service offerings; third, the diverse range of customers we serve; and fourth, our focus on cost compression.

Before Miles takes you through our results in more detail, I will touch on our performance, comment briefly on each of these four factors and address our posture with regard to M&A activity in global capital deployment.

With regard to our second quarter results, I am very proud of the manner which our employees continue to push through the economic headwinds. Non-GAAP earnings per diluted share from continuing operations was $0.73, up nearly 9% from the same quarter a year ago. Revenues increased 4.6% and pro forma revenue growth was favorable as well.

Our ability to take timely actions to manage our cost to leverage our scale by operating as one RR Donnelley and to continue to make fixed-cost variable, was reflected in non-GAAP operating margins of 10%, up from 9.9% during the same quarter a year ago.

After adjusting for acquisitions with lower aggregate margins, Cardinal Brands, Pro Line and Von Hoffmann, all non-GAAP operating margins were up 37 basis points. This economic environment is bringing the relative strength and weaknesses of our industry's players into clear view. Some companies have been forced into bankruptcy, while other competitors have exited the business. I expect more to follow.

Economic conditions are separating those that customers can confidently turn to for long-term comprehensive agreements from those that they cannot. Our financial strength and operating discipline are helping RR Donnelley win the opportunities that surface in the face of challenging economic conditions.

We remain committed to our strategy and strongly believe that we will be even better positioned to continue our growth whenever economic conditions improve. Our results and our reaffirmed guidance that our full year 2008 non-GAAP earnings per diluted share from continuing operations will be between $3.08 to $3.15, stem from our confidence in our employees ability to execute our strategy and from the four factors that I mentioned a moment ago. I would like to briefly address each, beginning with the scale of our platform.

RR Donnelley scales managed as one integrated platform is vital to creating total cost advantages, to allowing customers to maximize their leverage through primary and sole source agreements and to enhancing relationships by helping our customers to quickly take advantage of their best opportunities.

Let me share a quick example relating to each of these.

We recently helped the Fortune 60 technology manufacturer and retailer to consolidate work done by as many as nine different printers and one fulfillment provider into exclusively our RR Donnelley facilities. To do so, we used our scale to create a total cost of ownership advantage.

Our scaled geographic production network allowed us to print and fulfill the customers work in six RR Donnelley facilities whose price similarly to these customers retail outlets allowed us to slash cycle time and freight cost. This geographically distributed print and fulfillment model, actually, slightly increased the printing cost but reduced freight cost by dramatic 91%. This saved our customer nearly $800,000 in a single occurrence of a merchandising program that repeats throughout the year.

Our scale allows us to create solutions that lower the total cost of ownership for our customers. This is especially important as the economic climate plays into our strength and drives our customers to seek ways to increase their leverage by avoiding more work to a single supplier.

Our scale also allows customers to gain first maneuver advantages. For example, during this presidential election season, demand for key book titles can spike quickly in response to current events. Two such events, the entirely passing of a popular news figure and author and the publication of an insider's account of White House events quote publicity ways. RR Donnelley scaling some record sending production enabled us to help the publishers, meet the demand for these titles. As our customers look to take cost, better their own operations to create leverage through sole or primary supplier relationships and to maximize the value of each marketing opportunity, RR Donnelley is aligned perfectly with their goals.

Let me address the second factor that positions RR Donnelley to fight through this economic environment; that is the breadth and diversity of our innovative product and service offering, which we've built to assure that even as customers shift, their print communication's mix no dollar needs to leave our platform. Whatever strategy our prospect and customers pursue, RR Donnelley can provide the required products and services.

Let me give an example. We recently produced an annual report for a leading manufacturer of [indiscernible] products. Here's how we did it. We type set the 10-K in India as it passed the project electronically to our financial services composition professionals in California who guided the case throwing number around of edits.

Meanwhile, one of our sheet-fed commercial plants also in California handle the presswork, proofing and printing for the cover and color section of the book. As they were doing that, one of our web plants may indicate in another commercial plant produce a special tip on photo cover that allows print to demonstrate motion. That was a fix to the cover at one of our print for filming centers and then the entire project was distributed through RR Donnelley Logistics.

Efficient, absolutely seamless handoffs kept every dollar related to those activities for this complex regulated product under an RR Donnelley roof. It is worth repeating. Our ability to cost efficiently use multiple capabilities on our customers behalf, create competitive advantage. Our product in service diversity is reflecting in a number of other ways as well. We are leader in developing and using digital printing devices to help our customers cost effectively target their audiences.

The first in the world proprietary 1200 DPI color digital press capacity that we recently announced is already sold out. We believe that we have a 12 to 18 months head start with this technology. And we will be deploying additional units to take full advantage of our lead. As we expected, financial service companies to have jumped on board to grab first Moore advantage. We are also generating enthusiastic responses from our four publishing customers.

Our engineering and development pipeline has already allowed us to bring out innovations this year, ranging from virtual data rooms to sophisticated variable trim binding. There is more to come. This fall, we are in the look out for another first, a major publication will feature a cover with electronic inks. This sophisticated e-cover will be rowing out of an RR Donnelley bindery.

Although, the Olympics have not yet begun, we've already been a part of Gold, Silver, Bronze and Platinum medal wining teams in China. The American league of communications professionals reviewed annual reports for more than 20 countries and recognized five that we produced for company in China's fast growing economy as among the best of the best.

In the e-commerce arena, Merck has given RR Donnelley its e-commerce integration excellence award. This was presented in recognition of the value custom point print management system provides. As customers look to create print management efficiencies, order volumes through our custom point internet portal are up sequentially 42% in the first half versus the back half of 2007.

I recently announced 20 to 20 performance risk product for financial service customers, provide a full evaluation of a long haul within 48 hours, including full summary with risk distributions, default announces predications, and a forecast of full performance for the next 60 months. That is a timely offering.

In another example of our service diversity, you'll see RR Donnelley on the list published in the Wall Street journal which rank the top 50 outsourcing suppliers ranked by client satisfaction. As customers look to reduce costs and increased efficiency, they continue to source non-core activities to us.

These outsourcing relationships often take the form of what we call facilities management programs. In a facilities management arrangement, RR Donnelley employees are on or near side with the customers to handle design in other pre mediate task that we print production. This means that we are involved long before customers project is ready to go to press.

For example a popular nationwide quick service restaurant coming of a record 2007 as made manual enhancements a key part of its strategy for sustaining gains throughout 2008.

It is in RR Donnelley team that handles the end-to-end process of designing, producing and fulfilling the menu boards, new product promotions, in-store label coupons, stray displays and other materials that help to bring this customer's strategy to life.

We strongly believe that depth and breadth of our product and service offerings lift RR Donnelley from the ground of traditional commodity printer and separate us from our competitors. But most important, as our customers in prospects look for ways to differentiae their offerings to lower their costs and to increase their market share, RR Donnelley is uniquely positioned to provide the flexipus [ph] solutions that will help them achieve their objectives.

The third factor that I will like to touch on is the diversity of the customers that we serve. We have been successful on aligning ourselves with strong players in each of our offerings. For example, during the quarter, more than 40% of the magazines that saw improved ad page counts were titles that RR Donnelley produces. This diversity is also reflected by our geographic reach. 10% of our largest customer relationships are now predominantly based in Europe, Latin America or Asia. Diversity is also evident in the broad mix of products that we sell.

Our relationships been multiple product offerings and even the anchor product or the one that provides us the most volume with the given account varies form customer to customer. For instance, among our 50 largest accounts 12 different offerings anchor the relationships.

The fourth and final factor I'd like to discuss is our focus on cost compression. As you know from our prior performance, operational efficiency and cost takeouts are not a sometime thing at RR Donnelley. They are a way of life.

Our talented employees understand our business challenges and excel at executing our safety, quality service and operational plans. And they do this on a daily basis. Our scale also plays an important role in compressing cost as we leverage best practices, IT enhancements, technology investments and procurement efficiencies across our worldwide operations. What others may see a simple cost takeouts, we see it as an ongoing opportunity to make our unparallel platform operate more efficiently for our customers.

During the balance of the year, our talented employees will continue to push hard to obtain the maximum value from each of these factors that I've discussed. Especially important will be the role that our thousand person sales organization plays in building on our nearly 50,000 customer relationships.

With regard to M&A, we continue to be alert to opportunities to enhance our platform. In general, we have not seen multiples come down as much as we would expect in light of the difficulties that some industry players are facing. We will continue to be priced and valued disciplined as we evaluate potential acquisitions.

Our model is straightforward. We look for acquisitions that will strengthen an existing customer relationships or create new ones, add needing capacity and create opportunities to take out significant cost.

Our posture towards capital deployment remains balanced as we continue to use our strong balance sheet and cash flow to deliver value to our stakeholders. Our annual dividend of $1.4 per share has remained consistent since 2003. We remain vigilant for the right M&A opportunities. We have repurchased 5 million shares year-to-date and have a remaining authorization for 5 million more.

We continue to make the right investment in our platform while decreasing our leverage ratio and maintaining strong investment great metrics. And are well positioned with cash and committed liquidity of $1.6 billion. In this context, we believe that our stock price does not reflect our RR Donnelley's performance and prospects.

And with that, now let me turn it over to Miles to recap the quarter in more detail. Miles?

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

Thank you, Tom. I will provide a detail review of second quarter results as well as talk about our expectations for the full year 2008.

We are pleased with our second quarter performance as non-GAAP earnings per diluted share increased 9.0% to $0.73 in the second quarter of this year compared to last year's second quarter, non-GAAP earnings per diluted share was $0.67.

The integration of our most recent acquisitions, Von Hoffmann, Cardinal Brand and Pro Line Printing has preceded well and these acquisitions have had a positive impact on our results.

Q2 consolidated non-GAAP operating margin of 10.0% represents a 14 basis point increase from the second quarter 2007 reported results. On a like for like basis, adjusting for the acquisitions of Von Hoffmann, Cardinal Brands and Pro Line Printing, we expanded non-GAAP operating margins by 37 basis points this quarter. Included within this operating margin increase, is the negative impact of approximately 20 basis points from foreign exchange rate changes.

Operating margins continue to benefit from strong performance in the U.S. print related services segment as well from our continued cost savings efforts that also positively impacted our corporate costs.

Consolidated net sales in the second quarter were $2.9 billion, an increase of 4.6% over second quarter 2007 results. This increase was due to the acquisitions and favorable foreign exchange rates offset impart by volume declines and continued price pressures.

Pro forma growth, which presents the acquisitions on a comparable basis, was 0.4% over the second quarter of the prior year. Favorable foreign exchange comparisons accounted for approximately 177 basis points of pro forma second quarter growth.

Changes in paper prices did not significantly impact our revenue. So, on a like-for-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.

Our gross margin was 26.7% in the second quarter compared to 27.1% in the second quarter of 2007. On a like-for-like basis, gross margins decreased approximately 18 basis points due to continued price pressures, foreign exchange impacts and volume decreases, which more than offset the benefits of continuing productivity efforts.

Our SG&A, as a percentage of revenue decreased to 11.1% in the second quarter from 11.9% in the second quarter of the prior year, due to the benefits of our productivity efforts. On a like-for-like basis, SG&A as a percentage of revenue decreased approximately 69 basis points.

Depreciation and amortization expense in the second quarter was $164.2 million, an increase of $15.5 million over the $148.7 million reported in the comparable period a year ago, partially due to the impact of acquisitions.

GAAP operating income excluding... including restructuring and impairment charges was $276.4 million in the second quarter of 2008 compared to an operating loss of $54.4 million in the second quarter of the prior year.

Excluding restructuring and impairment charges, non-GAAP operating margins increased 14 basis points to 10.0% from the second quarter of 2007. We've stressed this before, but in tough economic environments like the present, it is even more apparent. Our tremendous scale has allowed us to reduce costs and absorb price reductions that allow our customers to get through the downturn, yet we still increased our operating margins by 14 basis points. That's no easy feet and we believe it's unmatched in our industry.

Also, we are as well positioned as we ever have been to continue to do well in the economic downturn, and ultimately benefit from the economic recovery once it begins.

Net interest expense was $57.8 million in the quarter versus $55.4 million in the comparable quarter of the prior year; primarily due to the incremental borrowings associated with acquisitions and share repurchases, offset impart by lower short-term borrowing rates.

We recognized GAAP income tax expense of $74.4 million compared to our Q2, 2007 tax benefit of $41.7 million, which primarily reflected the tax impact of last year's non-cash impairment charge on the pre-tax laws.

On a non-GAAP basis, the tax rate increased by 143 basis points to 33.3% in the second quarter of 2008 from last year's second quarter, due to a higher proportion of income generated in higher tax jurisdictions in 2008.

Our non-GAAP earnings per share from continuing operations in the second quarter of 2008 increased to 9.0% to $0.73 per diluted share, compared to the second quarter of 2007.

Now, let's turn to the second quarter operating results by segment. Our U.S. print and related services segment reported top-line growth of 4.5% to $2.2 billion. Pro forma sales decreased 1.1% as downward pressures and volume declines in commercial print, financial print and forms, more than offset sales increases in logistic services, stock products, direct mail and digital solutions.

The current economic slowdown in the U.S. continued to reduce the demands for commercial printing, while sales decreased in financial print due to a reduction in the number and size of capital market transactions. Sales of forms decreased due to increased price pressures and lower demand for consumable forms products.

Sales of logistic services increased in part due to higher fuel surcharges related to higher fuel costs. Sales of digital solutions grew due to increased volumes from new customers and finally sales of direct mail grew at a higher... as a higher volume of mailings for non-profit customers, offset lower fulfillment and distribution volume.

Non-GAAP operating margins increased by 36 basis points to 13.3% in the second quarter of 2008. On a like-for-like basis, including the acquisitions in both peering [ph], operating margins increased approximately 83 basis points from the second quarter of 2007 to the second quarter of 2008 as the benefit of productivity efforts more than offset the impact of continued price pressures.

Our international segments reported sales, grew 4.8% to $762.0 million due to the impact of changes in the foreign exchange rates and increased sales from our offerings or Global Turnkey Solutions and Latin America, partially offset by continued price pressures.

Non-GAAP operating margins decreased 76 basis points to 6.3% in the second quarter of 2008 due to changes in foreign exchange rates, an unfavorable business mix and continued price pressures.

Acquisitions had no impact on our international results, while foreign exchange rates added 681 basis points of growth but accounted for nearly 50 basis points of the 76 basis point non-GAAP operating margin decline.

Finally, excluding restructuring and impairment charges, our unallocated corporate expenses decreased $400,000 from last year's second quarter.

During the second quarter of 2008, we spent $85.5 million on capital expenditures, bringing our total year-to-date CapEx to $157.4 million. We expect full year capital expenditures to be approximately $375 million to $400 million, a significant decrease from last year's $482 million as we leveraged the capacity that our acquisitions have provided and we continued to realize the benefits, associated with optimizing our platform.

We generated just over $370 million in cash from operations on a year-to-date basis. You may recall that we identified on our first-quarter conference call, some timing related items that adversely affected cash from operations in the first quarter, and that would reverse throughout the year.

In the second-quarter, cash from operations increased by $31 million over last year's second-quarter. Our balance sheet and liquidity continued to be very strong. Our debt is approximately 82% 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 maintained investment grade credit metrics. Net debt, at the end of the second quarter, was $4.0 billion.

We have reaffirmed our non-GAAP EPS guidance from continuing operations for the full year 2008 to be in the range of $3.08 to $3.15 per diluted share. Underlying our guidance are the following assumptions: we expect a more pronounced slowdown in the economy to continue throughout 2008. And while we expect our top-line pro forma growth to exceed that of our industry and be slightly positive, we have lowered our full year revenue guidance to $12.25 billion to $12.35 billion.

As we continued to aggressively manage our cost structure and go after a new business, we expect our non-GAAP operating margin to be better than the 10.0% we delivered last year as we expect productivity initiatives to outweigh the impact of the continued price pressures.

We expect $615 million in depreciation and amortization, inclusive of 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 between 33.5% and 34.5%.

As we look at the industry, we see clear differentiation in our performance and ability to manage through in economic cycle. We are impacted by the economic climate, yet we believe less so than others on the top line, as our product line breadth allows us to find for our customers, solutions that meet their needs without their work leaving the RR Donnelley platform.

As we look at the results we've just announced today, the benefits of scale and focused cost management are clear. We've done a very good job of managing our cost structure to turn historically fixed cost into variable cost.

The change to one RR Donnelley that we announced in June 2007 and the tight management of our platform has enabled us to continue to drive cost out of business and deliver on our bottom line commitments.

Through the combination of solid earnings growth and disciplined capital spending, we continued to expect EBITDA less CapEx to grow by greater than 15% in 2008.

And with that, I return it to Tom.

Thomas J. Quinlan III - President and Chief Executive Officer

Thanks, Miles. Operator, we'll now open it up for questions.

Question And Answer


[Operator Instructions]. Your first question comes from the line of Charlie Strauzer with CJS Securities.

Thomas J. Quinlan III - President and Chief Executive Officer

Good morning, Charlie.

Charles Strauzer - CJS Securities

Hey. Tom, just a quick couple of things here. When you look at the guidance, I appreciate you are reaffirming the guidance, but give us a sense of the fact that could cause you to come in at the higher end or the lower end of that guidance range?

Thomas J. Quinlan III - President and Chief Executive Officer

Sure, Charlie. I think look we've got four and half months, five months left obviously in the back half year to get through, what we see now, what Miles went through as far as the forecast of the year.

These economic conditions that are out there, we feel pretty good about the range. No one knew you are trying to say where in that range. Now, look as we sit here today, we feel good that towards the higher end of that range, given the economic conditions that we see right now.

We're not coming off the number. We're not going head in, we'd lowered revenue by I think 0.1%, which given the economic conditions that are out there and given what we've built this year, we feel pretty good about again our forecasting capabilities.

So, I think as long as things sort of, I'll use the word 'muddy' along right now, we think we're going to have the year that we've spoken about. And again this is coming off a year which 2007 was probably one of the best years our company had had in a long time. I think if you think about the compound annual growth rate for what we've got from 2003 to 2007, where revenue growth is 29%, EBITDA growth 32%, EBITDA less CapEx of 35%, EPS 22%. These numbers are unprecedented in our industry.

And then if you look at the '08, and say okay, how you are going to beat '07 and '08, we're coming back and based on what Miles talked to you about today. We've got EPS growth if you tax... adjust for the tax hit that we've taken which we are not making any excuse for, which is probably about $0.17. We're still... without that we got double-digit growth again on EPS.

If you look at EBITDA less CapEx, we're expecting to be north of 15% debt. So, this is a solid story and I think when I talked to... when we talked to shareholders, everybody wants to go back to less recession, what it Donnelley do in the last recession.

So, if you go back to 2001, when go back to 1991, this is a completely different company. We didn't have the products and services back then that we have to-date. We didn't have the scale that we have today. Back then God forbid, financial print shutdown this company would be in a tremendous difficulty.

Now, not only Tommy Juhase and his team basically on a Citibank report that I saw, number one in almost everyone in their sectors, any businesses that's out there, we are winning. But again, it's not the driver, but those verticals that they are playing in; they are getting sales from other products and services as it opposed just from financial print.

So, I think again long winded way to answer you but, this is a different company than the last time we've seen a global economic slowdown like we are seeing now, I don't know what to call it recession or something else. But I do know that what we built here, can offer customers savings and make them more efficient and we've got their attention.

Charles Strauzer - CJS Securities

Great. And then Tom, you'll clearly, you obviously, taking share on the organic side but on the M&A side when you talked to companies that are kind of in discussions with you, are they getting more hesitant to hold the trigger on a transaction and you're preferring the wait for the economy to get better, are you seeing more people coming to the table, what's the general sense of the M&A pipeline right now?

Thomas J. Quinlan III - President and Chief Executive Officer

I would tell you that I think our... we use the term pipeline is as big as it's ever been. One other things we live by is look good deals are usually... they are a function of strategy and execution. That strategy part, obviously, we've talked about the execution part as we are not going to over pay.

It's not so much the economy. I think there is sticker shot for these, what I'll call the mom and pops that are $250 million maybe to $500 million, where they may be seeing multiples not where they thought they were or should be. And the only thing that we can say that there is that we think given what we're offering is fair pricing and unsure how, whether EBITDA numbers or where they are... the certain multiples are going to be six months from now. So, it's an economic environment where there is really no margin for error.

Again, we think we are in a pretty good shape with the balance sheet that we have and to work with people that are looking to monetize their operations.

Charles Strauzer - CJS Securities

Right. Thanks for comment and keep up the good work.

Thomas J. Quinlan III - President and Chief Executive Officer

Thanks Charlie.


And your next question comes from the line of Matt Troy with Citigroup.

Matthew Troy - Citigroup

Miles. I was wondering if you could directionally help me, what interest rate do you earn on your cash balance?

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

Yes. It's probably between about 2% plus or minus a little bit.

Matthew Troy - Citigroup

Okay. That help us me. What I'm going with this and this question then for Tom, RR Donnelly in the past has been a company that's been reluctant to buyback its own stock. You talk about some challenging multiple assumptions. I think we just need to look at your financial statements and see you are suffering from I guess some mid-valuation in the market.

If I do some quick back and then ask math, there is some pretty strong accretion if you were to step up the share repurchase program. And I think with that interest rate and your yield, it would actually be cash full of positive of at this point. Does it make sense to step up the share repurchase program; are you having that dialog with your Board?

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

Thanks Matt. I think if you go back and look we've purchased about 13 million shares in the last 18 months. We've given back; since we've been years, it's about a $6 billion we've given back to shareholders. But we are not opposed to anything regarding the deployment of capital. We've demonstrated I think now these regimes demonstrated what we will enter the market when appropriate to go back and get shares. And we continue to have that dialog and we continue to look at it. And there is no avenue that we've closed down.

Matthew Troy - Citigroup

Okay. Second question would be looking at your revenue mix, obviously some impressive comments in business winds in your commentary. The frustration I think some people on this side of the fence have is that we're presented with two revenue lines, so we can neither seen nor model some of the good things going on underneath.

I was wondering one, if I Miles or yourself could potentially give us essence of your revenue mix, directionally rough order magnitude, what percentage of your business in revenues relate to actually putting ink physically on paper and what percent actually represents more the services society, their downstream fulfillment, up-streams some of the creative or data management side that you alluded to, just trying to get a sense for those that seem to be on the chicken little camp that print is going the way that dough doesn't, that's not really the majority of what you do in providing value for your customers. Could you give us some tools to work with there in terms of what's print related versus what's more services related?

Thomas J. Quinlan III - President and Chief Executive Officer

I'll let Miles start that Matt and then I'll go and end to it.

Matthew Troy - Citigroup

Thank you.

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

Sure.And I'll say we do recognize this. It's helpful for the investment community to get more information on our top line breakups. And for a number of quarters now we've been putting a breakout of revenues into our 10-Ks and 10-Qs. So, when our 10-Q for the quarter comes out shortly, you'll see some of these numbers. But the breakout between some of these more traditional products and additional services that we're adding to the portfolio, you will see digital solutions which is a variety of, obviously, digital offerings that we have, logistic services, financial print business is more and more services oriented that it ever has been in addition to print. And then some of the rest of the business as we move through our platform, we end up doing more fulfillment distributions and that long with it that is an mixed in.

So, you'll see those areas inside of our10-Q this quarter. And you'll be able to compare those changes in past quarters too that will help you get some sort of a sense of the growth and where we're growing more than we are growing in other areas.

Thomas J. Quinlan III - President and Chief Executive Officer

Matt look, I mean with the... the Internet has been killing prints for the last 40 years I think and it's still here and it's going to continue to be here. E-books for example, they're not going to replace printed books but they're going to augment the printed book. And I think we're not running away from other electronic substitution. I think if you look at magazines, the good magazines and catalog players that are out there have taken that and made it into an additional sales channel. So that's the printed word, that portable product that can be sent to you or that you can pick up, doesn't require you to go do something.

You to go on a computer, you to go on your laptop and those two things work in hand-to-hand. We've seen where customers have had good days. If you think about what's going on in our shop and you talk about the breakout, what's service and what's non service. We've got a 1000 sales reps and with jump lines going ahead and put it in a couple of months or so ago, was up with 50,000 customers, 1000 sales reps. We're getting weekly updates from each one of those sales professionals to tell us what they did that week.

And that... you may look at that and go hold, what you guys thinking about? That's the kind of focus, attention and passion we're putting toward this because of... that's where the upside is for us. We're not there yet. With all the good things we've done over the last couple of years, we've still got room to improve to sell this platform and we're going to do it. And I think if you look at what... again the products and services logistics, print media, the front-end and back-end and everything in between, we offer people the ability to take cost out of their platform, make them more efficient and help them reach their customers. We do that, we're going to continue to hit these home runs that we've been doing.

Matthew Troy - Citigroup

Yes, and then again I agree and your comments certainly illustrate that, we've been in your facilities, we've seen what you done for instance, with Verizon and the RadioShack fulfillment. You talked about the restaurant fulfillment deal this year. It doesn't leave off the page in terms of your financial disclosure and I think the investment community misses a great deal of what's going on beneath the service... surface.

So I would just humbly recommend as always if you could just think about the disclosure, it would really be helpful in terms of evaluating the various pieces of the business if we could get more details. With that said, I realize we always want more rather than less.

Third question, some of the paper manufacturers, we're obviously in a commodity inflation environment. Papers largely past through for you guys, but some of them have been more vocal recently about pushing to price increases. Have you seen that? Are you in a position because of your scale to actually get favorable pricing concessions relative to some of your competitors?

Thomas J. Quinlan III - President and Chief Executive Officer

Yes. I mean our scale in any of the manufacturing components that we use obviously plays a big role for us; not only in price filament but also in availability which again given our size and given how we treat our... what I'll call our partners, that does not go unnoticed by them. We pay our bills, we're not in bankruptcy, we're not going to embarrass them and that is something that we are in our industry right now. That goes a long way with the vendors that we're dealing with.

Matthew Troy - Citigroup

Last question for me in terms of financial print. You cited obviously, a slowdown in deal activity I think certainly something we're acutely aware of in this industry on this side of the phone. I was wondering though, the regulation governing presentation as disclosure, since that we're not always getting proxies and the like in the mail, went into effect in the last 12 months. I think, there is a scaled implementation, people can begin to opt out this year or next. Are you seeing any impact from that in your business and just could you help in terms of how that business is set up, why that shouldn't be necessary in area of a larger concern? Thanks.

Thomas J. Quinlan III - President and Chief Executive Officer

You're welcome and have a good day. I think if you talk about e-proxies [ph] and what the SEC Chairman and the commission was looking to do down there, was to make things what they thought, was to make things simpler and easier for everyone by going through an electronic format. What has been found and what the data reveals is that, that's not been the case. People have not participated in voting proxies at the level that they were before electronic substitutions took over.

There maybe even some discrimination that's taken place because of having people, have to choose electronic substitution. So I think there could be... I think this next administration go around... that's going to get looked at in a major way to make sure again that the idea behind it was one would commend, but I don't think the results are where anyone down in Washington thought they would be. Obviously, that being the case that will help us.

On the flip side, the SEC with XPRL requirements... that is something that again our financial team is out there in their verticals. We were one of the ones leaders there, we're one of the ones that are going ahead and making sure that our customers know about it so that they are able to file underneath... within the timeframe and mandate that's been required by the SEC. And that's an opportunity for us. But again I think the great thing is when you think about all of the reduced private equity activity, the lowered deal flow, the investment banks, the earnings that you sort of went through the credit crunch, the amount of IPOs that have decreased in China.

I mean our team that we have here has just done a phenomenal job of making sure that whatever is out there we go ahead and get and then on the second point is making sure that everyone knows, in addition, that R. R. Donnelley is not only financial print, we can offer these other services whether they are outsourcing services or additional print capabilities, that they can avail themselves to. That again results in lower price and being more efficient. Next question operator?


Your next question comes from the line of Ethan Agarwal [ph] with Longbow Research.

Unidentified Analyst

Good morning, guys.

Thomas J. Quinlan III - President and Chief Executive Officer

Good morning.

Unidentified Analyst

Can you tell us how much of the U.S. sales decline was due to volume and how much of that is the pricing pressure impact?

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

Yes, we haven't broken that out separately, it's... we have just included it in our total numbers. So we don't do that for basically for margin reasons.

Thomas J. Quinlan III - President and Chief Executive Officer

But, what you can walk away here is... don't think that... the pricing store is fierce at it's ever been. The commercial product line that's out there. Obviously, we've told you all... most of the good things. I think commercial print is an area where given an economic environment that exist, it's a tough one to go ahead and that will prove because people are looking to spend less and again that's... therefore... but we... how can be differentiate ourselves of not being a commodity printer. What can we do for you distribution to lower your cost. What can we do on the front-end to make your composition cost less.

Unidentified Analyst

Okay, that's helpful. In terms of your M&A activity, do you have a preference on any particular geographical area where you want to make acquisition in the near future?

Thomas J. Quinlan III - President and Chief Executive Officer

Yes, what I would tell you is again...what we, I think what we've been saying over the last couple of calls is it's a three-pronged approach. Again what does it do for our customers. Does it have capacity that we need, there maybe things that have capacity that we don't need. And again how can we make it take out cost and have tremendous amount of synergies. Those three-prongs I will call it of what we look for when we look to see what's out there.

Unidentified Analyst

Okay, it appears that the revenue contribution from the Von Hoffmann, Cardinal and Pro Line acquisitions in the quarter was less than what we were expecting. Can you provide some color on whether these three acquisitions met your expectations in the second quarter?

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

I think we are still on track with where expected their revenues to be. I think that probably what you are seeing the impact of the partial quarter impact of last year's result versus this year's result. And as well as the, for the recent acquisitions that you don't have the full scale off of the business those after we bought them. So I think, for right now, we still see that all of these acquisitions have been on track with our expectations from both the bottom-line and the top-line also.

Unidentified Analyst

Okay and my last question is in terms of industry verticals I think you have already talked about the financial industry. But are there any other particular industry verticals that you can highlight as being particularly week or strong you are seeing in the last quarter?

Thomas J. Quinlan III - President and Chief Executive Officer

I would say again, we've done well in our variable... I'll call it variable print and what does that mean again and that's for everybody I mean direct mails, statement printing. Our trends promo [ph], our technology is a leader here which again is helping our customers because of the technology that I talked about with the... earlier with the press that we sent out a press release earlier in the year.

We are able to go ahead and we have the highest resolution output and quality available that's in the marketplace today. That's a differentiator for us. That helps our customers again reach their customers, improve their ROI. When you think about how we can take the multiple value of the delivery options that we had. So variable print for us is... despite these economic conditions, has been a pretty good performer for us. And again why is that yes, I think we believe it's because of again how we offer that product out to our customers and the benefits that they've seen. People want color, people want variability, we are able to provide that to them.

Unidentified Analyst

Okay, great. That's all from me. Thanks for taking all my questions.

Thomas J. Quinlan III - President and Chief Executive Officer

Thank you.


[Operator Instructions]. Your next question comes from the line of Edward Atorino, Benchmark.

Edward Atorino - Benchmark Company

Good morning.

Thomas J. Quinlan III - President and Chief Executive Officer

Good morning.

Edward Atorino - Benchmark Company

Regarding your top-line adjustments what you saw that it might be hard to do this or maybe or where, what areas are you sort of trimming, I presume a lot of its going to be in the print area such as magazines for example?

Thomas J. Quinlan III - President and Chief Executive Officer

Well, where we mentioned we're obviously financial print is has been the area where we talked about just a few minutes ago.

Edward Atorino - Benchmark Company


Thomas J. Quinlan III - President and Chief Executive Officer

Where the capital markets transaction are falling. As well as it is also our commercial print business is one of the areas where we were down and that's where we more economically sensitive. Along with what I'll say is more of a traditional and continuing trend of forms business.

Edward Atorino - Benchmark Company


Thomas J. Quinlan III - President and Chief Executive Officer

Thanks Ed have a good day.

Edward Atorino - Benchmark Company

Okay, bye, bye.

Thomas J. Quinlan III - President and Chief Executive Officer

Operator, that will wrap it up here let everybody get back. I appreciate everybody's support and look forward to talking to you in 90 days. Thank you.


Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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