third quarter 2019 results...since january 2018 sold five facilities totaling approximately $24...
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Confidential and Proprietary of R. R. Donnelley & Sons Company. All rights reserved.
THIRD QUARTER 2019 RESULTSDan Knotts, CEOTerry Peterson, CFOBrian Feeney, SVP, Investor Relations
October 30, 2019
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USE OF FORWARD LOOKING STATEMENTS NON-GAAP FINANCIAL INFORMATIONThis presentation contains “forward-looking statements” within the meaning of, and subject to the safe harbor created by, Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, strategy and plans of the Company and its expectations relating to future financial condition and performance. These statements include all those on the page under the heading “Full Year 2019 Guidance.” Readers are cautioned not to place undue reliance on these forward-looking statements and any such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. All forward-looking statements speak only as of the date of this presentation and are based on current expectations and involve a number of assumptions, risks and uncertainties that could cause the actual results to differ materially from such forward-looking statements. Words such as “believes”, “anticipates”, ”estimates”, “expects”, “intends”, “aims”, “potential”, “will”, “would”, “could”, “may”, “considered”, “likely”, and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such forward-looking statements are only predictions and involve known and unknown risks and uncertainties. The Company does not undertake to and specifically disclaims any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. These factors include such risks and uncertainties detailed in the Company’s periodic public filings with the SEC, including but not limited to, those discussed under the “Risk Factors” section in the Company’s Form 10-K for the fiscal year ended December 31, 2018 and other filings with the SEC and in other investor communications from the Company from time to time.
This document contains non-GAAP financial measures, including non-GAAP adjusted income from operations, non-GAAP adjusted operating margin, non-GAAP effective tax rate, non-GAAP adjusted diluted EPS and net organic sales growth rate. The Company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, provide useful information about its operating results and enhance the overall ability to assess the Company’s financial performance. Internally, the company uses this non-GAAP information as an indicator of business performance, and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial measures can be found in our periodic filings with the Securities and Exchange Commission and in the investors section of our website, www.rrd.com.
SAFE HARBOR & NON-GAAP
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Highlights• Adjusted income from operations, operating margins and EPS up significantly over prior year; sequential improvement in organic sales performance• Repatriated an additional $134 million of international cash in Q3 - $256 million year to date; outstanding debt reduced by $148 million from prior year • Sold Global Document Solutions (GDS) business in October, plus two idle facilities in Q3; proceeds will be used to reduce debt• Meeting all critical production milestones for the 2020 Census project• Revised full year guidance – includes update for GDS sale
THIRD QUARTER OVERVIEW
• Consolidated
– Reported: (1.8%)– Organic: (0.4%)
• Organic by segment
– Business Services: (4.6%)– Marketing Solutions: 19.9%
• Income from operations:
– GAAP: $73.8m– Non-GAAP adjusted: $77m, $9.6m favorable
• Operating margin:
– GAAP: 4.6%– Non-GAAP adjusted: 4.8%, favorable 70bps
• Effective tax rate:
– GAAP: 67.9%– Non-GAAP adjusted: 49.5%
• Diluted EPS
– GAAP: $0.18– Non-GAAP adjusted: $0.31, favorable $0.06
• Cash provided by operating activities: $29.3m, down $34.8m
• CapEx: $31.0m, $6.3m higher– Includes additional investments for the 2020
Census project
• Total debt: $2.03b• Interest expense: $37.4m, $4.6m lower• Cash and cash equivalents: $144.7m
Sales Profitability Cash/Debt
A reconciliation of GAAP to non-GAAP financial measures can be found in our periodic filings with the SEC and in the investors section of our website, www.rrd.com, including in the Form 8-K furnished with the SEC on October 29, 2019.
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RRD – A MARKETING AND BUSINESS COMMUNICATIONS COMPANY
RRD MARKETING SOLUTIONS
Empowering brands to optimize customer
engagement with maximum return
Insight
Interaction
Inspiration
Business connections
Product connections
Business processes
CLIENTCOMPANY
CLIENTCUSTOMERS
RRD BUSINESS SERVICES
Enabling companies to service and strengthen
customer relationships with maximum efficiency
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AWARDS AND RECOGNITION - 2019
Ranked among top global advertising and marketing services agencies in Ad Age’s Annual Agency Report
North American Supplier of the Year in the Foundational Principles category for showing exceptional commitment to
FCA and providing innovative and quality products and services
Ranked Gold in the annual Pentawards competition
based on work with YUNJIANG, a private label liqueur in China
Spirit of Excellence Awardfor work on Hormel’s labeling
throughout the year
8 Gold Ink Awards from Printing Impressions
Magazine for creative, high-quality packaging and commercial print
projects
2019 Supplier Quality Award from Cisco for delivery of stellar marketing and communications
support
#15 on 2019 Crain’s Chicago List of the Most Innovative
Companies
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Commercial Print 35%
Logistics16%
Packaging 14%
Statements11%
Labels 10%
Supply Chain Mgmt
5%
Forms5%
BPO4%
Direct Marketing
56%
DigitalPrint &
Fulfillment36%
Digital & Creative
8%
US74%
Asia15%
Europe7%
Other4%
THIRD QUARTER NET SALES PERFORMANCE($ In millions)
Marketing SolutionsBusiness Services Consolidated
Q3 2019 YOY Change
Commercial Print $442.9 (10.8%)
Logistics $204.6 (10.7%)
Packaging $182.1 1.3%
Statements $134.0 0.4%
Labels $124.0 4.4%
Supply Chain Management $69.8 (14.4%)
Forms $60.0 (5.8%)
Business Process Outsourcing $58.6 (3.1%)
Total - Reported1 $1,276.0 (6.4%)
Total - Organic2 (4.6%)
Q3 2019 YOY Change
Direct Marketing $193.5 35.6%
Digital Print & Fulfillment $122.5 7.9%
Digital & Creative Solutions $27.4 (9.0%)
Total - Reported $343.4 19.9%
Total - Organic2 19.9%
Q3 2019 YOY Change
US $1,197.0 0.5%
Asia $248.4 (5.6%)
Europe $111.7 (6.3%)
Other $62.3 (18.1%)
Total - Reported1 $1,619.4 (1.8%)
Total - Organic2 (0.4%)
By Products and ServicesBy Products and Services By Geography
$1,276.0 $343.4 $1,619.4
(1) YOY Change not adjusted for net sales of business dispositions which generated $13.4 million in net sales during Q3 2018: $12.4 million for Brazil Operations and $1.0 million for R&D Business.(2) A reconciliation of GAAP to non-GAAP financial measures can be found in our periodic filings with the SEC and in the investors section of our website, www.rrd.com, including in the Form 8-K furnished with the SEC on October 29, 2019.
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FINANCIAL TRENDS – PROFITABILITY
Non-GAAP Adjusted EPS1
-$0.10 -$0.09
$0.25
$0.64
-$0.06 -$0.03
$0.31
Q1 Q2 Q3 Q4 Q1 Q2 Q3
$32.9$36.5
$67.4
$107.0
$36.4 $39.2
$77.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Non-GAAP Adjusted Income from Operations1 ($ In millions)
$258.2$267.7
$243.8
2016 2017 2018
$0.69
$1.20
$0.70
2016 2017 2018
Annual
• Adjusted income from operations and margins increased vs. prior year period; fifth consecutive quarter of year-over-year margin improvement
– Cost reduction initiatives– Favorable product mix– Benefits from exiting unprofitable
business– Modest pricing pressure– Lower pension and other
postretirement benefits income
• Interest expense lower by $4.6 million
• 2019 adjusted effective tax rate – 49.5%
– Higher primarily due to additional disallowed interest deductions in the US
Comments on Q3 Performance
Quarterly
(1) A reconciliation of GAAP to non-GAAP financial measures can be found in our periodic filings with the SEC and in the investors section of our website, www.rrd.com
2018 20182019 2019
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$247.0
$370.6
$144.7
9/30/2018 12/31/2018 9/30/2019
BALANCE SHEET AND CASH FLOW
$64.1
$29.3
Q3 2018 Q3 2019
$2,177.3 $2,091.5 $2,029.1
9/30/2018 12/31/2018 9/30/2019
Cash & Cash Equivalents Total Debt Operating Cash Flow (Q3) Capital Expenditures (Q3)
• Accelerated cash repatriation used to reduce debt outstanding
• Asset based lending agreement:
– $800 million facility with maturity in 2022
– $223 million drawn; $438.6 million available as of September 30, 2019
($ In millions)
Key capital allocation priorities include strategic investments, debt pay down and dividends
$24.7 $31.0
Q3 2018 Q3 2019
• Management’s capital priorities:
– Invest in the business/pursue growth opportunities
– Pay down debt/reduce leverage and increase flexibility
– Continue to return capital through dividend
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Business Dispositions
Sale of GDS business in October 2019 – $42.3 million
Sale of R&D business in Q2 2019 – $11.7 million
Sale of Print Logistics in Q3 2018 - $43.9 million, net of cash sold
Accelerated Cash Repatriation
Repatriated $134 million in the third quarter of 2019
Repatriated $256 million year-to-date in 2019
Expect to transfer approximately $55 million in Q4 of 2019 which includes net proceeds from the October sale of the GDS business
Sale of Properties & Investments
Planned sale of Shenzhen, China printing facility for approximately $250 million in 2021; non-refundable deposits of $68.3 million collected through September 30, 2019 including $23.7 million collected in Q3 of 2019
Since January 2018 sold five facilities totaling approximately $24 million, including two facilities sold in Q3 of 2019 for $8.1 million
Sale of investment in LSC in 2017 - $121.4 million
Completed non-cash debt to equity exchange of investment in DFS in 2017 - $111.6 million
Sale of other investments in 2017 and 2018 – Approximately $13 million
Cash Flow
Delivered strong Operating Cash Flow:
– 2018: $203.5 million
– 2017: $217.9 million
Reduced annual interest expense $30.4 million from 2016 to 2018; reduced $10.1 million year-to-date 2019
Reduced dividend mid-2018 - annual savings of approximately $31 million
Working capital improvements
CUMULATIVE EFFORTS TO IMPROVE BALANCE SHEET FLEXIBILITY
Debt outstanding down $295.9 million from December 31, 2016 to December 31, 2018
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$66$167 (b)
$60 (a)
$140 $291 $298 $158 $69
$223
$577
$541
$0
$200
$400
$600
$800
$1,000
2020 2021 2022 2023 2024 2029 2031
7.625% Senior Notes due June 15, 2020 7.875% Senior Notes due March 15, 2021 8.875% Debentures due April 15, 2021
7.000% Senior Notes due February 15, 2022 6.500% Senior Notes due November 15, 2023 6.000% Senior Notes due April 1, 2024
6.625% Debentures due April 15, 2029 8.820% Debentures due April 15, 2031 ABL Revolving Credit Facility ($800 million) - Drawn
ABL Revolving Credit Facility ($800 million) - Undrawn Term Loan B due January 15, 2024 (annual principal payments of $5.5 million)
CURRENT DEBT MATURITY PROFILE($ In millions)
Plan to repay 2020 maturity using availability on the ABL revolving credit facility
(a) $20.7 million of the 8.875% Debentures due 2021 were repurchased during the quarter ended September 30, 2019(b) $23.4 million of the 7.875% Notes due 2021 were repurchased during the quarter ended September 30, 2019.
Q3 ‘19: Opportunistically repurchased 2021
notes and debentures with a face value of
$44.1 million
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FULL YEAR 2019 GUIDANCE REVISEDCurrent Guidance 1 Prior Guidance
October 29, 2019 July 30, 2019
Net sales $6.25 billion to $6.35 billion $6.40 billion to $6.60 billion
Adjusted income from operations - non-GAAP 2 $245 million to $260 million $225 million to $265 million
Adjusted diluted EPS - non-GAAP 2 $0.67 to $0.76 $0.60 to $0.90
Cash flow from operations 3 $150 million to $165 million $150 million to $180 million
Depreciation and amortization Approximately $170 million Approximately $175 million
Interest expense – net Approximately $152 million Approximately $160 million
Adjusted effective tax rate - non-GAAP 2, 4 Approximately 57% Approximately 50%
Capital expenditures 5 Approximately $140 million $135 million to $145 million
Proceeds from facility sales 6 Approximately $32.8 million Approximately $25 million(1) The revised net sales estimate reflects the continued pressure in Logistics and Commercial Print products, as well as the October sale of the GDS business. Despite lower sales performance in Logistics, the Company
believes the business, as well as the overall Logistics market, has stabilized. Adjusted income from operations has been tightened towards the upper end of the previous range reflecting strong operating performance and cost management partially offset by the impact of lower net sales. The adjusted EPS range has also been tightened and now reflects strong operating performance, lower interest expense and a slightly higher effective tax rate, including the additional taxes from the accelerated repatriation of cash.
(2) Certain components of the guidance given in the table above are provided on a non-GAAP basis only, without providing a reconciliation to guidance provided on a GAAP basis. Information is presented in this manner, consistent with SEC rules, because the preparation of such a reconciliation could not be accomplished without "unreasonable efforts." The Company does not have access to certain information that would be necessary to provide such a reconciliation, including non-recurring items and other items that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment, OPEB curtailments and other similar gains or losses not reflective of the Company's ongoing operations. The Company does not believe that excluding such items is likely to be significant to an assessment of the Company's ongoing operations, given that such excluded items are not believed to be indicators of business performance.
(3) 2019 cash flow from operations guidance includes restructuring payments related to the previously announced sale and relocation of a printing facility in Shenzhen, China and higher net tax payments primarily related to lower tax refunds relative to 2018.
(4) 2019 adjusted effective tax rate - non-GAAP guidance reflects a significantly higher rate than the statutory domestic rate primarily due to continued limitations on the Company’s domestic interest expense deduction and taxes from repatriating more cash in 2019. As earnings grow and interest expense is reduced, the Company expects the effective tax rate to improve over time.
(5) 2019 capital expenditures guidance is higher primarily related to investments associated with building a new facility in China in preparation for an expected sale of the existing facility for approximately $250 million, and additional investments related to the recently awarded 2020 Census contract. The Company expects its 2020 capital expenditures level to return to its previously stated range of 1.5% to 1.7% of net sales.
(6) 2019 proceeds from facility sales guidance primarily reflects the additional non-refundable deposit of $23.7 million collected in the third quarter of 2019 related to the planned facility sale in China and $8.1 million from sale of restructured facilities.
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KEY TAKEAWAYS
Adjusted income from operations, operating margin, and EPS up significantly over prior year; sequential improvement in organic sales performance
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Several actions taken to reduce debt and increase flexibility:• Repatriated $134 million of international cash in Q3; $256 million year to date• Outstanding debt reduced by $148 million from prior year• Sold two idle facilities in Q3 for $8.1 million• Sold GDS business in October for $42.3 million
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Achieving all critical milestones with 2020 Census production
Revised full year guidance
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APPENDIX
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THIRD QUARTER OPERATING PERFORMANCE
($ In millions) Q3 2019 Q3 2018Better/(Worse)
Organic SalesChange1
$ %
Net Sales $1,619.4 $1,649.5 ($30.1) (1.8%) (0.4%)
Business Services $1,276.0 $1,363.2 ($87.2) (6.4%) (4.6%)
Marketing Solutions $343.4 $286.3 $57.1 19.9% 19.9%
Adjusted Income from Operations1 $77.0 $67.4 $9.6 14.2%
Business Services $75.5 $77.4 ($1.9) (2.5%)
Marketing Solutions $24.5 $12.0 $12.5 104.2%
Corporate ($23.0) ($22.0) ($1.0) 4.5%
Adjusted Operating Margins1 4.8% 4.1% 70 bps
Business Services 5.9% 5.7% 20 bps
Marketing Solutions 7.1% 4.2% 290 bps
(1) A reconciliation of GAAP to non-GAAP financial measures can be found in our periodic filings with the SEC and in the investors section of our website, www.rrd.com, including in the Form 8-K furnished with the SEC on October 29, 2019.