RRD

R.R. Donnelley & Sons Company (RRD)

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R.R. Donnelley & Sons Company (RRD)

Q2 2009 Earnings Call

August 5, 2009 10:00 am ET

Executives

Dan Leib - SVP and Treasurer

Tom Quinlan - President and CEO

Miles McHugh - SVP and CFO

Analysts

Charles Strauzer - CJS Securities

Ryan Casey

Edward Atorino - The Benchmark Company

Presentation

Operator

Good morning. My name is Samarian, and I will be your conference operator today. At this time, I would like to welcome everyone on the R.R. Donnelley second quarter 2009 Earnings Call. (Operator Instructions). Thank you.

I would now like to turn the call over to Mr. Leib. Sir, you may begin.

Dan Leib

Thank you. Good morning and thank you for joining us for R. R. Donnelley's second quarter 2009 results conference call. Earlier this morning, we released our earnings report, a copy of can be found on the Investor Section of our website at rrdonnelley.com. During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement include in our earnings rerelease and further detailed in our annual report on form 10-K and other filings with the SEC.

Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provide you with useful, supplementary information concerning the company's ongoing operations, and are an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information, and a reconciliation of GAAP to non-GAAP.

We've also posted to our website in the Investor Sector a description as well as reconciliation of non-GAAP measures, which we'll refer on this call. We are joined this morning by Tom Quinlan, Miles McHugh and Drew Coxhead, and Dave Gardella.

I will now turn the call over to Tom.

Tom Quinlan

Thank you, Dan, and good morning everyone. I will discuss four topics before Miles covers the second quarter in detail. Once he has taken you through that, I'll return with a few comments, and then open it up for questions. The first topic I would like to address is our strong cash flow performance.

During the second quarter, cash from continuing operations was $312 million, up more than 26% from the same quarter a year ago. Our focus on working capital, and cash management discipline continued to yield very positive results even in the face of the challenges that overall economic conditions are creating for the top line.

Through the first half, cash from continuing operations was $851 million, up $478 million or 128% as compared with the same period last year. In February, we told you that we expected to generate at least $700 million of free cash flow during 2009. Based upon our strong performance in the first half, we believe that we will exceed that, and expect to generate close to a billion dollars of free cash flow for the full year.

Our second topic is our strategy regarding the deployment of capital. As we have said before, we continue to focus on deploying capital in a balanced manner in order to help maintain strong liquidity and operational flexibility. Doing so allows us to best serve our customers and deliver the best long-term returns to our shareholders. Miles will touch on this in more detail, but I want to note the fact that we have paid down nearly $800 million in debt during the past 12 months.

In the first half of this year alone, we have paid down more than $500 million of debt. We believe that our early recognition of tightening liquidity and prompt and aggressive response has enabled us to achieve these reductions, even as the global slowdown significantly impacted revenues.

The flexibility that our strong liquidity provides is allowing us to watch for any compelling opportunities that emerge with regard to M&A. As you saw recently, we will aggressively pursue organizations or assets that fit our strategy and platform, but not at any valuation.

As we continue to be disciplined in our M&A approach, economic conditions are forcing down excess capacity. According to census and industry data, nearly 1000 domestic establishments have closed their doors in the last 12 months. We believe these to have been primarily one or two product operations. Our continuing ability to offer product, service and geographic diversity provides an advantage.

For example, the range of products and services that we offer is illustrated in a new, multi-year $80 million arrangement that we were recently awarded by PETCO. This will see us provide them products produced across our platform, including retail circulars, commercial printing, forms, labels and gift cards. Our ability to support functions from store operations to merchandising helps retailers to implement integrated communications programs, and maximize their procurement leverage.

The same is true with the other sectors we serve. R. R. Donnelley spans the breadth of their communications supply chain. Top line is the third topic about which I'll comment. During the second quarter, revenue decreased 19.6% on a pro forma basis, of which, approximately 3% was attributable to currency fluctuations, and 85 basis points were attributable to lower paper prices. This was in line with what we had expected and previously communicated.

We believe that the top line is reflecting the overall softness of the global economy, not decisions by customers to take their business elsewhere. The full effect of the dramatic economic slowdown for us was not felt until the third quarter of 2008, so during Q3 and Q4, we expect the revenue impacts to moderate as we compare quarters on a year-over-year basis.

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