R. R. Donnelley & Sons Company
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Welcome to the RRD First Quarter 2021 Results Conference Call. My name is Ashley and I will be your operator today’s call. Please note that this call is being recorded. I will now turn the call over to Johan Nystedt, RRD's Senior Vice President of Finance.

[Johan Nystedt:]

Thank you, Ashley. And thank you everyone for joining RRD's First Quarter 2021 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 Investors section of our website at rrd.com. As we review our results on today's call, I will be advancing the slides if you are connected by webcast. Alternatively we will periodically reference page numbers from the supplemental slides for those participants, who wish to follow along by advancing the slides themselves.

[Dan Knotts:]

Thanks, Johan. Good morning, everyone, it's great to be with you and thank you for joining our call today. On behalf of all of us at RRD I hope that you and your families continue to stay healthy and safe. On today's call, I'm going to recap our first quarter results and provide an overview of how we are deploying our extensive capabilities to win new opportunities in what remains a dynamic market. And then before turning the call over to Terry, I will share a couple of recent awards that re reinforced the strength of our brand and the high level performance we are delivering for our clients. Our first quarter results represented a strong start to the New Year, reflecting the scale and breadth of our business model, very solid operating performance and our unwavering commitment to successfully navigate through this challenging pandemic environment. I'm especially proud of the RRD team for continuing to perform at the high level for our clients while protecting the health and safety of our global colleagues. When the COVID-19 crisis emerged a little more than a year ago, we developed an aggressive game plan to strengthen our businesses, amidst a rapidly changing economic environment and very uncertain outlook guided by our strategic priorities to strengthen our core drive revenue performance and improve financial flexibility. Over the last 12 months, the RRD team has been relentlessly executing our game plan and our results for the last three quarters reflect the positive impact of those actions.

[Terry Peterson:]

Thank you. Dan, our starting to 2021 was strong across the board despite a second consecutive quarter of significant foreign exchange headwinds. Our sales and adjusted income from operations came in at the top end of our earlier estimates with the organic sales decline rate, improving sequentially for the third consecutive quarter. Adjusted income from operations with solid spite on favorable foreign exchange, which provided an $11 million headwind. As a reminder, the first quarter of 2020 comparison was the strongest first quarter adjusted IFO we have ever delivered since the 2016 spin. As most of our global operations had not yet been impacted by the pandemic recent actions to reduce our cost structure, continue to mostly offset the impact of the pandemic. And last year census, we also reported a $61 million improvement in operating cash-flow versus the first quarter of 2020 due, primarily to working capital improvements. In addition, total debt remained unchanged from year end 2020. This is the first time since our 2016 spin, where we have avoided additional borrowings at the end of first quarter, as compared to the previous year end. Lastly, we made significant progress to further improve our balance sheet flexibility. Earlier this month, when we completed an amendment to our ADL credit facility, which extended the maturity date to 2026, we also priced $400 million of new 6.12, 5% senior secured notes, which we close as planned earlier this morning. Most of those proceeds were used to repay a portion of our outstanding term loans, which effectively extended their maturity date to late 2026. I'll talk more about these transactions later in my prepared remarks. But first, let me get started with the review of our first quarter performance, turning to slide 8, net sales were down 3.6% in the first quarter, which includes an increase of $14.5 million due to foreign exchange and a decrease of $6.5 million from the previous closure of our operations in Chile.

[Operator:]

Thank you. We will now begin the question in it. . Andrew, our first question comes from Charles Strauzer with CJS Securities

[Charles Strauzer:]

Good morning. just some of the guidance and Terry me maybe this is for you, but talking about the Q2 adjusted IFO, any additional color there as to how much of an increase you may make see year over year?

[Terry Peterson:]

A certainty with how the Carter will format on an IFA basis. But, you know, I would, I would just really say that, you know, if the increase was conservative and if it's over $10 million, that's probably in the category of achievable, but I'm more on the aggressive side. So that's probably the best color that I can provide on, on how you see, I felt for next quarter.

[Charles Strauzer:]

Great. That's that's helpful and then just to you about the, the China folios, that's still a pending sale any thoughts there?

[Terry Peterson:]

That'd be expected to, I know that's still continues. So we still feel, very optimistic that that will, close, you know, all the work with the Chinese government though, that is in the hands of the developer that is buying the property from us those communications are, are in, in all of that work is being done by them, but we do get regular updates from them. You know, they've continued to make all the RRD deposits on time with us. And we have no reason to believe that the, upcoming deposit for about $50 million later this year, we have no reason to believe that that won't come in on time.

[Charles Strauzer:]

Great. Great. And then, lastly on the housekeeping if you can tell us the -- what's remaining payment wise there, if you can kind of give us a sense of that.

[Terry Peterson:]

So in first quarter, you know, we had, roughly a little over $9 million of bankruptcy payments there that was largely to settle the, SERP liability for them as part of the bankruptcy, being accepted by the courts. We also had a payment as a result of that settlement of about $2.5 million dollars, again, included in the nine, but, that was for the, the meth plan participants. And then, separately, we have negotiated settlements with, one of the one of the three met plans, and we negotiated a discounted settlement, for that so that, that will result in a payment of a little over $9 million again in the second quarter. So that is a discounted settlement as it's an attractive offer. And we, decided to, to fund that in order to that liability. We did take a there's a $1.7 million gain that's reflected in the non-GAAP results, this quarter for that, but the funding of that will happen in, April or second quarter here, besides that, we have two remaining map plans, with the LLC and, we'll have, you know, you know, some level of funding for that, if it's a few million dollars a year, for, for those assuming that we don't, we don't execute any more settlements, for those, those remaining two plans. And then there is the, you know, we have a small amount of funding related to one lease that we had to, take over, as part of the, as part of the guarantees that we had from the spin time, but it was a lease that was rejected as part of the bankruptcy process. one, one lease there that we'll have a little bit of funding just to terminate that there's, that is, I believe we're past the lease term is a matter of, um, returning the facility to it's previous years.

[Charles Strauzer:]

Great. Thank you for that. And then Dan, maybe this is one for you on the marketing solutions side. Obviously that's been a, you know, the laggard given the pandemic, you know, hitting the hardest, you know, what are you hearing from clients about, and you kind of a return to spending post COVID. I expecting to see some of that ramp in the back half of the, especially with, you know, when you lapsed the, the, census work.

[Dan Knotts:]

Yeah, Charlie, I think, you know, marketing solutions, you know, unlike, you know, some of the areas we've talked about within, within business services, you know, continues to continue to lag that recovery is continuing to extend out. You know, I think, you know, the good news on that in the meantime we are, as I mentioned in, in, in my previous comments that we are pursuing the, the areas that, that, that are recovering faster than we're well-positioned, in leveraging our in flexing our platform to be able to go do that in the interim period as the marketing solutions continues to recover. But I think two things are important, there, and yes, the, the census is obviously impacting the size of those numbers because we're not doing it this year versus the last year, but the, you know, the first one is, is, as you look at consistency of economic recovery, and you look at marketers looking for return on their, on their investment. So having a sustained consistent sustained economic recovery, we do believe based on feedback from clients that as that occurs and they get comfortable, more comfortable, with that relative to unemployment, consumer confidence, consumer spending, et cetera, which all are trending in the right direction that they want to be back in the back in the, in the mail. And we do expect to see that marketing spend increase as the, as the year unfolds, assuming that the economic recovery sustains in a consistent manner, and we don't take steps backwards. So that, that recovery, is lagging, I think the, the economic recovery, but we do expect that to, come forward. And I think the second part of that is dependent upon industry, so it's gonna happen at a different pace depending upon recovery of the industry, right? So as we think about, airlines, and we think about, hotels is very different than some of the retailers, strategies, et cetera, Not-for-profits so I think it's paramount, it's proven it works, you know, they're, they're in a quest for driving their revenue, performance, top line performance as well. and I think as the economy continues to recovery, we recover, we will see a recovery in marketing solutions.

[Charles Strauzer:]

And then when you look at, you know, the other side of the business that, you know, especially in the packaging has been very well and, you know, are you seeing, you know, a pickup in, you know, kind of repeat business over recurring business that, it could carry forward from, you know, some of the kind of one-time stuff that, you know, was related to Covid?

[Dan Knotts:]

Yeah, we don't the on the supply chain side of the chicken there, but the that the good news about that as it connects from supply chain to the packaging and, and labels opportunities as well with the, with a number of those, those clients. So the short answer to that Charlie is yes, we are having ongoing, ongoing conversations with clients about that, and exploring additional and leveraging that platform, and the capabilities of that platform and pursuing new opportunities. but we are having recurring, conversations and do expect to see some degree of recurring revenue. As Terry talked about, we had a lot of, you know, one time items that happened in, instantly a lot of, a number of, several, one-time large, very large projects that happened in the Q4 type timeframe of, of last year. but as we have the current conversations we are having are progressing, and it's talking about recurring business, right.

[Charles Strauzer:]

Thank you very much for taking my questions.

[Operator:]

Your next question comes from Bill Mastoris with Baird.

[Bill Mastoris:]

Hey, well, how are you guys doing well?. Okay. So the first question I have is for Terry and, with the placement of the 601 eight. and, is that going to be really the last, really your debt issuances until maybe we approach 2024? Are we done for a while?

[Terry Peterson:]

We certainly, you know, the, the need to, to do something else at this point is, is significantly a down, obviously with the, the recent transactions. I can never you know, because in all honesty, I mean, the, you know, I probably was a year ahead of myself in terms of with this recent issuance but it was really just driven by, you know, the market conditions that today it was just very, very attractive and it was an opportunistic, you know, placement for us. So I can never say never. but certainly the, you know, the, the, the need to do anything, you know, in advance of, you know, the late 2026 maturities, you know, it's down pretty low right now, but, but again, I'll never say never.

[Bill Mastoris:]

No completely understand. And, with very light, actually, no debt maturities for the balance of this year and fairly light debt maturities for 2022 in 2023. can we safely assume that this is going to be, really handled with free cash flow or proceeds from asset sales or, you know, kind of as a, as a last resort, maybe the ABL, is that a safe assumption?

[Terry Peterson:]

Yeah, that, I mean, those are obviously very small maturities that are coming up the, April, 2021 maturity is behind us now. So, so yeah, I mean, we are really nothing until, you know, tell the February of 22 has come to, and again, each of these upcoming maturity is they're all kind of in the small enough category to just be dealt with, with existing cashflow, proceeds from asset sales and then kind of the last choices, availability on the credit facility. So you've got that nailed. So if you do have excess cash, will you opportunistically maybe go out into the marketplace and repurchase the debt, maybe to kind of, if you will further ease some of the later maturities, you know, I wouldn't go past, the, the, 2024, because, you know, I, I still have a, you know, stub left on the term lawns to take care of if I had, you know, more cash or extra cash above that, you know, my first, my first go-to would be, to do a further repayment, a pre-payment on the term loans you know, those are, you know, the next, you know, medium-sized maturity that that's coming up here and that's January 2024. So I would, I would chip away at that and I'm kind of assuming that I won't be able to get anything notable in the market at a reasonable price on the 23 or the 22, they're just, just not a lot of, liquidity with those. So, so again, assuming that I can to get, anything there at, at a price that, that I've used reasonable, you know, we would look to the term loans to prepay that, which does not require any, any additional costs for prepaying that at par. Okay, great. Next question I have is for Dan and that has to do with, with expand, expanding digital services to capture a larger portion of your clients marketing spend, I mean, are these digital services being expanded with your in-house capabilities, or are they being done in partnerships with outside third parties? How is that evolving?

[Dan Knotts:]

You know, the answer to that, bill is both, we are continuing to expand our own, in-house capabilities. You know, we mentioned, previously the innovation and new offerings and, and that, that we're, that we're continuing to, to develop in a very concentrated, concentrated area. And I think what's important about that to reinforce is that, you know, the, is that the digital, when we talk about, you know, the ability to expand digital as being complimentary to print, to capture the larger portion of marketing spend is being able to, to, to differentiate ourselves and having that combination of the digital and the physical, to take on more of that, that principle, but it's in a, it's in a targeted, targeted area within the digital world, because digital is obviously a very, broad definition. But, the second part of that is we are absolutely working with the continue to explore additional opportunities to work with a third, a third parties, you know, technology is changing, very, very rapidly, investments are flowing regularly on that as in required as, as technology changes rapidly. So using partnerships to, to stay up with that a bit in those key areas that we think are relevant, for us to partner and build on, or expand our Digital capabilities to support our current, print channel, print channel offering. So the short answer to that is it's a combination of both, internal investments, expansion as well as third-party, relationships.

[Bill Mastoris:]

Thank you very much. I appreciate the color. I, thanks bill

[Operator:]

Again, that is star one for any questions that concludes our question and answer session. I will now turn the call back over to Dan knots.

[Dan Knotts:]

Great. Thank you. And thank you everyone. Joining us on the call today. A summary of our key takeaways from the call can be found on slide 15 of the presentation. in closing, I'd like to say thank you to all of our RRD employees around the world for your ongoing dedication to serving and supporting our clients in our company. great bulk of your focus, your energy and your commitment as we continue to learn and evolve in today's challenging climate. Please know your efforts are greatly appreciated. Thank you everyone, and have a great day. Thanks, as a reminder information to access and all your replay of our first four spending spending on besides coal can be found on the investor section of our [e-mail]. Thank you for joining us and that computes to RRD first quarter 2021 earnings called

[Operator:]

That concludes today's conference. Thank you for your participation. You may now disconnect.