R.R. Donnelley & Sons Company (RRD)

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R.R. Donnelley & Sons Company (RRD)

December 01, 2011 4:10 pm ET


Daniel N. Leib - Chief Financial Officer and Executive Vice President


Unknown Analyst

Stephen W. Weiss - BofA Merrill Lynch, Research Division


Stephen W. Weiss - BofA Merrill Lynch, Research Division

Moving right ahead. Good afternoon. I'm Stephen Weiss, the high yield cable and media analyst at the Bank of America Merrill Lynch. And I'm very pleased to welcome RR Donnelley to the firm's annual leverage finance conference here in Orlando.

With us from the company today, we have a Dan Leib, Chief Financial Officer; Janet Halpin , company's Treasurer; as well as Dave Gardella, Senior Vice President of Finance.

And with that, I'm going to turn the podium over to Dan.

Daniel N. Leib

Thank you. And thank you for joining us this afternoon. We know you have plenty of other things to do and other opportunities to look at, so we do appreciate you spending time with us.

We have few a slides here that we'll go through, and we'll leave some time for Q&A as well. So Slide 2, Safe Harbor language. I leave this to you to read at your leisure. We have all of these on our website as well.

Moving to Slide 3. So Donnelley, largest leading global provider of integrated communications. We are a 147-year-old company, 59,000 employees worldwide. We're in 37 countries, 14 time zones. So at any time of the day or night something is going on in our facilities and in our service centers.

We have, importantly, on the right-hand side, 60,000 customers. And you can see the breakdown of how many customers we're serving, with over $100 million in revenue and how much over 1 million. We do business with 100% of the Fortune 1000 -- or rather Fortune 100, and 88% of the Fortune 1000. And the key takeaway -- and we'll jump into some of the different product lines in which we serve these customers.

Key takeaway is everything we do for our customers was something that our customers formerly did for themself. And so we see this as a continuing opportunity for us. And we see this in our service offerings, and we'll go into our pie chart. We do report our earnings in terms of service -- or rather our results in terms of service and product.

But you see an increasing level of the company generating earnings from services, and the positive news there is as you look at our capital requirements in the company, they are decreasing. So we would expect, on a go-forward basis, to need to put capital expense in the business at a rate of about 2% to 2.25% of revenue, on a go-forward basis.

These customers here and it's a couple of some examples so obviously, large in -- with the publishing set in magazines, catalogs, retail and search books and directories. And as we have discussions with those customers, we have the ability to bring in our other products and services. We'll show a slide of where we're serving our customers for 6 or more products all the way to 10 or more products. And interestingly enough, we'll show another slide that will show we're the only provider that can have those discussions, and those are productive discussions for us and for our customers. We help them make their supply chain more efficient.

The other thing that you may have read about Donnelley recently, is we've purchased a couple of, small for us, but meaningful packaging and labels companies. And that comes purely out of the customer demand to Donnelley to provide those services. And we find that coming out of our global print management initiative, we find where we're sourcing on our customers' behalf and where we're doing that, and then we have the opportunity to make the decision of whether we continue to source on their behalf or whether we should own that capability.

One of the very nice things about our RR Donnelley is our consistent cash flow. This slide, the yellow bar is cash flow from operations, and the blue bar is free cash flow or cash flow from operations less CapEx. You can see that over the period from 2004 through this year. Our expectation this year is that we'll generate $600 million of free cash flow. And over this period, we've generated an average of $574 million of free cash flow.

We have normalized 2009, which has a couple of one-time positive items for free cash. And to my earlier comment that the business is becoming less capital intensive, you can see that in the spread between the yellow bars and the blue bars.

Other key takeaway here is that we've done it in very good economic times, and we've done it in very tough economic times. So our ability to generate the $600 million of free cash flow is a confidence that we have in both good and bad times. And the model we think about is an incremental -- as we've variablized the business, an incremental or decremental margin of approximately 25%.

If you tax effect that and let's take the down case, so $0.25 on the $1. If I lose $1 of revenue, I lose $0.25 in the EBITDA. If I tax effect that, I lose $0.15 or so which is also approximately the amount of working capital commitment we have in the business.

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