RRD
#Thank you, Richard, and thank you, everyone, for joining RR Donnelley's fourth-quarter 2016 results conference call.
Joining me on today's call are <UNK> <UNK>, RR Donnelley's President and Chief Executive Officer, and <UNK> <UNK>, our Chief Financial Officer.
At the conclusion of today's prepared remarks, <UNK>, <UNK> and I will take questions.
The information that will be reviewed during this call is addressed in more detail in our fourth-quarter press release, a copy of which is posted on the Investors section of our website at rrdonnelley.com.
This information will also be furnished to the SEC on the form 8-K we filed today.
Throughout this call we will refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risk 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 further detail 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, however, provided for informational purposes only.
Any reference to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and on our website.
I will now turn the call over to <UNK>.
Great.
Thanks, <UNK>.
Good morning, everyone.
Thank you for joining us on our call today.
I'd like to begin by saying that we are pleased for our results for the fourth quarter of 2016, as we grew both our net sales and our non-GAAP income from operations for the second consecutive quarter.
Our results for the fourth quarter, similar to our third-quarter results, reflect continued improvements in our performance trend from the first half of 2016.
Our strong performance continues to be driven by our differentiated ability to provide cost-effective products and services as well as comprehensive communication solutions that enable our clients around the world to effectively create, manage, and execute their marketing and business communications.
Further, we continue executing on our strategy to optimize our core, accelerate our strategic growth offerings, broaden our existing client relationships, and scale our multi-channel communication services.
Underlying our strategic growth initiatives is our ongoing focus on adjusting our cost structure to match our sales performance while also maintaining a disciplined approach to capital allocation.
As an industry leader serving a large, fragments and evolving market, we are well positioned to meet growing client demand for innovative solutions that improve communications' effectiveness, reduce complexity and decrease cost.
The choices companies have to make to effectively communicate with their intended audiences are becoming critical in growing investments.
As our clients gain experience communicating in a multi-channel world, they are recognizing that how these communications are managed, optimized and delivered across the right channels makes those communications more effective and more impactful.
And while many companies have learned how to effectively communicate using individual channels, print or digital, or social, very few have mastered a fully integrated approach using multiple channels.
Companies are increasingly challenged to manage their content and deliver it across a complex maze of channels, all while reducing their cost.
Siloed processes, numerous suppliers, and rapidly involving technology, impact both current and future communications as brands are pressured to deliver meaningful customer experiences and the stakes are high for them to get it right.
Research from the Aberdeen Group shows that companies with strong omni-channel customer engagement efforts retained, on average, 89% of their customers compared to just 33% for companies with weak omni-channel customer engagement, yet most companies are challenged to put it all together.
Effective, impactful communications are at the heart of every successful organization and are at the core of what we do.
Whether unmatched portfolio products and services, specialized expertise and innovative technologies, we're confident in our ability to effectively serve the expanding and complex needs of our clients.
We are utilizing each of our offerings individually to extend our market position through new client acquisition.
We are providing combinations of our offerings to create bundled solutions as we expand our relationships with our more than 52,000 existing clients, and we continue to scale our multinational capabilities, including content management, digital services, and work flow automation to further expand our long-term strategic relationships with our clients by transforming the way they connect, interact, and engage with their customers.
Every day we are providing individual products, bundled offerings and integrated communication solutions across virtually all market segments to help our clients create those meaningful connections with their target audiences.
I'd now like to share a few examples of how we are creating value for our clients worldwide.
To further expand our marketing communications capabilities, in the third quarter of 2016, we acquired Precision Dialogue, an insights driven, omni-channel customer engagement firm.
We use these new capabilities to develop an innovative solution for a large national retailer faced with database inefficiencies, no real-time data, infrequent reporting, limited data analytics and underperforming marketing programs.
We rebuilt the client's database to become the realtime engine for their marketing initiatives, with RRD performing all of their analytics, managing all their marketing campaign development and executing all of their campaigns across multiple channels, including integrating their direct mail with digital, web, and mobile.
The results have been significant.
Our integrated offering through the combination of print and digital communications delivered a tremendous improvement in their return on investment as compared to their prior efforts.
We monitor performance by channel, by campaign type, and even by local store, which enables us to optimize the program for the client over time.
Our ability to develop insight-driven communication strategies that guide marketing initiatives and lead to improved client engagement through a true one-to-one dialogue further enhances our marketing communications offering.
In the complex and fast moving world of secure business communications, a growing number of our clients are searching for a more comprehensive, effective, and modernized offering to replace their legacy, homegrown, and aging data management applications.
To solve that challenge, we've developed a hosted client communications management platform that provides highly automated work flow tools to manage the entire communications process, from content create, composition and approvals through production, delivery, and optimization.
We provide these services while ensuring the highest level of security and compliance throughout the process.
Whether the individual technologies are housed at RR Donnelley or at the client's location, the work flow is seamless and provides significant value well beyond traditional print and mail business applications.
In the UK, we work with businesses to develop effective communication solutions that improve the customer experience and allow our clients to focus on what they do best.
We were recently selected to manage the omni-channel business communications services for Schroders, a global asset management company.
We have a team of 40 individuals working in a creative studio in Schroders' London headquarters to deliver graphic design, brand governance, and business presentations for delivery across all media channels.
Additionally, we provide reprographics, mail room and records management services onsite and print procurement and warehousing from a nearby RR Donnelley facility.
From creative design to digital and print production to multi-channel delivery, we are providing Schroders with an integrated end-to-end communications management service.
We also continue to extend our relationships with our existing clients while accelerating our strategic growth offerings.
Our packaging solutions team, which specialize in consumer electronics, medical devices, pharmaceutical, health and beauty, and wine and spirits markets was selected by a longstanding telecommunications client to manage a complex new product launch.
Because of our extensive capabilities, our packaging solutions team managed the entire project from packaging design through print production, including inbox materials, labels, retail packaging.
The structure of design was supported by our Santa Clara, California, office who worked seamlessly with our China new product development team to manage this complex solution.
And like many of our other clients, the success of this project has led to additional opportunities with this client.
From a market vertical perspective, in the healthcare industry we are providing the expertise in the economies of scale to execute our clients' non-core processes more effectively and more efficiently.
Our solutions integrate seamlessly into their communication work flows, with industry-leading capabilities, enabling our clients in this highly regulated industry to focus on their most critical market differentiators.
In 2016, we became among the first companies to have successfully leveraged and incorporated the HITRUST Common Security Framework program in to the annual SOC 2 audit process.
HITRUST Common Security Framework is an information security framework created to meet the specific needs of the healthcare industry.
The completed SOC 2 report attests to RR Donnelley's compliance with the HITRUST controls in three of the AICPA trust principles.
We are proud of this accomplishment as just one example of how we prioritize the importance of our data security for all of our clients.
Additionally, our sustained commitment to innovation continues to produce marketable intellectual property and create significant value for our customers.
Our approach leverages a combination of organic development, external partnerships, and new technology investments to expand our patented capabilities within areas such as variable print in RIFD technology, printed electronics, adhesive coatings, commercial and direct mail applications, and technologies associated with high-speed color digital presses.
These accomplishments, driven by our focused strategy, enable us to continue to provide differentiated value for our clients as a leading provider of effective marketing and business communications.
With that, I will now turn it over to <UNK> <UNK>.
<UNK>.
Thank you, <UNK>.
The primary focus of my comments will be on certain non-GAAP results and measures.
Please refer to the supporting schedules in our earnings release and on our website for a reconciliation of GAAP to non-GAAP results.
References and comparisons of income statement amounts to prior periods will be on a continuing operations basis after giving effect to the spin-offs of LSC and Donnelley Financial, effective October 1, 2016.
Overall, we are pleased with our fourth-quarter operating results as the net sales and profit trends continue to improve versus the first half of the year and as compared to the prior year.
Fourth-quarter 2016 net sales of $1.88 billion grew $67 million, or 3.7%, as compared to the fourth quarter of 2015.
This increase was primarily due to $80.4 million of net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial and the previously announced acquisition of Precision Dialogue, which contributed $14 million of net sales in the quarter.
Partially offsetting these increases were changes in foreign exchange rates, which negatively impacted fourth-quarter net sales by $16.1 million and a $6.3 million negative impact from several small acquisitions earlier in the year.
Adjusted for these factors, consolidated net organic sales declined 0.4% as volume growth in the international and strategic services segments was more than offset by $15.5 million of lower postage pass-through sales in the strategic services segment, price erosion across all three segments and volume declines in the variable print segment.
Non-GAAP gross profit for the fourth quarter of 2016 was $363.9 million, down $9.7 million versus $373.6 million in the fourth quarter of 2015.
Continued cost reductions from productivity improvements were more than offset by price pressure in most product categories, unfavorable product mix, and a one-time charge in the logistics reporting unit within the strategic services segment.
As a percentage of net sales, non-GAAP gross profit was 19.4% in the fourth quarter, down 1.2 percentage points from 20.6% reported in 2015.
Fourth-quarter of 2016 non-GAAP SG&A of $211.4 million decreased $5.7 million from $217.1 million reported in last year's quarter, primarily due to cost reduction initiatives and allocation differences resulting from the spin-offs, partially offset by increased expenses associated with higher net sales.
Fourth-quarter non-GAAP SG&A as a percentage of net sales was 11.3%, an improvement of 0.7 percentage points from 12% reported in the fourth quarter of 2015.
Fourth-quarter 2016 non-GAAP income from operations was $101.8 million, up $1.2 million, or 1.2%, from last year, as lower SG&A and depreciation and amortization expense more than offset lower gross profit.
As a percentage of net sales, non-GAAP income from operations of 5.4% was down slightly as compared to 5.6% reported last year.
Non-GAAP adjusted EBITDA of $152.5 million, or 8.1% of net sales, was down slightly from $156.5 million, or 8.6% of net sales, reported in 2015.
In a GAAP basis, we reported a loss per diluted share for the fourth quarter of $6.98, which included a $7.42 per-share charge for the impairment of good will and intangibles in our commercial and digital print and statement printing reporting units, both within our variable print segment and a net $0.07 per share for spin-off related transaction expenses and other items.
Excluding these items, our fourth-quarter non-GAAP diluted earnings per share was $0.51 compared to $0.53 in the fourth quarter of 2015.
The slight reduction was due to higher income from operations and non-operating income and lower interest expense, which were more than offset by a significantly higher effective tax rate in the fourth quarter of 2016, primarily due to a charge to record evaluation allowance on certain state-deferred tax assets.
Next, I will discuss fourth-quarter 2016 net sales and non-GAAP income from operations for each of our segments in more detail.
Fourth-quarter 2016 net sales in our variable prints segment were $833.6 million, which is down $6.4 million, or 0.8%, from fourth quarter of the prior year.
Volume increases in our commercial and digital print and labels reporting units and growth from digital print and inserting operations of Precision Dialogue were more than offset by volume declines, primarily with our direct mail and forums reporting units and modest price erosion throughout the segment.
Variable print generated non-GAAP income from operations of $64.7 million, up slightly from $64.3 million reported in the fourth quarter of 2014.
Increases from productivity improvements, the Precision Dialogue acquisition, and lower depreciation and amortization expense were partially offset by modest price erosion and net volume declines.
Non-GAAP adjusted EBITDA was $95.7 million, down slightly from $97.1 million in the fourth quarter of 2015.
Strategic services generated fourth-quarter 2016 net sales of $497.3 million, which is an increase of $80.7 million, or 19.4%, as compared to last year's fourth quarter.
Net sales in the quarter benefited from $76.7 million of net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial.
In addition, volume increases in our logistics and sources reporting units and net sales from Precision Dialogue's data analytics services offerings also benefited the current quarter.
Partially offsetting these increases were lower postage pass-through sales of $15.5 million, volume declines within digital and creative solutions and modest price declines in the segment.
Changes in fuel surcharges, which have negatively impacted our growth over the last two years, did not have a significant impact year over year in the fourth quarter.
Non-GAAP income from operations in strategic services of $1.6 million was down $10.7 million in the quarter, primarily due to a one-time charge of $8.4 million in our logistics reporting unit and modest price declines, which were partially offset by net volume increases, including those from the recent acquisition of Precision Dialogue.
Non-GAAP adjusted EBITDA was $7 million, down from $16.9 million in 2015.
Fourth-quarter 2016 net sales in our international segment were $545.4 million, which is a decrease of $7.3 million, or 1.3%, from $552.7 million reported in the fourth quarter of 2015.
Significant volume increases in our Asia and Latin America reporting units and net sales previously recognized by a reporting unit that's now part of LSC were more than offset by the negative impact of changes in foreign exchange rates, volume declines in the global turnkey solutions, business process outsourcing in Canada recording units, previously small dispositions and price pressure in the segment.
Non-GAAP income from operations in international was $51.8 million, which is an increase of $2.8 million, or 5.7%, versus $49 million reported in the fourth quarter of the prior year.
Favorable mix, higher productivity, and lower depreciation and amortization expense were partially offset by modest price erosion.
Non-GAAP adjusted EBITDA was $66.1 million, down from $67.1 million for the 2015 period.
Fourth-quarter 2016 non-GAAP unallocated corporate expenses were $16.3 million, which is an improvement of $8.7 million from the fourth quarter of 2015, primarily due to cost reduction activities and allocation differences resulting from the spinoffs.
Net cash provided by operating activities during the fourth quarter of 2016 was $117.4 million, down from $447.8 million generated in the prior-year period.
As a reminder, the prior period includes cash provided by LSC and Donnelley Financial operations and has not been restated.
The 2016 quarter also included spin-off related cash payments of $29.7 million.
Capital expenditures were $24.2 million during the current quarter.
Before we discuss the balance sheet and 2017 guidance, I'd like to briefly summarize our results for the full year from continuing operations.
Full-year 2016 net sales of $6.9 billion declined $41.6 million, or 0.6% compared to 2015.
2016 results included $123.2 million for net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial and $22.4 million from the third-quarter acquisition of Precision Dialogue.
Changes in foreign exchange rates negatively impacted net sales during the year by $71.3 million and several smaller dispositions in 2015 and 2016 reduced year-over-year net sales by $37.3 million.
Adjusting for these items, full-year 2016 net organic sales declined 1.2%.
A net volume increase, primarily driven by our strategic services and international segments, was more than offset by modest price erosion across all three segments, $29.9 million of lower fuel surcharges, and $28.8 million of lower postage pass-through sales, both of which occurred in our strategic services segment.
Our full-year 2016 non-GAAP income from operations was $284.1 million compared to $300.5 million in 2015.
Notable items contributing to the 2016 decline include the one-time charge and logistics and an $8 million pre-tax charge for a legal settlement reported earlier in the year.
These items, along with price pressure and unfavorable mix, were partially offset by lower depreciation and amortization expense, cost reduction activities and growth from the Precision Dialogue acquisition.
Non-GAAP operating margin for the full year of 4.1% was 20 basis points lower than the 4.3% reported in 2015.
Full-year 2016 non-GAAP adjusted EBITDA was $488.3 million, down from $533 million reported last year.
Our full-year 2016 non-GAAP diluted earnings per share was $0.69 compared to $0.97 in 2015 due to a significantly higher effective tax rate in 2016, primarily from a charge to record evaluation allowance on certain state-deferred tax assets and lower income from operations, partially offset by lower interest expense due to lower average borrowings outstanding.
Turning now to the balance sheet, as of December 31, 2016 we had total cash on hand of $317.5 million and total debt outstanding of $2.39 billion, including $185 million drawn against our credit facility.
Remaining availability on the credit facility was $403 million as of December 31.
During the fourth quarter, we retired $222 million of our long-term notes by drawing on our credit facility, which has since been partially repaid.
Now that we've completed the spin-off transactions, our gross leverage at December 31 is 4.89 times, which is higher than our targeted gross leverage range of 2.25 to 2.75 times.
We do expect our leverage to be reduced in 2017 as we plan to reduce our long-term debt by dispossessing of our 19.25% equity positions in both LSC and Donnelley Financial and cash provided by operating activities.
At year end, our pension and other post-retirement benefit plans were underfunded by $234 million, which is significantly improved from the $680 million unfunded level at the end of 2015, which included underfunded obligations that were subsequently transferred to LSC and Donnelley Financial.
Required contributions in 2017 under all pension and other post-retirement benefit plans are expected to be approximately $17 million.
Looking ahead to 2017, we expect net sales to range from $6.8 billion to $7 billion.
Non-GAAP income from operations is expected to range from $275 million to $300 million and fully diluted non-GAAP earnings per share is expected to range from $0.90 to $1.20.
There are several key factors that impact our outlook for next year, including the following.
In variable print, we expect that the increase in net sales from the digital print and inserting operations of the recent Precision Dialogue acquisition and volume increases in commercial and digital print, direct mail and labels will be slightly more than offset by secular volume reductions in forums and statement printing and modest price erosion across most product categories.
In our strategic services segment, we expect continued volume growth in our logistics reporting unit, including a small increase in fuel surcharges, increased net sales from Precision Dialogue's data analytics services offering, plus additional net sales previously recognized by reporting units that are now part of LSC and Donnelley Financial.
We expect these factors will be partially offset by lower postage pass-through sales and modest price erosion.
In the international segment, we expect increased volume in our global outsourcing and Asia reporting units and additional net sales previously recognized by a reporting unit that is now part of LSC to be partially offset by modest price erosion, difficult economic conditions across Latin America and the effect of changes in foreign exchange rates.
We expect to normalize our variable compensation expense in 2017, which will result in a significant increase in expense.
We expect pension and other post-retirement benefits income of $15 million, which is $7 million lower than 2016, primarily due to reductions in our opev income.
We plan to continue our strong focus on cost reductions in order to offset the impact of various items, including inflation and price erosion in each of our segments.
Depreciation and amortization expense is expected to be in the range of $200 million to $205 million, we expect interest expense to be between $175 million and $180 million and our full year non-GAAP effective tax rate is anticipated to be between 32% and 33%, which is down significantly from the 2016 rate since we do not expect the one-time items recorded in 2016 to repeat.
Shifting to our 2017 cash flow, we expect cash flow from operations to range from $220 million to $270 million and capital expenditures are expected to be between $100 million and $115 million.
Before we open up the call for questions, I would like to review our ongoing capital priorities.
Although I stated earlier that we plan to lower our debt leverage in 2017 and beyond, we will continue to make strategic investments in our business, including both organic investments and acquisitions that help us de-lever over time and accelerate achieving our strategic goals.
We also continuously evaluate our portfolio for strategic opportunities to optimize shareholder value and we remain committed to our quarterly dividend, although our Board does review our dividend recommendation each quarter.
Finally, we do not expect to repurchase shares in the foreseeable future.
Now, Operator, let's open up the line for questions.
Yes, Charlie, it's hard to articulate a number of those assumptions in the prepared remarks, but we are expecting revenue ranging ---+ a $200 million range.
We do expect that to be down slightly to up slightly depending which end of the range you're on there.
We are getting benefits coming through and you can see it in our corporate segment most notably.
We're getting net benefits from the allocation differences with last year to going in to this year.
You saw that about $9 million in the current quarter.
We do have some other cost increases that have to be taken into consideration, one of which is a significant increase in our compensation expense as we normalize some of the compensation programs coming off of the lower results for the 2016 period.
So that is certainly something that has to be factored in as you really kind of look to the 2017 EBITDA as well as operating income results.
Charlie, it's <UNK>.
I'll jump in here.
I think the ---+ in terms of economic improvement, we're assuming for 2017 an environment that was very similar to what we saw in 2016.
It was a bit of a tale of two stories for those who have been following us in that the first-half volumes that were coming through from a multiple of platforms were not nearly as strong as what we saw were improving towards the back half of the year.
So we look at the collective mix across the entire year of a softer first half and improving back half.
We also saw as we completed ---+ got toward the end of the year some softness in a couple individual product lines.
So there's quite a bit of volatility that still exists across the different product offerings we have as we head in to 2017.
But essentially the sort answer to your question is an economic environment that looks a lot like 2016 is our assumption.
I'd say there's two things there.
The first one is the mix of work that is running through the units within strategic services and an increased focus on the more profitable side of that mix is directly on our radar screen as we head in to 2017.
The second piece of that is we know that we have to continue to focus on leveraging that cost structure, reducing that cost structure in certain areas as well to get those margins heading back in the right direction and both of those are firmly on our radar screen.
I mentioned a couple times in my prepared remarks, too, we had these sales that used to be reported in reporting units that are part of LSC and DFS today.
That revenue that we're recognizing today that is increased revenue in that segment, that's all outsourced business to us.
We still send that business over to LSC primarily and they actually do the production on it, so it's an outsourced piece of business for us.
Those revenues coming into that mix and creating some of the growth, those are lower margin revenues or sales for us because of the outsourced nature of those activities.
Charlie, it's <UNK> again.
Starting with the global turnkey side, as most are aware, there's a lot of large, complex customers that make up the global turnkey business and as their volumes have volatility to them from a quarter-to-quarter basis, that flows directly through to us, obviously.
So in terms of what we're seeing there and our outlook there, we are aggressively pursuing new opportunities to expand and diversify the global turnkey offering, a critical component of the future of that particular business.
From a BPO standpoint, I would say comparable approach to that as well.
The dynamics within that business I don't think ---+ there are opportunities that remain in that business to continue to improve upon the top line for that business.
It has large customers that as their volume fluctuates it directly impacts us as well.
But relative to any systemic issue, problem there relative to the customers we're serving, we think we have opportunities to grow that business or get the revenue trajectory on the right line.
Okay.
Thank you.
If there's no other questions, we're going to go ahead and conclude the call.
I would like to thank everyone on the call for spending time with us today.
With the successful completion of our first standalone quarter as the new RRD, we continue to remain confident and optimistic about our future as a leading provider of integrated multi-channel marketing and business communications services.
I would also like to take the time to thank the dedicated and talented employees of RRD for your tremendous passion, deep commitment and significant contributions throughout 2016.
With that, I'll turn it back over to <UNK> for some final housekeeping.
Thanks, <UNK>.
As a reminder, a replay of RR Donnelley's fourth-quarter 2016 results call will be posted on the Investors section of our website at rrdonnelley.com.
Thank you for joining us.
That concludes the RR Donnelley fourth-quarter 2016 earnings call.
