R. R. Donnelley & Sons Company
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Welcome to the RRD Fourth Quarter 2020 Results Conference Call. My name is Mariama 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, Mariama. And thank you everyone for joining RRD's fourth quarter and full year 2020 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 and thank you for joining. It's great to be with you today. And on behalf of all of us at RRD I hope that you and your families are staying healthy and safe. On today's call, I will provide an update on how we're successfully navigating through the ongoing pandemic challenges while advancing our strategic priorities. And we'll also share my perspective on our Q4 and full-year performance. I like to start by first thanking the global RRD team for your hard work in your commitment to our company. I am extremely proud of how our team continues to respond to the near-term challenges created by the global pandemic while strengthening RRD for the long-term to the execution of our strategic priorities. When the pandemic emerged early in the year, we quickly deployed our COVID-19 operating plan with a focus in three areas; to protect the health and safety of our employees; maintain operational continuity for our clients; and prudently manage our business performance through the pandemic driven challenges.

[Terry Peterson:]

Alright, thank you, Dan. We had a remarkable finish to a challenging years, we significantly outperformed against our expectations suddenly four months ago. Once again, we focus on those matters within our control and have delivered results that demonstrate that our strategy is working during this uncertain and volatile time. Our team continues to land new work through innovative solutions that help our clients meet their evolving communications needs. This focus helped us deliver better than expected net sales as our actual results exceeded the midpoint of our previous guidance by over $150 million. We also continue to focus on our cost structure, which enabled us to grow adjusted income from operations and deliver a 50 basis point improvement in our adjusted operating margin for the quarter versus the prior year. Overall, we are very pleased to report adjusted diluted earnings per share from continuing operations for the fourth quarter of $0.71, which was up 65.1% over the prior year. For the full year, our adjusted diluted earnings per share from continuing operations was $1.21 up 133% from 2019. Our ongoing strategic focus to improve our capital structure led to our single largest reduction in debt outstanding delivered in any quarter since the spin in 2016. This significant reduction was largely driven by the divestitures of our two logistics businesses; the liquidation of certain life insurance policies; the sale of three idle facilities and strong operating cash flow for the quarter. We also returned to our normal borrowing practices after having taken additional draws on our credit facility earlier in the year in order to protect liquidity. Total debt outstanding was reduced by $518 million in the quarter, which was $143 million better than the midpoint of our guidance last quarter. This brings our total reduction for the year to $315 million and since 2016, we have reduced our outstanding debt by $884 million. I'll provide more details on our debt later. But let me get started with additional details on our fourth quarter financial results. Turning now to Slide 11, net sales of $1.35 billion were down $80.6 million or 5.6% in the quarter, which included a reduction of $24.5 million associated with the GDS, Europe disposition and the closure of Chile plus an increase of $11.5 million associated with a weaker U.S. dollar. Net sales were down 4.8% organically, marking our second consecutive quarter of year-over-year improvement since the pandemic began. For the segment's business services reported organic growth of 1.7% primarily driven by higher volumes and supply chain management, packaging and labels, which are three of our strategic growth product categories. Our supply chain management growth was driven by several large healthcare kitting projects. Packaging grew in the quarter due to strong demand in both our domestic and international operations. And our labels, products experience continued growth to increase demand for shipping related labels. Lower demand for our statements, forms and commercial print products was driven by the impact of COVID-19 pandemic and secular decline. However, the decline rates in these products have shown improvement from the previous two quarters as we continue to see a gradual recovery in demand for these product categories. Marketing Solutions reported an organic decline of 22.8% due primarily to the impact of COVID-19 and the lapping of the Census project, which was completed earlier in 2020. The Census project alone contributed to over 9 points of the quarterly decline rate for this segment. Despite the fourth quarter being only the only quarter in 2020 with no Census sales the decline rate for this segment improves slightly from the previous two quarters. On Slide 12, our adjusted income from operations of $94.5 million was $1.2 million higher than the fourth quarter of 2019 despite the decline in organic sales. This increase was primarily due to aggressive actions taken to reduce the company's cost structure and lower depreciation and amortization expense partially offset by the decline in sales, higher variable incentive compensation and unfavorable FX of nearly $10 billion, which was mostly associated with our operations in China. Adjusted SG&A expense of $160.9 million in the fourth quarter was down $4.3 million or 2.6% from the prior year and down $95.7 million or 13.9% for the full-year versus 2019 reflecting the impact of recent dispositions and ongoing execution of our strategic initiative to deliver and lower our cost to serve. Our GAAP results for income from operations for the fourth quarter included restructuring and other charges of $6.2 million, which was nearly flat to the 2019 amount. Adjusted earnings per share of $0.71 in the fourth quarter increased $0.28 as compared to earnings per share of $0.43 in the prior year period. This increase was primarily due to a lower effective tax rate, lower interest expense and higher adjusted income from operations. Our adjusted effective tax rate decreased from 51.1% in 2019 to 22.5% in 2020 primarily due to the favorable impact of recently issued tax law guidance. Turning now to the balance sheet and cash flow on Slide 13. As of December 31st, 2020, we had total cash on hand of $289 million and total debt outstanding of $1.5 billion after having repaid all borrowings on our credit facility. Availability on the credit facility was $576 million at the end of the year and total available liquidity including cash on hand was $865 million, which was $322 million higher than the beginning of the quarter and our highest level since 2018. Our end of the year leverage also improved significantly. At December 31st, 2020, we reported gross leverage of 3.7 times, which was 0.5 times lower than 2019 leverage and 1.0 times lower than the leverage at September 30th. That leverage of 3.0 times improved 0.7 times from both the prior year and quarter. Full-year net cash provided by operating activities of $149.8 million in 2020 was $10.5 million higher than 2019 due primarily to the deferral of the employer portion of payroll taxes as part of the CARES Act, which contributed $35.1 million lower interest payments and a reduction in working capital. These factors were partially offset by $47 million paid in 2020 to terminate 25 deferred compensation plans and higher restructuring payments. Capital expenditures of $85.6 million in 2020 or $53.2 million lower than 2019 due primarily to additional investments made last year for the Census project and the new facility in China. Slide 14 summarizes several key actions we have taken to improve our balance sheet during the year. To highlight a few during the year, we sold our remaining logistics businesses bringing our total proceeds from business dispositions to $247.6 million in 2020. We also sold six facilities and collected one additional deposit on the China building sale, all of which aggregated to proceeds $43 million in 2020. In addition, we received proceeds of $100 million from life insurance policies most of which was due to liquidating the policies during the fourth quarter. Collectively, our efforts to improve our balance sheets have yielded a reduction in total debt outstanding of $315 million in 2020, while significantly improving both our gross and net leverage. In regards to the pending sale of our printing facility in Shenzhen, China, the buyer continues to work with the government to obtain the necessary approvals so we can complete the sale. Once the transaction closes, we expect to record a significant gain on the sale. Today we have collected $123.3 million in deposits and we are scheduled to collect one additional deposit of approximately $50 million in 2021. Our contract with the buyer requires them to pay the final installment in 2022. Even if the government's final approval is delayed. If the buyer fails to comply with the terms of the agreement or terminate for any reason, RRD is entitled to retain 30% of the purchase price in liquidated damages. Slide 15 of the supplemental slides show the various maturities of our outstanding debt as of December 31st. throughout 2020, we reduced total debt outstanding by $315 million. In addition, since the end of 2019, the aggregate amount of senior notes and debentures due through to 2024 was reduced by $750 million from $1.0 billion to $272 million. This was accomplished through a series of debt exchanges which extended approximately $475 million of debt due from 2021 to 2024 to later years along with debt repurchases and repayments. During the fourth quarter alone, we reduced debt by over $500 million as we fully repaid all balances drawn on our credit facility, redeemed the remaining $83.3 million of the 7.875% senior notes due March 15th, 2021 and opportunistically repurchased $25 million of senior notes maturing in 2022. Also, the unfunded status of our pension and other post retirement plans also improved from the prior year. At the end of 2020, our plans were underfunded by $107.6 million, which was an improvement from the $137.2 million underfunded level at the end of 2019. The decrease is due to strong asset returns partially offset by lower discount rates. Planned contributions in 2021 under all pension and other post retirement plans are expected to be approximately $6 million, which is slightly less than our 2020 funding. Income in 2021 from all plans is expected to be approximately $19 million as compared to $12 million recorded in 2020. Our expectations for full-year 2021 are reflected on Slide 16. As the COVID-19 infection rates remain elevated in many parts of the world, we expect the path forward to remain uncertain and volatile. As such we are unable to furnish our typical guidance for 2021. However, I do have the following observations and guidance for 2021 beginning with observations regarding our two segments. For business services, the organic growth we achieved in the fourth quarter gives us optimism for the year ahead, even though there are select verticals such as travel and lodging that remain in the pandemic screw up. We believe that our supply chain packaging and labels businesses will continue to benefit from the shift to e-commerce and other pandemic induced changes in consumer behavior that many are predicting to become permanent. The healthcare industry for example, is adjusting to the growth of telehealth and in-home services and with our CGMP assembly and fulfillment capabilities, we are well positioned to support them going forward. And with the start of nationwide vaccinations comes to the -- __ comes of the potential for the Coronavirus to be under control later this year, which will bode well for continued economic recovery and a corresponding increase in demand for print and support services. For marketing solutions, based on forecasts for the U.S. advertising spending in 2021, client marketing budgets are expected to increase and ad spending is projected to grow from 3% to 6%, depending on the pace and timing of the projected economic recovery. The unique conditions and impact of COVID-19 on different industries means that the pace of recovery and the mix of marketing activity will continue to vary greatly. Integrated marketing programs with demonstratable ROI will be critical to marketers who are increasingly challenged to restore top line growth. And we believe that our marketing solutions team is well positioned to provide innovative solutions that help our clients achieve that objective. Net sales for the year are expected to be flat to up low single-digits taking into consideration reductions from the Census project and one-time pandemic related projects in the second half of 2020 offset by a modest economic recovery as the year progresses. However net sales in the first quarter are expected to be between $1.09 billion and $1.15 billion or down 5% to 10% organically since the pandemic did not begin impacting most of the company's businesses until late March 2020. And we were producing the Census last year which wrapped up in mid-2020. Excluding the unpredictable impact from changes in foreign exchange rates, non-GAAP adjusted income from operations and the resulting operating margin are expected to be flat to up slightly from the prior year as the company continues to benefit from aggressive costs out actions. Results for the first quarter are expected to be slightly lower than the prior year given the exceptionally strong first quarter of 2020, which included work for the Census. Interest expense is expected to range from $120 million to $125 million benefiting from lower average borrowings and a lower average interest rate throughout 2021. The full-year non-GAAP effective tax rate is expected to be approximately 35%, which is higher than reported in 2020 as non-recurring benefits were reflected in 2020 and benefit from the CARES Act has expired. Operating cash flow is expected to be slightly lower than the prior year, reflecting a reduction due to the repayment of half of the employer portion of payroll taxes deferred in 2020. Capital expenditures are expected to be approximately $80 million. And as part of our agreement to sell the printing facility in China, the company expects to collect one additional deposit of approximately $50 million in 2021. Company also expects to continue generating additional proceeds from monetizing other assets, including proceeds from selling additional facilities. And now operator, let's open up the line for questions.

[Operator:]

Thank you. And Charles Strauzer from CJS Securities is on the line with a question. Your line is open. Please go ahead.

[Charles Strauzer:]

Hi, good morning.

[Dan Knotts:]

Good morning, Charlie.

[Terry Peterson:]

Hi, Charlie.

[Charles Strauzer:]

Hey, can we perhaps dive a little deeper into the stronger than expected sales performance in the quarter? And specifically, when you look at the business services side, what were the kind of key drivers within the sub segments there. And then what was kind of one-time versus maybe more ongoing, if you will?

[Terry Peterson:]

Yes sure, Charlie. I'll take this and Dan can kick in with some additional comments if necessary. One of the areas where we had the greatest over performance from our previous expectations was in the supply chain management. So I mean, that area reported very significant organic growth, probably one of our largest organic growth for any product category since the time of the spin. So, that area had just a tremendous wins. And that group is having great success with projects, kitting projects that are helping to distribute medical supplies and kits to folks out there as well as just a number of other types of opportunities that have come in from kind of the healthcare profession. So, that's probably the largest area of over performance. We did see really good performance somewhat better than expectations also in our packaging. And that came out of both our Chinese operations as well as our domestic U.S. operation and labels continues to really do well. So, breaking it down between one-time projects and NATA, we hope to be able to leverage these new relationships and these new product offerings that we've been able to provide. We hope that that can continue to provide additional sources of revenue in the future. But, many of those are -- were one-time in nature, at least for now but again the relationships that we have established with some of these and some of the relationships that have been extended, we think really can provide some ongoing extra work with these clients even if it's not exactly the same as what we produced in the fourth quarter. But those are probably the big areas where we had over performance. Places that were still down actually performed a little bit better as well. And our commercial print that was a little bit better, as I mentioned several of the down areas for us. We're showing a better and lower rates have declined and what we had seen in previous quarters. So, those are really kind of helping to even though they didn't report growth for the quarter.

[Dan Knotts:]

Hey, Charlie just to add to that. If you look at the three categories, that product categories that are for organic growth for the quarter supply chain management, packaging, and in labels. I think there's an important element of this as we look to 2021, a strategic element of this as we looked at 2021 of the changing landscape for those product categories and capabilities.

[,:]

And the question there on a going forward basis is has the market or as the demand profile shifted now where you think about teladoc and you think about telehealth, and kits being sent out directly to people's homes, the extent to which that becomes a permanent shift in the market shift in organizational company behavior. In consumer acceptance, we think we're very well positioned in that space, I continue to pursue those opportunities today, as we speak with those organizations as they try to figure it out, heading into now that we're into 2021. From a packaging and labels standpoint, both of those are predicated on two things. And that is from a packaging standpoint more from the standpoint of the electronic device and new wins that we had with clients in a number of different areas as we continue to grow our packaging business. So, the two aspects of that is upon organic growth based on the packaging we're providing for the products that are being purchased primarily in the technology side, as well as the sustained or new growth we're experiencing, as a result of a building continue to build out our packaging business. So, we're pretty excited about the future opportunities that we have in front of us there. And from a label standpoint, there's a shift in from secondary from shipping label, e-commerce, a trend that is moving forward from a market standpoint. We're very well-positioned in that space as well. And feel good about the ongoing opportunities for us to continue to support those clients, as they recognize or respond to the shift in e-commerce, home deliveries, et cetera and the increased use of labels. So, all three of those have different but similar dynamics that we're pretty excited about as we head into 2021. And the real question is how do you turn those into permanent opportunities and support that level of growth that those clients are looking for going forward.

[Terry Peterson:]

And Charlie, I just to one more follow on here. This is really the second quarter where we've had good surprises to the upside. And one of the other things that's really unique with a lot of these opportunities, is the sales cycle has been incredibly short on this. So, what we have visibility to at the time ratio and guidance, and what materializes after that is -- can be notably different. So the sales cycle has been short, which is a great testament to our team's ability to really address and respond and adapt to our client's changing needs and put together programs that can be executed -- sold and executed very, very quickly. So like I said, this is the second quarter where we've seen some nice upside. And a lot of that just because this sales cycle and these have just been so incredibly short and our ability to execute and deliver on these large projects has been pretty incredible in such a short period of time.

[Charles Strauzer:]

Yes, that's encouraging, thank you. And then just segwaying into let's have a discussion about the guidance that you gave out. It looks like Q4, Q1 to kind of the bottom here, what gives you the confidence that that we are seeing a bottom at this point and talk about the assumptions behind the guidance a little bit more, if you could.

[Terry Peterson:]

Yes, I mean it is tough. We debated a lot about how far we felt comfortable going with guidance because as I mentioned there's still a lot of uncertainty, there's still a lot of volatility, and that creates more challenges with providing that guidance, but we felt like it's important to kind of share at least our perspectives as of the current time here. So, we've spent a lot of time kind of looking at the different markets that different product categories are performing in. Some of the opportunities with some of the new products that and the products and the services that we have rolled out. And we have taken a stab at estimating what that recovery might look like and we're kind of looking at vaccination the pace of vaccinations and believing that as vaccinations continue to get further distributed that that will provide a return over a period of time to more normal times. So, we've made some assumptions around that pace, and what -- kind of what the new normal is going to look like. It won't look the same as it did before the pandemic. We have always believed that it would be different afterwards and that we would emerge stronger even if we did emerge a little bit smaller. But at the same time we just really tried to take all the data points that we've seen and look at what's happening with the vaccinations and the timing and the pace expected for that. And we've made some assumptions around what that would look like for our revenue given the mix of products and services that we have.

[Dan Knotts:]

And, Charlie, I think it's also important to think about that or share how we think about that relative to the two segments. And within business services that the key drivers of business services are all about product spending by both businesses and consumers. And as the economy begins to open up, you think about packaging, you think about labels, you think about supply chain managers, if you think about statements from a consumer spending standpoint, in commercial print activities under the assumption that the economy is going to continue to open up as vaccines roll-out and product spending by both businesses and consumers going to continue to increase key driver for business services. If you think about marketing solutions and marketing solutions spend was significantly curtailed. Marketer spend was significantly curtailed in 2020 amidst the uncertainty in uncertain environment and whether there be return on that marketing ROI. The downside to that is from a marketer standpoint is marketing works and to be able to drive increased sales and growth of the companies out there that use marketing to do that at some point that is going to return. And consumers are going to respond to that. So, both of those are predicated on the economic return a little bit different dynamics relative to the product spending versus the marketing spend significantly uncertain at this point in time of how this is going to play out. But we feel pretty good about where we sit today.

[Charles Strauzer:]

Excellent, thank you. And then if we could shift a little bit to the balance sheet, kind of given how wide open the capital markets are any thoughts on taking advantage of the window here to further refinance the balance sheet?

[Terry Peterson:]

Yes, I mean, it's certainly attractive looking at the strength of the capital markets right now. At this point, we've not announced anything but as I've said in many other previous quarters, we're always looking for a great opportunity to improve the health and strength of our balance sheet. So, but at this point, we've not got any sort of opportunistic transaction to announce.

[Charles Strauzer:]

Got it. And then just lastly thoughts on D&A for 2021?

[Terry Peterson:]

D&A, depreciation?

[Charles Strauzer:]

Yes.

[Terry Peterson:]

We've shown steady reductions in that over the past several years here. We would expect just given that the CapEx was a little bit lower this year. We would expect that to come down a little bit. We didn't provide exact numbers on that, but we will expect to see some continued downward movement in that expense.

[Charles Strauzer:]

Great, thank you very much.

[Dan Knotts:]

Well, thanks Charlie.

[Terry Peterson:]

Yes, thank you Charles.

[Operator:]

Bill Mastoris is on the line -- Bill Mastoris from Baird is online with a question. Your line is open. Please go ahead.

[Bill Mastoris:]

Okay, thank you. Terry, this is a little bit of a follow on to your comment to the most recent question. Are there any hurdles that you have right now in any of the revolving credit agreements assuming you elect not to refinance your 2022 maturities that would prevent you from maybe taking it out with the revolving credit agreement?

[Terry Peterson:]

No, there's no restrictions at all. And in fact our capacity for secured debt issues right now is probably the greatest capacity that we've had in quite a long time. So, we feel like we have very few challenges to work around when it comes to doing any sort of financing right now.

[Bill Mastoris:]

Okay. And what is that secured capacity right now?

[Terry Peterson:]

It's over a $1 billion if you look at first and junior priorities. It's very high right now, it's over a $1 billion.

[Bill Mastoris:]

Okay. And then a related question, but over the longer term do you have a leverage target that you would care to articulate, I know this year is going to be a little bit challenging just in terms of your ability to maybe reduce it at the same pace. But is there a long-term target where you say, okay, this is going to be our comfort level going forward. I understand it's a little bit difficult because we don't know what's going to unfold and as far as the economy opening up or the pace at which it opens up.

[Terry Peterson:]

Yes, we have not published or shared kind of a medium or long range target other than to say that our goal for the foreseeable future is going to be to continue to reduce that leverage over time. So, we look at all sorts of opportunities to help reduce that leverage including focused on improving in growing EBITDA certainly one other mechanism to help reduce that leverage. So, we haven't really published anything. But for the yes foreseeable future there's going to be a pretty hard focus on continuing to reduce that leverage.

[Bill Mastoris:]

Okay. And then maybe a question for Dan, this is kind of a follow up to your recent comments. As the economy begins to open up and your clients kind of look towards the future, have they expressed an interest in shifting maybe their business communications mix a little bit more towards print, I think you touched on some of that with packaging and labels but I don't think you directly address commercial print.

[Dan Knotts:]

Yes, I think commercial print has a given the breadth of our platform has a tremendous number of capabilities and product offerings within it. I think for the most part from a packaging, we talked about from a packaging and the kits within supply chain management and the labels piece of that and even the statements a piece of that all continue to be critical business communications that our clients use to manage and run their business and part of that spills over into our commercial print platform. I think it's the -- I think that's going to continue to happen. I think the interesting question on that, Bill, is relative to the future of marketing and the call the abundance of digital platforms that are out there. And in this remote world people trying to utilize, companies utilize those market utilizing those, because they're pretty inexpensive to do that. But what we know and what's been proven over time is that the combination of both print and digital is most effective means of marketing communications. So, when you think about the digital print side, we think about customized direct mail programs. We think about retail and store signage they all work. So, I think as the economy opens back up, you're going to continue to see a balanced approach that marketers are taking relative to both the digital side and the physical print side.

[Bill Mastoris:]

Okay, my last question. And this is admittedly a little bit of a head scratcher for me. I can't say I've seen this very often and that is the $96 million in liquidated life insurance policies, Terry any details around that. I'm not exactly sure what's involved there. But any color would be appreciated.

[Terry Peterson:]

Yes, we've said we’ve had for a long time, I can't even tell you how long we've had. Some cash values on our balance sheet associated with these life insurance policies. Many but not all of those policies were actually in a Rabbi trust that was used to provide security for many of the obligations that we owed under the deferred comp plan that we also terminated. So, there's a bit of a linkage there between terminating those deferred comp plans and the proceeds that we received. So, once we were able to terminate those deferred comp plans, we were able to monetize or to get at the cash that's still invested in those insurance policies. So, that's -- it's been a very lengthy project for us. It's probably from the time we started studying the opportunity to being able to execute on it and deliver the results probably somewhere around a two year window of time to do that. But we -- the team just hung in there did a great job getting through some very complicated analyses and strategies. And we were able to complete it at a time when the tax laws were a bit more favorable than they have been both before this year as well as what they will be for 2021. So yes, I mean it's essentially what it is but it is just shutting down the policies and pulling the cash out of that. But there's a whole series of events and activities that had to happen before we could do that for most of those policies. Some are free and clear and more easily done, but for the bulk of them we had a lot of heavy lifting to do to free those up.

[Bill Mastoris:]

Thank you, very much. I appreciate all the color and best of luck in the upcoming year.

[Dan Knotts:]

Thanks, Bill.

[Terry Peterson:]

Thanks, Bill.

[Dan Knotts:]

I appreciate it.

[Operator:]

I'm showing no further questions at this time. I will now turn the call back to Dan Knotts.

[Dan Knotts:]

[.:]

Thank you for joining us today and please everyone stay safe.

[Johan Nystedt:]

Thanks, Dan. As a reminder information to access the telephonic replay of RRDs fourth quarter 2020 results can be found in our fourth quarter press release, a copy which is posted on the investors section of our website at rrd.com. Thank you for joining us. And that concludes RRD fourth quarter 2020 earnings call.