R.R. Donnelley & Sons Company (RRD) CEO Daniel Knotts on Q2 2019 Results - Earnings Call Transcript

Jul. 31, 2019 4:56 PM ETR. R. Donnelley & Sons Company (RRD)
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R.R. Donnelley & Sons Company (NYSE:RRD) Q2 2019 Earnings Conference Call July 31, 2019 11:00 AM ET

Company Participants

Brian Feeney - Senior Vice President of Investor Relations

Dan Knotts - President & Chief Executive Officer

Terry Peterson - Chief Financial Officer

Conference Call Participants

Charlie Strauzer - CJS

Jamie Clement - Buckingham Research

David Phipps - Citi

Bill Mastoris - Baird

Operator

Welcome to the R.R. Donnelley Second Quarter 2019 Earnings Conference Call. My name is Greg and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After remarks from the company representatives, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded.

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

Brian Feeney

Thank you, Greg, and thank you, everyone, for joining RRD second quarter 2019 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 on the investor section of our website at rrd.com. As we review second 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 investor section of our website 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 different materially, please refer to the cautionary statement included in our earnings release and the risk factors included 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, which is also posted on the Investors section of our website.

I will now turn the call over to Dan.

Dan Knotts

Great. Thanks, Brian. Good morning, everyone, and thank you for joining us. On our call today, I'm going to review our second quarter performance and provide an update on the progress we're making in executing our strategic priorities. I'm also going to share a couple of client examples that reinforce our strategic direction and further demonstrate how we're helping our clients better connect with their customers through their marketing and business communications.

Turning to slide 3. Our results for the quarter were in line with our expectations. We delivered improvements in adjusted income from operations, EPS and operating cash flow and we successfully launched our accelerated cash repatriation strategies to further reduce our debt outstanding. Throughout the quarter, our executional focus remained strong. We delivered against our operating plans and we continued to aggressively drive our cost-reduction initiatives and lower our cost-to-serve.

Let me hit the highlights for the quarter. On the top line, our organic sales performance improved sequentially from the first quarter, highlighted by improved organic growth in our Marketing Solutions segment. While we continue to experience market softness, primarily in our Commercial Print and Logistics categories, we posted top line growth in a number of our targeted higher-value categories, including direct marketing, packaging, labels and digital print.

Overall, our top line performance has played out as we expected for the first half of the year, including the impact from exiting unprofitable business in our platform rationalization actions. Looking ahead, we expect to see continued improvement in our organic sales performance for the back half of the year.

From a profitability perspective, we delivered a 7.4% improvement in income from operations and 40 basis point improvement in our operating margin. Our favorable performance reflects the positive impact from the actions we are taking to strengthen our core performance, including exiting unprofitable work, rationalizing our global operating platforms to better match our cost with our revenues, divesting non-core businesses and maintaining our relentless focus on productivity in lowering our cost to serve.

Our favorable operating earnings performance in Q2 marks our second consecutive quarter of earnings improvement and we have now posted higher earnings in three of our last four quarters. Further, with a reported operating margin improvement, we achieved our fourth consecutive quarter of year-over-year operating margin expansion.

During the quarter, our teams continued to execute well on two very important initiatives that we've discussed on our prior calls; the planned sale and relocation of our China printing facility and production of the 2020 Census. With regards to our China facility, we've completed construction and we successfully vacated the exiting print location. We will now begin to ramp up production in the new facility in the second half of the year.

Relative to the 2020 Census, we've begun production and we remain on track to deliver this project as planned. Our teams are laser-focused on executing both of these high-profile initiatives with the same level of commitment and quality assurance that we bring to every client engagement.

Shifting to cash and debt. I'm pleased to report that during the quarter, we took two important steps that reinforce our commitment to improving our balance sheet. First, we finalized our strategy to accelerate the repatriation of international cash to the U.S. this year, which we are using to lower our outstanding debt.

Second, we sold our Research and Development business for $11.7 million in cash and used the proceeds to pay down debt. Terry will provide additional details on both of these initiatives in his comments. As we move into our seasonally stronger second half of the year, we are confident in our ability to drive continued sequential improvement in organic sales, execute our operating plans and achieve our full year guidance.

Turning to slide 4. The challenge for businesses to attract, acquire and retain customers is becoming increasingly complicated and requires tight integration of digital and physical customer communications. To better help our clients meet that challenge, we are continuing to build an industry-leading portfolio of integrated services that reduces complexity and cost for our clients, while helping them enhance the effectiveness of their communications investments.

Through our Marketing Solutions capabilities, we're partnering with our clients to create, manage and execute their complex marketing programs across both print and digital channels. As a recent client example, global jewelry brand Swarovski AG developed a marketing campaign to promote a new product line. As part of this broader marketing campaign, Swarovski AG developed a concept for a new pop-up store retail format.

Our Retail Solutions group activated this aspect of the marketing plan by helping to create, produce and execute the installation to a five-day event that drove brand awareness, interactions, social engagements and website referrals. This project resulted in increase in sales over the prior year as well as an increase in store traffic and an increase in overall transactions.

In Business Services, we're helping our clients more effectively execute the business communication programs they use to engage with their customers over the full course of their business relationship. And as our clients face more options than ever before to engage with their customers, we're leveraging our business communications expertise to reduce the overall complexity and cost of these programs for our clients.

We recently won an engagement with a large resort company to improve the efficiency of their print supply chain. This client sought to consolidate print suppliers, improve branding and automate the process to which their resort locations order products that include branded menus in-room materials, loyalty programs and check-out invoices. Through a combination of our Commercial Print platform and technology solutions, we're streamlining the ordering process to create a seamless experience for employees and ensure brand consistency across all the print and point-of-sale products that they use to engage with their customers.

And while the solutions we provide through our Marketing Solutions and Business Services segments are creating value for our clients on a stand-alone basis, what further differentiates RRD in the markets we serve is our ability to connect our clients with their customers across the full range of the communications touch points, from the marketing programs they use to acquire new and inspire repeat customers to the business communications they use to service inform and transact with those customers over time.

By tapping into the full breadth of our offerings, we're harnessing the power of RRD in providing complete solutions to support our clients' integrated marketing and business communications programs. To further accentuate this point, one of our very large bank clients recently won a significant new retail credit card program that requires extensive communications across multiple consumer touch points.

Starting with the launch. Our Marketing Solutions team is executing a Direct Mail program to acquire new and lapse customers, encourage online shopper engagement and drive store traffic. Our Business Services team is managing the ongoing customer experience by providing the forms and inserts that accompany the new cards, producing and mailing the monthly credit card statements and creating and producing the in-store promotions that support new customer enrollment.

By leveraging the capabilities of both of our segments, we are creating a smarter, more customized and responsive experience for potential and current cardholders of the bank. And as we leverage our differentiated capabilities to create value for our clients, we continue to earn important recognition in the markets we serve.

FCA recently recognized RRD with the North American Supplier of the Year award in the Foundational Principles category. The Supplier of the Year awards are determined based on an evaluation of each company's supplier scorecard performance in 2018. The Foundational Principle winners in particular are recognized for demonstrating extraordinary partnership, collaboration, transparency and integrity. We are proud to be part of FCA's ongoing transformation as the company builds for the future.

We were also shortlisted for the annual Pentawards competition, a global competition conducted by a leading network dedicated to sharing and bringing exposure to global packaging design. We were recognized for designing and producing a new label Chinese for YUNJIANG, China's premier private label liquor manufacturer. YUNJIANG engaged RRD to create a label that would showcase the quality and uniqueness of their product, which is the first ginger-fermented liquor in the China market.

RRD conducted extensive research to inform the development of a new label that would highlight the significance of the beverage and its origin.

Around the world, our right to play and our ability to win all starts with the experience we're delivering for our clients. We are proud of our performance and honored to be recognized through these awards.

Turning to slide 5. Before turning the call over to Terry, I would like to reinforce a number of key messages related to the progress we are making in advancing our strategic priority. First, we continue to strengthen our core performance by rationalizing our global footprint, and exiting unprofitable business, divesting of non-core businesses and executing our productivity and cost-reduction plans.

Second, we're delivering growth in our higher-value product and service categories including Direct Mail, Packaging, Labels and Digital Print.

Third, we're aggressively managing our cost-to-serve as evidenced by the 4.3% reduction in SG&A cost we reported for the quarter. Together, these actions are playing a key role in driving the improvement in our operating earnings and operating performance -- margin performance over the last four quarters.

Finally, we remain disciplined in our approach to capital deployment and we have taken additional actions to further reduce our outstanding debt through the sale of our RRD business and the successful launch of our strategies to accelerate international cash repatriation.

While we always have more work to do, I am pleased with our progress as we continue to evolve RRD as an industry-leading provider of marketing and business communications services.

And with that I'll 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. Please refer to page 6 on the supplemental slides as I begin my remarks. This page provides a snapshot of our second quarter products and services net sales performance by segment and by geography for consolidated RRD.

On a reported basis, net sales were down 10.2% in the quarter which included a reduction of 6.7 percentage points associated with three recent business dispositions including last year's sale of our Print Logistics business and another 1 percentage point associated with the stronger U.S. dollar.

On an organic basis, sales were down 2.5% which included a decline of 3.5% in Business Services, partially offset by an increase of 2.6% in Marketing Solutions. In Business Services, sales in Commercial Print continue to be negatively impacted by normal secular declines as well as our continued exit of unprofitable business.

We estimate that the secular organic sales decline rate for our Commercial, Print domestically was between 3% and 4% in the second quarter including some impact from higher election-related volume last year not repeating this year.

We have also reported year-over-year declines in our Logistics business for the last two quarters driven by lower client demand. We believe the recent declines in Logistics is primarily due to an exceptionally strong 2018 rather than an issue with performance in the current year. Results and growth trends in 2019 are favorable and in line with growth trends reported in 2017 after excluding the 2018 anomaly.

Last year, the logistics industry as a whole, experienced a spike in demand from a strong economy and capacity shortages amongst shippers. Demand and capacity levels have returned to normal levels in 2019. Packaging and Labels, two of our strategic growth categories both reported favorable organic sales performance in the quarter.

In Marketing Solutions, we delivered sales growth in Digital Print and Fulfillment and Direct Marketing products driven by higher client volumes. This favorable sales performance was partially offset by the expected decline in Digital and Creative Solutions related to our continued strategic shift away from traditional print media services for non-core market segments. The impact of this shift is now behind us and will not impact future quarters.

As I mentioned on our first quarter call, we expected to see organic sales declines in the first two quarters of this year and we continue to expect a return to organic sales growth in the back half of the year as we onboard new large clients including the 2020 Census. Additionally, sales from our Brazil operations which had previously been negatively impacting our organic sales performance are now excluded from our organic calculation beginning in the second quarter as a result of the closure on March 31.

On page 7, adjusted income from operations of $39.2 million was $2.7 million higher versus the second quarter of 2018. In addition, our corresponding operating margins increased from 2.2% in 2018 to 2.6% this year. This represents our fourth consecutive quarter of reporting year-over-year improvements in our operating margin as we continue to strengthen our core business performance.

The combination of an approximate $11 million benefit from changes in foreign exchange rates, ongoing cost-reductions initiatives and lower depreciation and amortization expense more than offset the impact of unfavorable volume and product mix in 2019 versus the same period in 2018.

Adjusted SG&A expense of $199.1 million in the second quarter is down $8.9 million or 4.3% from the prior year reflecting our ongoing efforts to lower our cost-to-serve.

Adjusted loss per share was $0.03 in the second quarter as compared to a $0.09 loss, reported in the prior year period. While the 2019 period benefited from a $3.9 million reduction in interest expense.

And higher adjusted income from operations, tax expense was unfavorable. Our adjusted effective tax rate was 146.3%, in the current quarter which once again is a bit nonsensical.

However, the higher rate is attributable to a combination of seasonally lower income, and the disproportionate part of the business operating at a seasonal loss for which we do not record a tax benefit.

In addition, tax expense in the second quarter of 2019, included a charge of $3.4 million, relating to withholding taxes associated with the significant repatriation of foreign cash.

Similar to last year, we expect the rate to normalize in the last half of the year, as we generate seasonally strong higher earnings. We also expect our ongoing efforts to reduce interest expense among other initiatives will help improve our effective tax rate in future years.

Our GAAP results for the quarter included pre-tax restructuring and other charges of $16 million, including charges associated with the closure of our China facility. We also recognized a pre-tax gain of $6.2 million related to the sale of our Research and Development business in the second quarter.

But that gain was largely offset by a negative charge related to an unfavorable court ruling on a state sales tax matter associated with the former print facility we closed in 2015.

Turning now to the balance sheet and cash flow on page 8, as of June 30 2019, we had total cash on hand of $220.5 million. And total debt outstanding of $2.12 billion, including $270 million drawn against the credit facility. Remaining availability on the credit facility was $397.2 million at the end of the quarter.

Net cash provided by operating activities was $12.9 million which was an improvement of $600,000 as compared to the second quarter of 2018. Improvements in working capital were partially offset by higher tax and restructuring payments.

Capital expenditures of $39 million were $12.5 million higher compared to the 2018 period. As a reminder, throughout the course of 2019, we are funding incremental investments for the construction of the new China facility and the 2020 Census project.

Next, I would like to provide you with a reminder, of our ongoing capital priorities. As I 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 opportunities to optimize stockholder value.

Page 9 is a summary of recent actions we have taken to reduce our debt outstanding. In regards to the pending sale of our printing facility in Shenzhen, China, we completed construction of the new printing facility early in the second quarter. And we finished moving to the new location in June, on schedule.

The buyer continues to work with the government, to obtain the necessary approvals so we can complete the sale. Based on the buyer's previous experience, they estimate the required approvals will be obtained in early to mid-2021, at which time the transaction will close and we expect to record a significant gain on the sale.

We expect that we will collect our next non-refundable deposit of approximately $25 million in the third quarter of 2019. As a reminder, our contract with the buyer requires them to pay the entire purchase price, even if the government's approval is not obtained and the sale does not close.

We continue to focus on improving our balance sheet flexibility. In last night's press release, we announced that we launched our strategy to accelerate the repatriation of cash from foreign jurisdictions to the U.S. During the six months ended June 30 2019, we transferred $122 million of international cash to the U.S. which was used to reduce debt outstanding.

Based on current regulations and procedural requirements in foreign countries, we expect to transfer between $200 million and $250 million to the U.S. during 2019, including amounts transferred during the first half of the year.

Further, we sold our Research and Development business in the second quarter for $11.7 million in cash, which was also used to reduce debt outstanding. Given that our debt outstanding at the end of the second quarter of the year is usually at, or near its highest point during the year, due to the seasonal nature of our business.

We believe the best comparison to show the progress we have made in reducing our debt, is to compare the amount of debt currently outstanding, to the same period in 2018.

Since June 30 2018, we have reduced total debt outstanding by $134 million while making incremental investments, in critical initiatives like constructing the new print facility in China and purchasing additional equipment for the 2020 Census project.

Page 10 of the supplemental slide show the various maturities of our outstanding debt by year, as of June 30. The 2020 notes, with an outstanding balance of nearly $66 million are scheduled to mature in June, and are now being reflected on our balance sheet in the current category. We plan to repay those notes using availability on our credit facility, similar to how we retired the $172 million of 2019 notes that matured last February. Our expectations for full year 2019 are reflected on Page 11 of the supplemental slides. We have reaffirmed all of our guidance for the year.

Before I wrap-up my comments, I would like to comment on our expected performance for the third quarter of the year. We expect our reported net sales in the third quarter to be similar to 2018.

Business dispositions, which reported net sales of $13.5 million in the third quarter last year, will be a negative factor on a reported basis. The impact of those dispositions will be partially offset by the continued onboarding of a new significant client and we expect to begin recording sales from the 2020 Census project.

We also expect continued softness in our commercial print products related to the closure of certain low-performing printing facilities as well as planned reductions in unprofitable work in both the U.S. and China.

As a side note, we have closed 18 locations across our business since early last year as part of our profit improvement initiatives. We will continue to make investments to onboard new clients, while we strengthen our core performance and lower our cost-to-serve through the execution of our productivity initiatives and business improvement plans.

We expect our China margins to continue to be negatively impacted during the third quarter as we transition work into our new facility from the third-party printers. Interest expense is expected to be favorable in the quarter versus last year following the repayment of our 2019 notes and our effective tax rate is expected to be slightly higher year-over-year due to the finalization of tax reform regulations in the fourth quarter of 2018.

Taking all of these factors into consideration, we expect our adjusted diluted income per share to be similar to last year's reported amount. Importantly, each of these factors has been considered in our full year guidance.

And now operator let's open up the lines for questions.

Question-and-Answer Session

Operator

Okay. [Operator Instructions] Your first question comes from the line of Charlie Strauzer from CJS. Please go ahead.

Charlie Strauzer

Hi, good morning.

Dan Knotts

Good morning Charlie.

Terry Peterson

Hey Charlie.

Charlie Strauzer

Hey. If we can talk a little bit more about Q3 and also just your margins as well in general. Just if you look at the margin improvement you've been showing with it the Census contract ramping, is there any potential steps down in margins in Q3 expected there just as you're ramping expenses ahead of the revenue for the Census contract?

Terry Peterson

Charlie we've certainly provided our guidance for the operating income for the year, but we do continue to expect that as we onboard things like the Census and as we plan to report relative to the last half of the year that we should continue to benefit from our cost-out actions and profit improvement activities and that should continue to help us report strength in our operating margins going into third quarter for sure.

Charlie Strauzer

Got it. So, action on the cost front should be enough to hopefully absorb any additional onboarding cost?

Terry Peterson

Any what cost?

Dan Knotts

Onboarding.

Charlie Strauzer

Onboarding cost for the Census.

Terry Peterson

Yes. Yes, we do, where that's been the case.

Dan Knotts

Yes, I think Charlie just to add to that. The cost -- ongoing cost reduction actions that we've taken as well as the ramping up of additional volume and incremental levers we get from that are key factors in driving that margin performance as well.

Charlie Strauzer

Got it. And then just looking at this current quarter that you just reported on the Business Services side, obviously, logistics was down year-over-year. What was the -- on the organic basis, what was that number -- what that decline looked like?

Terry Peterson

If you -- we had the -- the reported number contains about $96 million of Print Logistics from last year. So, if you were to reduce that reduction by about $96 million, you'd probably come up -- I think it's close to $20 million.

Charlie Strauzer

Got it. Okay, great. And then just as you see -- as you head into the back half of the year in logistics, what are the trend looks like there? And are you seeing some improvement there on the revenue front?

Terry Peterson

So, we still continue to think that we'll have tougher comps to the 2018 period for the reasons I cited in my prepared remarks. But we expect stabilization and continued progress in that business. So, again, if you're going to go back to 2017 and use that as a comparative period, we would expect really continued progress that we've been seeing in the first two quarters.

Charlie Strauzer

Great. And then just looking at the statements printing in the quarter two, it's also down, I think it was 6.5% or so. Anything driving that that we can keep an eye on?

Terry Peterson

Yes. On the first two quarters, we talked in the past about working through the lapsing of a former customer of ours. That went through second quarter of last year. So that headwind will be gone. And that is generally the same product category where we are onboarding a new large client that continues to ramp. We'll continue to provide more benefit going into the last half of the year. So, the absence of the customer loss from a year ago will eliminate a headwind there.

Dan Knotts

Yes. Charlie in that -- on the statements, we're in a transition phase where the previous client is out. We're ramping up the new client. Those don't happen simultaneously. So, that's really what's driving the change there in the statement performance.

Charlie Strauzer

Excellent. Thank you very much.

Dan Knotts

Thank you.

Operator

Your next question comes from the line of Jamie Clement from Buckingham Research. Please go ahead.

Jamie Clement

Hey. Good morning gentlemen. Thanks for taking my questions.

Dan Knotts

Good morning Jamie.

Jamie Clement

Dan I was curious if we could kind of delve into some of your product lines a little bit. Really what I was kind of curious to get some info on are some of your more economically sensitive lines of business, and I guess obviously the big one is Commercial Print. I think Terry were you suggesting you thought organically, excluding the business that you all have walked away from you thought you're probably down about 3% to 4% during the quarter. Is that -- did I hear that right?

Terry Peterson

Yeah. On a secular basis, we think between 3% and 4%. But that does include some temporary impact because of the election-related revenue from last year.

Jamie Clement

Sure. Yeah. Of course.

Terry Peterson

Yeah. Yeah. Okay.

Jamie Clement

So I -- so Dan I would suggest that's a pretty good number for this market. And I've heard some independents complain about business activity during the June quarter. Were there are -- I mean, you think that you're -- first of all, do you agree that you think you outperformed the market? I guess that's the first question.

And then the second thing is, is it broad-based market share gains? Or is it just specific customer projects, whether it's consumer trading cards or anything like that? I'm just curious for your thoughts.

Dan Knotts

Yes. So, a couple of questions in there Jamie. I'll take them kind of one at a time. The first one is relative to market outperformance and I do believe that we are outperforming the market. And we have similar anecdotal information things that we hear about what's going on within the market what demand is happening or not happening from client base, et cetera. But one of the other things we play -- pay very close attention to is what's going on in the paper market and what's happening from an overall demand in the paper market.

If you look at the overall demand of what's going on there, whether you're talking uncoated ground with two coated free-sheet, you're talking ranges of down 10% to down 20% in the paper demand for a paper. So we do believe that -- never satisfied unless we're going, but do believe that there's a difference in our performance versus performance that's going on in the rest of the market number one.

Two then getting into what's driving that and I think that's really where the power of the RRD story comes into play. And if I'm competing solely with the ability only to provide commercial print services versus the ability to take the significant client base that we have of over 50,000 clients and extend our relationships with them, being able to offer and going after those opportunities to sell all of our products, but in particular Commercial Print, which the vast majority of those clients do some form of commercial printing and I think our sales team is doing a very good job of expanding our relationship winning larger client engagements. And each of these wins that we're trying to reinforce on our quarterly calls are driving -- are a key player in driving that overall performance.

But the short answer to that is given our client base and given our ability to leverage -- start at any point in their communications process and build from there by selling additional products and services is definitely a benefit for us and enables us to outperform the market in a lot of these categories.

Jamie Clement

Okay. I appreciate that. And Terry, I don't know if you want to take this. It sounds like in your logistics business you're facing identical fundamentals to some of the other public companies out there that have already had earnings calls. Were you also noticing -- in a lot of those cases you saw pretty substantial revenue declines year-over-year, but improvements in the net revenue margin. I know you're not -- you don't have to give me specific numbers. But how are your margins in Logistics holding up?

Dan Knotts

So I'll take that first Jamie and then I'll let Terry talk about the margin side. From Logistics product offering, service offering as we look at -- I think one of the important pieces to emphasize and to take out of what Terry shared is that if you look at whether it's the rail -- the intermodal rail carriers the over-the-road carriers or the brokerage providers, service providers that are all involved in the logistics space, you're seeing a fairly consistent story. There's some anomalies, but you're seeing a fairly consistent story of what's going on in 2019, and everybody sitting back scratching their head relative to the comparison to 2018 and what's going on within 2019.

And as we look at that and have done quite a bit of homework on that, the anomaly for us and I think that's underlying -- underpinning in the industry is really the 2018 performance driven by driver logs and increased demand and TL shortages and weather-related stuff that were causing shortages. And if you go back to look at the -- more of the historical trend excluding 2018 you see more of a trend that's aligned with previous years than a spike that occurred in 2018 from a demand standpoint.

The other dynamic that you've got going on within that as volumes spiked with the demand shortage that occurred in 2018, what naturally occurred there were price increases being passed along. And what you're seeing in 2019 is actually a reversal of that with softening market. You're seeing people talk about gross revenue net revenues. They're talking about pricing and perhaps something in a lower price per mile that they're capturing etcetera and expensive. It's broker versus carrier. But there's an aspect of that or element of that, that's actually being driven by prices on their way down because of the lower demand that's out there.

So it's a really unique -- I believe, it's really unique environment right now within the Logistics business that I believe will stabilize. We expect it to stabilize and we'll go forward from there. But Terry, why don't you comment on the margin side?

Terry Peterson

Yes. The challenge with comparing to the prior year for the last two quarters has been more of a challenge in the sales side, where we have reported the declines, but still up versus the 2017 period in those quarters.

On the profitability side or the income from operations side, it's been a little bit easier there. We're actually in both quarters a little bit favorable even to 2018 and even more favorable, if you were to compare to the 2017 first and second quarters. So margins have been fine. They're actually improving.

Jamie Clement

And is that -- Terry is that a function of, like at the net revenue line like in other words purchase transportation prices going down? Or are there -- or there are these specific actions you've taken?

Terry Peterson

It's both. We were certainly seeing pressure from the higher cost transportation especially earlier last year. But also too, that part of the business has been a focus of ours as well on cost improvement initiatives. So I would say both.

Jamie Clement

Yes. Dan, back to you. Some folks depending on where they're geographically heavy, referenced weather here in the June quarter. Was that an impact in the business at all?

Dan Knotts

I'd say that -- the short answer to that is yes, right? Those weather-related challenges it's pretty amazing the impact of those have overall. And it's -- actually location came down to state-specific in terms of what's happening -- what happens there. There are two things that drive that.

One is, obviously things get delayed dependent upon weather. But the other part that drives that is dependent upon what's happening and how significant that -- those weather events are.

A number of carriers get diverted and those trucks and TL and LTL both get diverted to emergency-type situations. So both those factors come into play in our Logistics business.

Jamie Clement

And then changing gears a little bit. Dan, it seems that folks in direct mail have enjoyed pretty good June quarters. What do you think is going on there? Do you think people are kind of recognizing the value of direct mail a little bit more than -- and then perhaps move a little bit away -- too far away from that over the last couple of years?

Dan Knotts

Yes. Well I think the depth of direct mail has been greatly exaggerated. I think as marketers that -- I think as marketers continue to look at the integrated programs and look at it each of us have preferences on how we want to be communicated with. And the Holy Grail was being able to -- from a digital standpoint the digital communications we're going to take over everything because it's be direct line of sight and accountability to that spend that goes into the digital channels.

And the reality is that, it's not -- put on the web so many click-throughs, so many page work the exactly -- I know that campaign or that channel works. That's not -- that works. That's not how it's playing out for marketers.

And the ability to connect through digital channels, the ability to connect through physical channels and the ability to connect through in-store experiences all remain critical components. It's product-specific, it's brand-specific and it's consumer-specific.

So as we think about direct mail, we continue to believe in the longevity of direct mail in that, it will continue to be an important part of marketers' campaigns, going forward. I think it's important that people just don't take one anecdote or one client saying, we're out of direct mail, and they label that across, that's what's happening to the entire marketplace because that's not our experience. And I don't believe that's going to be the experience going forward.

Jamie Clement

Okay. Thank you all very much for your time as always.

Dan Knotts

Yeah, thanks Jamie.

Operator

Your next question comes from the line of David Phipps from Citi. Please go ahead.

David Phipps

Hi, thanks for taking my question. And to -- like talk a little bit about the turnaround in the Packaging business from the first quarter, maybe what was driving that and maybe we can also talk about the improvement in the Asia sales on a sequential basis?

Terry Peterson

Yes. So then the Asia business and some of the Packaging business actually does come out of Asia too. But the turnaround there it's -- from a geographic standpoint, it still does show up as negative, but that is really just strictly because of the impact of FX.

Those on slide 6 are actually reported numbers not organic numbers. Asia and particularly China, we did report organic growth in the quarter and we did see some recovering pickup from the packaging business. There was customer activity in the first quarter of last year coming out of our China, the Packaging business that was not repeated and it creates some just temporary kind of one quarter-type drag bit on the sales there. So obviously that didn't repeat in the second quarter.

And we continue to see good strength in many of the product lines especially in Europe, but also in the United States from a Packaging standpoint. So that's just showing through better this quarter.

David Phipps

Fair enough. And just to follow through -- on the repatriated cash that you're able to bring back. You tend to focus that on some of the debt reduction which I guess would be the revolver and then continuing with the -- when we look at the remaining payments that are scheduled from the China asset sale, should we think of them as something like quarterly payments of about $25 million? Or are there other milestones or lumpiness that we should figure in?

Terry Peterson

No. Those are not regular. They're contractually-based. $25 million was the only one that was scheduled for this year, and it just happened to be in third quarter of this year. So, no. And the largest portion of those payments will actually be at closing. I do believe, we'll get another one or two payments next year, but the biggest piece will be once that closing occurs which again the current expectation for that is early to mid-2021.

David Phipps

Fair enough. And then finally, if you look at commodity prices year-over-year for the third quarter roughly what guidance can you give us on that?

Terry Peterson

I'd tell you that one of the large ones being paper. We had seen escalating cost in that space a year ago, and even into the first part of this year. Those really have stabilized and kind of our view and our outlook for the balance of the year is continued stabilization there. So I think that issue certainly seems to be tempering from where it as a few quarters ago.

David Phipps

Okay. Those are my questions. Thank you.

Terry Peterson

Thank you.

Brian Feeney

Yes. Thank you, David.

Operator

[Operator Instructions] Next we'll go to the line of Bill Mastoris from Baird. Please go ahead.

Bill Mastoris

Thank you. Terry I wonder if you could maybe clarify your answer to your last question a little bit more. And that is when you repatriate this cash, are you going to allocate it towards the near-term maturities first? Or is the flow of funds going to go first to the payment of the revolving credit facility, which will then redeem the 2021 maturities?

Terry Peterson

Yeah. The 2020 and the 2021 maturities. So, obviously the fastest thing I can do when the cash arrives is to pay down the credit facility, because I can do that in real time. But that being said, I am not opposed to looking at opportunities to perhaps do open-market purchases and such on some of the nearer-term maturities like the 2020s and 2021s should those -- should there be some liquidity in those spaces.

So that would be another alternative to help bring that interest expense down a little bit faster. But at a minimum, I've got still enough outstanding with $270 million outstanding on the credit facility as of June 30, still enough to actually use that cash to actually bring down debt. So...

Bill Mastoris

Okay. Thank you. And maybe one for you Dan and that is that -- we start to take a look at maybe some additional sales of businesses. As you kind of prune and actually refine your portfolio. Should we expect to see more bite-sized sales of businesses? Or is there something larger that could be coming down the pike?

Dan Knotts

Yes. So I think we don't provide direction or guidance relative to what businesses may or may not be candidates or are candidates for future divestitures. But I would say this is that the ongoing optimization of our portfolio is critical for two reasons. The first one is to continue to narrow our focus and emphasis on the core product lines and the higher value growth categories as we shift the overall mix of this company towards higher value, higher growth product and service offerings.

And the second part of that is the financial benefit of using those proceeds to help reposition our balance sheet to support the growth that we're looking to achieve in other areas. So we are -- we have ongoing focus on optimizing our portfolio, and you will see that play out over time.

Bill Mastoris

Okay. Thank you very much.

Operator

And at this time, there are no further questions. I'd like to turn the call back to Dan Knotts for any closing remarks.

Dan Knotts

Okay. Thank you. Slide 12 lists our key takeaways from today's calls. I'd like to thank all of our R&D team members around the world for your continued commitment to our clients and to our company. Your hard work is evidenced in our continued progress to position RRD for long-term profitable growth and deliver on our mission of better connecting our clients with their customers. Thank you. Your efforts are greatly appreciated.

And with that, I'll turn the call back over to Brian.

Brian Feeney

Thanks, Dan. As a reminder, information to access the telephonic replay of RRD second quarter 2019 results call can be found in our second quarter press release, a copy of which is posted on the Investors section of our website at rrd.com.

Thank you for joining us this morning, and thank -- that concludes the R.R. Donnelley second quarter 2019 earnings call.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Executive TeleConference. You may now disconnect.

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