R.R. Donnelley & Sons Company (RRD) CEO Dan Knotts on Q2 2018 Results - Earnings Call Transcript

About: R.R. Donnelley & Sons Company (RRD)
by: SA Transcripts

R.R. Donnelley & Sons Company (NYSE:RRD) Q2 2018 Earnings Conference Call August 2, 2018 11:00 AM ET


Brian Feeney – Investor Relations

Dan Knotts – President and Chief Executive Officer

Terry Peterson – Chief Financial Officer


Charlie Strauzer – CJS Securities

David Phipps – Citi

Bill Mastoris – Robert W. Baird


Welcome to the R.R. Donnelley's Second Quarter 2018 Results Conference Call. My name is Nick, and I'll be your operator for today's call. [Operator Instructions] Please note that this call is being recorded.

I would now like to turn the call over to Brian Feeney, R.R. Donnelley's Senior Vice President of Investor Relations. Please go ahead.

Brian Feeney

Thank you, Nick, and thank you everyone for joining RRD's second quarter 2018 results conference call. Joining me on today's call are Dan Knotts, RRD's President and Chief Executive Officer; and Terry Peterson, our Chief Financial Officer. At the conclusion of today's prepared remarks, Dan, Terry, and I will take questions.

As a reminder, we have prepared supplemental slides for today's call, which can be found under the Events tab in the Investors section of our Web site at www.rrd.com. As we review first quarter results on today's call, we will reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves.

The information that will be reviewed during this call is addressed in more detail in our second quarter press release, a copy of which is posted on the Investors section of our Web site at rrd.com. This information was also furnished to the SEC on the Form 8-K we filed yesterday.

Throughout this call, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risks and uncertainties. Therefore, our actual results could differ materially from our current expectations.

For a complete discussion of the factors that could cause our actual results to differ materially, please refer to the cautionary statement included in our earnings release and the risk factors in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other filings with the SEC.

Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides investors with useful supplementary information concerning the company's ongoing operations and is an appropriate way to evaluate the company's performance. They are provided for informational purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in our press release and the Investors section of our Web site under the Presentation tab.

I will now turn the call over to Dan.

Dan Knotts

Great. Thank you, Brian, and good morning everyone, and thank you for joining us. On our call today, I'm going to provide an overview of our financial performance for the quarter, and our expectations for the remainder of 2018. I will then frame the key actions that we are taking to reposition our balance sheet in support of our growth strategy, followed by an update on our segment performance, including new client wins that reinforce our strategic direction.

Before turning it over to Terry, I will review the new innovative offerings that we had launched to further expand our digital capabilities. Starting with slide three, we delivered a solid quarter performance as we continue to advance RRD as a marketing business communications company. For the quarter, we reported top line growth of 3.7% and achieved our third consecutive quarter of organic sales growth with a 2% increase -- 2.7% increase over the prior year; our strongest quarterly performance since 2014.

Our organic growth expand [ph] more of product lines and geographies with seven of our 11 product and service categories reporting organic growth in the quarter. Our ongoing positive organic sales performance is a direct result of our teams successfully extending our industry-leading capabilities to help our clients execute their communication strategies.

Excluding the nearly $7 million negative impact from foreign exchange rates, both our adjusted income from operations and our EBITDA improved versus the prior year. Increased sales volume, strong operating performance, and effective cost management more than offset the inflationary cost pressures impacting a number of our businesses. Our team has made good progress in executing our plans to lower our overall cost structure, including delivering a 3.3% reduction in our SG&A cost for the quarter.

Our operating cash flow also improved significantly in line with our expectations. As we enter our seasonally-stronger back-half of the year, we remain confident in our ability to drive sustained organic sales growth, deliver our operating plans and achieve our full-year guidance, which we updated primarily for the sale of or print logistics business and expected stronger organic sales performance.

Turning to slide four, before discussing our segment performance, I'd to frame a number of the actions that we've taken that reinforce our commitment to improving our balance sheet in support of our growth strategy. First, as an important step forward in our portfolio optimization efforts, we closed the previously announced sale of our print, logistics, and mail services business on July 2nd. And we have used those proceeds to pay down debt. Second, we have taken two significant steps as part of our plan to monetize other assets. In the first quarter, we reported a sale of an idle facility for $12 million, and yesterday we announced that we've entered into an agreement to sell an international facility that would generate pretax proceeds of approximately $250 million, and is expected to close in 2020.

Finally, we announced a reduction in our quarterly dividend, which we believe will allow us to accelerate the pace at which we reposition our balance sheet and improve our financial flexibility to drive our long-term growth strategy.

Turning to slide five, as a marketing and business communications company we're on a journey to drive long-term growth by helping our clients create better connections with their customers. With our extensive portfolio of multi-channel capabilities, we are providing innovative solutions that enable our clients to more effectively manage the complexities of personalize marketing, and execute the essential business communications they utilize to service, inform, and transact with their customers.

Today's communications environment is filled with a multitude of offerings from many different marketing and print services providers. But through the powerful combination of our marketing solutions and business services capabilities, RRD is uniquely positioned to provide a single unified solution to execute all of our clients' communications requirements.

In our Marketing Solutions segment, our teams are helping our clients activate marketing campaigns to acquire new and inspire repeat customers. Our comprehensive solutions, including data management and analytics, creative services, and multi-channel execution enable us to partner with our clients every step of the way. We are integrating our clients' data to set the stage for personalized marketing. We are creating content to attract and engage our clients' customers. And we are leveraging advanced analytics to deliver targeted campaigns at scale.

In our Business Services segment we're providing innovative solutions that improve our clients' ability to build brand loyalty and strengthen the bonds with their customers through their business communications. Our clients know that they must understand the specific preferences of their customers and customize both the content and the delivery of their communications according to those customer preferences. We know that through our advanced offerings, including commercial print services, targeted customer, product, and brand communications, and business process services, our Business Services team is well positioned to ensure that every customer touch point is optimized, memorable, and contributes to an overall brand experience.

We've organized RRD for success. Our value proposition is resonating with our clients, our segment teams are focused on delivering innovative and efficient solutions to the market, and we are continuing to win new clients while further extending our existing client relationships. Through the powerful combination of our marketing solutions and business services capabilities, we believe that we are well positioned to continue to win new business and successfully execute our long-term growth strategy.

Let's now turn to our segment performance, on slide six. Business Services delivered strong top line performance with a 4.5% increase in total net sales, and a 3.3% increase in organic sales, with packaging, logistics, labels, BPO and supply chain services representing majority of the growth. This is the fourth consecutive quarter of organic growth for this segment. While operating income declined by $1.6 million or 3.5% after adjusting for the nearly $7 million negative impact to foreign exchange rates, both operating income and margin improved from the prior year period.

Our Business Services teams made substantial progress in implementing their action plans to help offset the impact of inflationary materials and transportation cost increases, as well as the specific client challenges we mentioned last quarter.

I'd like to share a few examples of how our Business Services teams are enabling companies to service and strengthen their relationships with maximum efficiency. A leading health insurance company recently awarded us additional volumes for their member communication kits. Today, we manage and deliver the personalized enrollment kits, annual notice of change documents, and dental kits for this client. As far as this expanded agreement, we will additionally provide this client's customers with mini kits, which are personalized courtesy mailings intended to drive member commitment and satisfaction. This large health insurance client represents a great example of a long-term relationship that continues to expand due to our strong service performance and commitment to excellence, particularly around IT controls and privacy standards.

As a second example, we recently created custom retail packaging for an education technology company looking to expand its customer base from small to larger online retailers as well as brick-and-mortar stores. This client sought to crate custom packaging for its augmented reality technology that would represents its growing brand, and serve as a powerful form of communication with its customers. We designed and created multiple customized boxes that prominently represent this client's brand. And we subsequently sourced, assembled, and kitted customized promotional materials within each package to help this client build brand awareness and expand their market share.

Shifting to Marketing Solutions performance, Marketing Solutions' total net sales were flat versus prior year, with organic sales declining slightly by 0.3%. Our results included the negative impact of a strategic shift away from traditional pre-media services for non-core market segments, which we expect will impact our digital and creative revenue performance for the remainder of the year. As a positive offset to this decline, we delivered our third consecutive quarter of double-digit growth in our direct mail offering. Adjusted income from operations increased by $3.1 million or 41%, with operating margin also improving over the prior year. Similar to Business Services, our Marketing Solutions teams also made substantial progress in implementing their business improvement plans to lower their overall cost structure and improve performance.

I'd like to share a few examples of how we're leveraging our Marketing Solutions capabilities to help our clients optimize customer engagement with maximum return. We recently added significant new business with G&C, a national leader in the health and nutrition space, and an existing client of RRD. This new work will address a major client initiative to provide highly personalized communications that are informed by customer insights gathered from multiple types of interactions. We will provide analytical consulting, customer relationship management strategy support, and digital communications in addition to the direct mail work that we already manage for G&C. This work will help the client make significant improvements in its delivery of highly relevant and coordinated communications across all of the interactions it has with its customers.

G&C is a great example of how we're leveraging our extensive capabilities to further expand our relationships with our existing clients. We also recently announced a major new agreement with Sobeys, a leading Canadian retailer, and one of only two national grocery retailers in Canada. As far as this agreement, we will provide marketing into core signage print, including production, procurement, fulfillment, warehousing, logistics, and installation support for more than 1,200 Sobeys stores and over 1,500 additional stores within Sobeys independent and wholesale operations. Sobeys selected RRD as their business partner because of our retail marketing expertise and our scaled print production and fulfillment capabilities. We are excited to add Sobeys as a new client and are looking forward to expanding our relationship with them over time.

Shifting to the innovation front, we are developing new technologies to help our clients determine and act upon their customers' communications preferences. During the quarter, we launched a new technology-driven capability called SuperDoc that transforms fixed business statements into interactive dynamic customer communications. SuperDoc enables clients to achieve greater engagement by overlaying interactivity and activated content for PDF statements bills, policies, letters, and other transactional communications. This new capability ensures that are clients are not simply taking a printed piece and delivering it in a static digital format, but rather are delivering an enhanced digital communication that provides personalized insights and enables interactivity with the data contained within the document.

Additionally, we've developed a direct-to-consumer app to play application called MOTIF. MOTIF is a new Mac OS extension for photo products created on Apple Mac OS devices. This application replaces Apple's photo print products with a new service that enables Apple customers to use the unique data that is embedded within each image to more easily create and order customized photo books, cards, and calendars. In addition to creating the app for this service, we will produce all of the high quality printing for orders placed through MOTIF as we did with the previous Apple service.

An important element of enhancing and expanding our capabilities also includes identifying partnerships to enhance delivery of our current offerings. We recently signed a multi-year agreement with Walletron, a company whose software platform automates brand's presence in mobile wallet. As part of this agreement, we now offer clients a new innovative way to transact with their customers through their mobile devices.

Our clients have the ability to share bills, invoices, statements, compliance documents, and other notifications directly with consumers through mobile wallets native to their customer's Apple and android devices. We remain excited about our opportunity to grow as a marketing and business communications company. And we are pleased with the progress we are making on a strategic journey. At the same time, we recognize that we have more work to do to address the challenges of operating in a competitive and dynamic market. And we remain highly focused on executing our business improvement plans, streamline our operations and improve our cost structure.

And with that, I am going to turn the call over to Terry to provide more details on our financial performance and outlook. Terry, over to you.

Terry Peterson

Thank you, Dan. The primary focus of my comments will be on certain non-GAAP results and measures. For those participants who are following along with the supplemental slides, please refer to Page 7 in the deck as I begin my remarks. Page 7 provides a snapshot of our second quarter products and services net sales performance by segment and by geography for consolidated RRD.

Net sales of $1.68 billion were up $59.5 million or 3.7% for the quarter. Excluding the impact of foreign exchange rate changes, organic net sales were up 2.7% on a consolidated basis which is our best quarterly performance since 2014. Page 8 shows the organic sales trends by quarter and by year. Net sales were up on a reported and on an organic basis for the third consecutive quarter. These results were in line with our expectations for the quarter as we continue to see the benefits of new client wins and expanded work with existing clients.

I am also happy to report that we experienced growth in seven of our 11 product and services categories. Packaging, logistics, labels, and direct mail are just a few of the categories that reported growth in the quarter. While our Commercial Print Products and Business Services continue to see ongoing secular declines in addition to a large client significantly reducing its specialty card volume in the quarter, the year-over-year comparison did improve as compared to the first quarter.

On Page 9, adjusted income from operations of $36.5 million was down $2.9 million versus the second quarter of 2017, but up $3.6 million sequentially from the first quarter. As Dan mentioned earlier, unfavorable changes in foreign exchange rates of nearly $7 million negatively impacted negatively impacted results in 2018 versus the same period in 2017. In addition, higher volumes and cost reduction initiatives were only partially offset by modest price pressure in business services and higher healthcare and performance based compensation expenses.

Adjusted SG&A expense of $208 million or 12.4% of net sales in the quarter was down $7.1 million and favorable 90 basis points compared to last year. Our teams continue to aggressively implement plans to lower our overall cost to serve. And these efforts continue to have a positive impact on our SG&A expenses. I would like to provide you with an update on the actions we have taken to address both the inflationary cost pressures and client specific challenges I discussed last quarter, resulting outcomes and where we see these issues going forward.

Inflationary cost increases occurred in two areas. First, paper costs in Asia have been rapidly increasing since mid-last year. During the second quarter, we saw those increases level off while we continue to implement market price increases and expanded our supplier base. As a result of these efforts, we have offset the impact of higher paper costs. And absent additional unexpected paper price increases, we do not expect further negative impacts for the remainder of the year.

The second inflationary impact I mentioned last quarter related to increased costs of transportation which also began to impact us in the middle last year. We are actively deploying alternative procurement strategies, including a shift to using more intermodal services and implemented market rate adjustments as permitted within our client contracts to recover these increased costs. As such, the negative impact was significantly less in the second quarter. And because the impact primarily occurred within the recently divested print logistics business, we do not expect additional negative impacts for the remainder of the year absent further unexpected increases.

Turning to the client specific challenges, beginning late in fourth quarter of 2017 and continuing into 2018, we incurred inefficiencies due to lower volumes in two production facilities. Each of which is largely dedicated to a single client. For the first of these two clients, we expect demand to remain lower in 2018 with our year-over-year comparisons improving throughout the year due to the class actions we are implementing and because volume in the first half of 2017 was higher than the second half.

For the second client, we expect to see volumes increased in the last half of the year and profitability improve year over year. In both of these cases, we have aggressively adjusted our cost structure to better match our cost with the revised revenue projections for these clients. Adjusted diluted loss per share of $0.09 per share in quarter was unfavorable versus adjusted diluted loss per share of $0.06 reported in the prior year period. The shortfall was primarily related to lower income from operations and higher taxes partially offset by lower interest expense of $3.5 million.

The Q2 2018 income tax rate reflects unfavorable items related to the mix in our pretax profits by jurisdiction which is expected to reverse later in the year, discrete items, and tax reform. Our effective tax rate fluctuated significantly in the first half of the year, but is expected to normalize in the last half when profitability typically increases significantly.

Our GAAP results for the quarter included pretax restructuring and other charges of $11 million primarily related to our ongoing cost reduction initiatives. Next, I will discuss the highlights for each of our segments. On Page 10, second quarter 2018 net sales in our business services segment of $1.41 billion were up $60.3 million or 4.5% compared to the prior year.

After adjusting for the effective foreign exchange rate changes, we delivered a 0.3% organic net sales increase for the quarter. We reported volume growth in six of our eight product categories in the segment as our value proposition continues to resonate with our clients. Fuel surcharges in logistics increased $12.7 million while modest price pressure across the segment negatively impacted net sales.

Adjusted income from operations of $44.4 million was down $1.6 million versus the 2017 period. Excluding the negative FX impact of nearly $7 million, profitability and margins improved as a result of cost reduction initiatives and volume gains. Turning to Page 11, net sales in our marketing solutions segment of $270.5 million for the second quarter of 2018 were down $0.8 million or 0.3% to the prior year quarter and both reported in an organic basis.

A double digit increase in our direct mail products driven by growth from existing clients and recent new client wins was offset by declines in our other product categories. Adjusted income from operations of $10.6 million was up $3.1 million. And our operating margin improved 110 basis points versus 2017 period due to class reductions. Second quarter 2018 non-GAAP and allocated corporate expenses of $18.5 million increased $4.4 million driven by lower allocation recoveries and higher healthcare expenses partially offset by cost reduction initiatives.

On Page 12, net cash used in operating activities for the first half of 2018 was $128 million as compared to $40.9 million in 2017. Net changes in working capital, lower income, and higher tax payments are the key reasons for the year-on-year and favorability.

During the second quarter of 2018, net cash provided by operating activities was $12.3 million which was an improvement of $48.2 million as compared to the 2017 period. As expected, the unfavorable working capital build reported in the first quarter has started to reverse and we believe or working capital initiatives will provide further benefits in the second half of 2018.

Capital expenditures were $48 million in the first half of 2018 and proceeds and deposits from facility and other asset sales were $48.1 million in the same period.

Turning now to the balance sheet, as of June 30, we had total cash on hand of $257 million and total debt outstanding of $2.26 billion, including $322 million drawn against our credit facility. Remaining availability on the credit facility was $351.8 million as of June 30. On July 2, we completed the sale of our print logistics business for $60 million subject to normal working capital adjustments.

Proceeds from the sale were used to reduce borrowings outstanding in our credit facility. We expect to report an insignificant gain on the sale in the third quarter with no cash taxes and that sale will have a slightly favorable impact on our financial leverage. Also as referenced in our press release yesterday, we have entered into an agreement to sell a building in an international location and transfer the related land used rights to a third-party.

Gross proceeds from the sale are expected to be approximately $250 million and the network value of the assets is insignificant, we expect to close this transaction in 2020 after we have relocated the business to a new facility and obtain required governmental approvals. As of June 30, we have collected $44.6 million of non-refundable deposits from the buyer plus additional deposits are required prior to closing.

Amongst collected are unrestricted, but we expect and will remain in a foreign cash accounts until the governmental approvals are obtained closing is finalized and local taxes are paid. Before I shift to our updated expectations for 2018, I would like to provide you with an update of our ongoing capital priorities.

Yesterday, we announced that our board declared a reduced dividend in order to accelerate the pace at which we reposition our balance sheet and improve our financial flexibility to support our strategy. We remain committed to our quarterly dividend although our board does review our recommendation each quarter.

As I have stated in past quarters, we expect to make strategic investments in our business, including both organic investments and potential acquisitions and we continuously evaluate our portfolio for strategic opportunities to optimize stockholder value like a sale of our print logistics business and the same of facilities and other assets.

Lastly, we do not expect to repurchase shares in the foreseeable future. Our revised expectations for full year 2018 are reflected on Page 13 of the supplemental slides. For the full year, we expect net sales to range from $6.75 billion to $6.9 billion. Adjusted diluted earnings per share is expected to range from $0.80 to $1.10.

Updates to the previous guidance primarily reflect the impact the divestiture of our print logistics business on July 2. While print logistics had been expected to generate $270 million of net sales in the last half of 2018, we have offset a portion of this decline with an upward adjustment of sales reflecting a continuation of the stronger organic performance we are seeing since the beginning of the year.

It is also important to note that the print logistics profitability in the first half of the year was significantly less than was expected in the last half of the year due to the impact of higher cost of transportation and lower seasonal volume. Thus we expect that this position will have a slightly favorable impact on our financial leverage.

Shifting to our 2018 cash flow, we expect cash flow from operations to range from $175 million to $210 million. This range has been updated to reflect the disposition of current logistics and payments for transaction cost. Capital expenditures are expected to range from $100 million to $110 million.

Before I wrap up, I would like to comment on our expected performance for the third quarter of the year. We anticipate our net sales and earnings will be seasonally strongest in the last half for the year with a greater concentration in Q4 as compared to 2017. In the third quarter, we estimate our net organic sales to be up slightly but down on a reported basis as a result of the divestiture of our print logistics business.

Further, assuming exchange rates remain similar to those of the end of second quarter, we expect FX, FX rate changes to have a slightly positive impact on our results as compared to the prior year period.

We also expect to realize additional savings from our cost reduction initiatives, which will help offset normal pricing pressure. Interest expense is expected to be flat last year and our effective tax rate is expected to begin to normalize with increased earnings but is expected still to be unfavorable to last year. Each of these factors has been considered in our full year guidance.

And now, Operator, let's open up the line for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question today comes from line of Charlie Strauzer with CJS. Please go ahead.

Charlie Strauzer

Hi, good morning.

Dan Knotts

Good morning, Charlie.

Terry Peterson

Hi, Charlie.

Charlie Strauzer

Just a few things we can talk about here. First, the sale of the international building, that's a pretty big number and you obviously have mentioned I think it as a gross number, and again you have to find a new location, any sense of what the cost will be to kind of move into that new location to kind of give us a sense as to what the net proceeds might look like?

Terry Peterson

Yes. Certainly the largest adjustments in those proceeds will be for the taxes that we will be doing. That's a normal level of the taxes on a gain -- on a significant gain like that. The relocation cost, we don't expect to be significant to relocate that, certainly not in the context of the sales price that we are talking about here. So we will be relocating that business. I have identified a new facility, so work is underway to plan and prepare for that.

Dan Knotts

And Charlie, the neutrality, the only other thing I would add to that is we think about the investment required to establish a new facility, and the equipment that goes within that, we plan on funding that through our normal capital allocation process. So that will be included in the range, the capital range, our normal capital range that we provide as a company.

Terry Peterson

Yes, the capital expenditure guidance that we provided for this year, the $100 million to $110 million, some of that is earmarked for this particular project.

Charlie Strauzer

Understood, great. Thank you very much on that. And then, if you can give us a little bit of color, Terry, maybe on how we should think about Q3 and Q4 separately with the back-half of the year, I know that historically is in a pretty good ramp from Q3 to Q4 profitability wide, but maybe give us a little bit more kind of granularity on just between how we should model Q3 versus Q4.

Terry Peterson

Yes, absolutely. As I mentioned in my prepared remarks, the distribution between quarters, we expect they are waiting to be a little bit higher in the fourth quarter than what we saw in 2017. So, as you are thinking about how you split between those quarters, certainly keep that in mind.

The other thing, Charlie, that I would offer to help you seeing through that, is to really kind of look at our second quarter results that we just posted here. As both Dan and I mentioned, we saw some organic growth. I indicated in my remarks that we continue to see that, expected to see that in third quarter. And again setting the FX impact beside, which was a negative impact of nearly a $7 million in the second quarter, we were able to report both EBITDA as well as adjusted IFO growth on the bottom-line there. So, if you think about third quarter and potentially the negative headwind of FX going away for the first time in a very long period of time, there is relationships there that will potentially carry over into third quarter as well, so that's really on the -- kind of the pre-tax basis. Again, taxes as we guided for the entire year but that will certainly be an impact in third and fourth quarter as well. We do expect those taxes to be higher this year compared to the prior year. So, some of that work that we've done operationally, a portion of that will have to offset higher taxes.

Charlie Strauzer

That's helpful. Thank you very much. And then, just lastly before I jump back in queue, just an update like the overall plans that you worked with the balance sheet, and I know obviously the sale of this land and property internationally will help that process, but maybe is there any update on kind of what your thoughts on there?

Terry Peterson

Yes. This thing that we have eminently ahead of us here is -- our last half operating cash flow and free cash flow are nationally positive because of the seasonality of our business. So that free cash flow will be able to help us reduce debt and de-lever over the balance of the year as well. The reduction and the dividend that will allow us to I think that pays a little bit on top of that. We will continue to look at opportunities, not only the balance of this year but certainly in the next year in the future, but to help us improve our leverage from it is today through as we continue to look at our portfolio and optimize businesses that are not a strategic are core to our strategy and also looking for opportunistic abilities to execute on facility and other asset type of sales.

So, we are continuing to look at that and our restructuring activities are natural place to provide us some opportunities, although the international facility that we are currently under contract. The magnitude of that is obviously very unique and rare and we would expect nothing like that as we look through other portions of our asset base.

Dan Knotts

And Charlie, it's Dan. I think the frame model of that, I think it is important that, it starts for us with generating the free cash flow by driving our operating performance and we remain very focused on that as we progress into the second half of the year and delivering on the guidance that we provided. The second and third piece of that is dimension of the framework that were as part of our plan to de-lever the balance sheet. The second one does include ongoing evaluation of opportunities to monetize other assets and it's not something that the decision, the agreements that we announced is the one we did in the first quarter, it's not something that came out of blue. We have a target list of opportunities, we want to make sense for us to move forward with those, we will continue to do that and the third part of that is around portfolio optimization, it really ties into our strategy.

And as we look at the strategic direction where we want to go with the marketing business communications company where we are going to continue to look at opportunities will make sense for us to further optimize our portfolio and tighten our focus as we execute the strategy that we've defined for the foreseeable future.

Charlie Strauzer

It's helpful. Thank you very much.

Dan Knotts

Thanks, Charlie


Our next question will come from the line of Jamie Claman with Buckingham [Ph].

Unidentified Analyst

Hey, gentlemen. Good morning.

Dan Knotts

Good morning.

Terry Peterson

Hi, Jamie.

Unidentified Analyst

Hi, guys. Can you just refresh my memory on the cards business in Commercial Print to get kind of how that business develops possibly last year? So are we getting close to the point where you guys are laughing that, analyzing it?

Dan Knotts

I'll answer the last part first, the laughing part, it will continue to improve those year-on-year comparisons, we will get better as the year progresses, so that is getting better and it's getting better for two reasons. Last year, in 2017 those sales were at their peak and in the first part of the year and it cut back throughout the year. So those year-over-year comparisons do get easier for us and so we are at continued to be at a lower level throughout the balance of 2018. And then, secondly as we've taken actions to adjust that cost structure based on the revised demand from that client. We are just building upon the benefits that we are realizing that are also helping to protect the profitability from that reduction. So this is the specialty cards that's based. This is a business that, it can -- it is impacted by popular trends and what the kids and young adults are really focused on given at first time, there was as we think about the end of '15 and to '16 and early '17. There were as the trend for these types of cards was very, very strong and…

Unidentified Analyst

Yes, yes, I just want to bud in, I saw plenty all timers looking at their telephone screens walking around the streets obviously, you are so good, so not just get the young adults?

Dan Knotts

Yes, okay. That's fair. Certainly if you are below 30 years old but I appreciate that but. Yes, but still it is somewhat driven by Feds and demand driven by something that is more popular at certain times and run its course and cycles through. So we are especially in a down cycle right now.

Terry Peterson

And Jamie, just to build on that a bit what traditional points, the first one is we are also not sitting idle and taking cost reduction actions that will, that are working their way through the results overtime for that particular facility but even more important than that is that we are aggressively pursuing new business in the marketplace to replace that business that existed in that particular facility and we are making progress there as well.

Unidentified Analyst

On other, on Commercial Print, not a presidential year but certainly potentially compatible actions coming up for fall. I would anticipate you all would benefit from that, is that right?

Dan Knotts

Yes, absolutely we do, that was contemplated in our guidance and even at the beginning of the year and we expect that to be good for the midterm elections. Certainly, up from last year but again that was contemplating. We did, start to see some of those orders come in even in second quarter here, but it's small enough, but early signs are absolutely good there from the health of that business.

Unidentified Analyst

Notice the defenses contract are came back out, is that something you are bidding on?

Dan Knotts

Yes, it's early in the process, you saw that -- you saw the announcement, you obviously saw the announcement with the GPL government is bringing the censuses contract of that unit but that's one that as it comes out we will evaluate our position in the requirements of that, the second time around and determines to make sense for us to pursue that or not historically in the process at this point.

Unidentified Analyst

Okay, then laughing again, you don't have to be thrilled of that direct mail and the numbers you all are putting up. How much of this, I mean I know it's impossible with numbers around it, but how much of this is customers buying into the transformation strategy. How you all positioning yourself when you are going to market, et cetera, et cetera.

Dan Knotts

Yes, I think. First off, Jamie, I'm excited about direct mail, but I'm also excited that 7 of our 11 product offerings delivered organic growth for the quarter. So when we think about our value proposition and our go-to-market strategies under the new alignment New York station structure we have within marketing solutions and business services, we feel very good about our value proposition and how it's resonating with our clients as evidenced by our new wins in ongoing growth that we are delivering. Direct mail is an interesting one in that and the people thought, also my direct mail was going to go away and the clients are finding as that direct mail still plays a very prominent role in the marketing communications, strategies and people still respond to direct mail and perhaps because a little bit of digital overload on the flip side of that. So our direct mail is simply, our direct mail offering those well beyond simply printing and mailing direct mail. So think about data analytics, we think about the creative design elements of that. We think about controls and programs driving those that benefit and showing our clients a better way that drives better responses, it's a critical component of our direct mail, direct marketing offering and we feel good, very good about our position there.

Unidentified Analyst

Thank you all very much for your time.

Dan Knotts

Yes, thanks, Jamie.


Our next question comes from the line of David Phipps with Citi.

David Phipps

Thank you. For the asset sales that you are building your earnings now transfer to 2020, now why is the contract so early in the cycle. So is it a couple of year process, you got the price you are looking for and how this is kind of about that you have something that's almost two years away.

Dan Knotts

So I'll start with how it came about, I'll come back to my -- the stand by the way, I come back to my previous comments and that as we look at collectively in our asset structure, physical asset structure around the world, we constantly evaluate for opportunities that make sense for us for monetization standpoint and drive the appropriate return that we are looking for. So again this is not and that hard type decision, it's part of rather framework of opportunities that we continue to explore and we will continue to explore going forward.

In terms of the length of the process, I think it's important to recognize that this is a transition of a facility that is currently operating into a new facility. So as you think about the timeframe that's required to first of all upfront design permitting all the things that go in permits, all the things that go into that. The second piece of that is actually building a facility and moving all the equipment into that facility, third part that is finalizing all the approvals that are necessary that's what is driving that to your process, so it's part of the original plan, part of the overall plan and we remain on track to deliver that plan.

David Phipps

Thank you and then we look at the segment revenue breakdown Europe is also very strong, can you talked that and then may be talked to the slowdown on the Asian sales which were gone up 10 percentage points growth is still healthier?

Dan Knotts

Yes, thanks for noticing that's Europe has really had a strong a year thus far our first quarter was strong and certainly second quarter is up nicely there to but that much like the, the whole business we're actually seeing really nice growth in many of our products categories over there, it was certainly are seeing our packaging business at doing well over there. Our statement business is doing well.

We also are benefiting a little bit from FX but really most of the products across the board there are doing well. The beginning of a slowdown in the Asia increases is really just a function of we're starting to laugh tougher quarters so that business is good strong still continuing to grow nicely but we were asked started to see some of that growth really materializing this time last year but still very, good, very strong out like there as well.

David Phipps

All right, thank you those are my questions.

Dan Knotts

Thank you.

Brian Feeney

Hey Nick, we have time for one more call question.


Thank you. And that will come from line of Bill Mastoris with Baird and Company.

Bill Mastoris

Thanks for squeezing me and I do appreciate it. Terry fully acknowledging right that free cash flow obviously is much stronger in the second half and on that you do need a minimum level of liquidity but also recognizing that you've got about 400, little bit o $400 million debt matures coming up over the next two years, could you update us on your thinking of how you're going to actually meet those debt matures, it's just going to be a matter of we're going to use a little bit of the revolving credit agreement or we're going to refinance this because maybe we can out there at coupon rates is a little bit cheaper than where your current coupons would imply, what you're thinking there now?

Terry Peterson

Yes, let me address the imminent maturity which is the February of 2019 maturity for $172 million that's as stated we do plan to utilize availability on the credit facility to us satisfy that redemption there and as we look out to. Additional upcoming maturities that we have nothing else coming due for the balance of 2019, so we're really talking about getting into 2020 as we begin to tackle those next maturities.

Planned there we're still looking at different options we have not spoken publicly about set our firm plans to do that but certainly refinancing is something that we would consider status of our cash position, could change as well with certainly with, depending on what happens with the portfolio versus strategic investments, so that can create some potential opportunity there too.

We talked about the facilities sale and the significant proceeds coming from that, that won't be the answer for 2020 but that's can certainly help, nicely in that window of time when we have sizable majority of that coming to us so that sort of an opportunity also plays into that, so kind of have the answer in the strategy kind of locked down for the Internet maturity and working through different options on the later ones.

Bill Mastoris

Okay, my second question for Dan. Dan here you've had really two good quarters at least I would characterize them as good quarters where you had additional wins certainly in the business seems to be moving in the right direction and things with promising your debt has actually held in extremely well versus that of let's say other securities out there in the marketplace but the stock has taken a little bit of a beating, where's the disconnect there?

Dan Knotts

First of all thank you for acknowledging our performance over the last couple of quarters. We are in full agreement with you that, we continue to deliver a solid performance. We also recognize we have more work to do we're never satisfied and with that continue to get better and better over time if we work very hard to do that.

Here relative to the disconnect is a great question and I certainly wish I had that had that answer, we have spent a lot of time in the market and getting feedback from lots of different experts, analysts people that spent time in this industry and for us I don't have the think the way to frame that our position that is there's a significant number of opinions out there. But the reality is we are going to continue to focus on driving our performance.

We're going to continue to focus on driving the top line of this company of its unit growth to focus on driving the bottom-line on this company. We continue to focus on creating the free cash flow and we continued to focus on improving our balance sheet and creating the financial flexibility we need to execute our strategy and we firmly believe in our strategy going forward and the evidence of the last couple quarters we believe is there, that tells us that we're definitely moving in the right direction, so hard one to answer other than saying. We're going to continue to perform. We're going to focus on improving our balance sheet, improving our financial flexibility and at the stock price take care of itself.

Bill Mastoris

Okay, thank you very much. I appreciate it.


Thank you. I'll turn the call back over to Dan Knotts for closing remarks.

Dan Knotts

Great, thank you for joining us on the call today. Our key messages for the quarter are listed on slide 14 of our deck and as you heard on today's call, we continue to advance our strategy and we're taking actions that we believe will deliver long-term profitable growth for RRD. I like to thank all of our employees around the world for your dedication and commitment as we continue to perform for our clients each and every day. Your commitments excellence is what makes this company great enables RRD to help our clients create better connections with their customers. With that I'm going to turn the call back over to Brian.

Brian Feeney

Thanks, Dan. I would like to inform everyone that RRDs management team will be participating in the Buckingham Research Conference in New York City on Thursday, September 20. Also as a reminder, information to access telephonic replay of RRD second quarter 2018 results call can be found in our second quarter press release. A copy of which is posted on the Investor section of our Web site at our rrd.com.

Thank you for joining us and that concludes the R.R. Donnelley second quarter 2018 earnings call.


Thank you as stated. That does conclude our conference for today. We thank you for your participation and for using AT&T teleconference. You may now disconnect.