R. R. Donnelley & Sons Company
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Welcome to the R.R. Donnelley's Third Quarter 2018 Results Conference Call. My name is Paul and I will be your operator for today's call. [Operator Instructions] Please note that this call is being recorded. I will now turn the call over to Brian Feeney, R.R. Donnelley's Senior Vice President of Investor Relations. Please go ahead.

[Brian Feeney:]

Thank you, Paul, and thank you everyone for joining RRD’s third quarter 2018 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 under the Events tab in the Investors section of our website at www.rrd.com. As we review third quarter results on today’s call, we will reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves. The information that will be reviewed during this call is addressed in more detail in our second quarter press release, a copy of which is posted on the Investors section of our website at rrd.com. This information was also furnished to the SEC on the Form 8-K we filed yesterday. Throughout this call, we will also refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risks and uncertainties. Therefore, our actual results could differ materially from our current expectations. For a complete discussion of the factors that could cause our actual results to differ materially, please refer to the cautionary statement included in our earnings release and the risk factors included in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides investors with useful supplementary information concerning the company’s ongoing operations and is an appropriate way to evaluate the company’s performance. They are provided for informational purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in our press release and the Investors section of our website under the Presentation tab. I will now turn the call over to Dan.

[Dan Knotts:]

Great. Thanks, Brian. Good morning everyone and thank you for joining us. On our call today, I will provide an overview of our financial performance for the quarter and discuss the debt refinancing we recently completed to improve our debt maturity profile, followed by an update on our segment performance. And before turning the call over to Terry, I would also like to share a number of awards we received recognizing our focus on innovation and supplier excellence. Starting with Slide 3, our third quarter performance was in line with our expectations as we continue to help our clients create better connections with their customers through their marketing and business communications. I am pleased to report that we delivered our fourth consecutive quarter of organic sales growth. We improved both our adjusted income from operations and operating margin with meaningful progress in executing our cost reduction plans and we increased our operating cash flow. On the top line, our organic sales increased 1.8% and similar to our last several quarters, our organic growth spanned multiple product lines in multiple geographies. 6 of our 11 product and service categories delivered year-over-year growth in the quarter reflecting our broad-based and differentiated ability to provide innovative solutions to enhance customer engagement and drive business performance. From a probability perspective, the increase in our adjusted income from operations and operating margin was driven through a combination of favorable productivity and effective cost management, positive FX and higher sales volume which more than offset product mix challenges within several of our businesses and increased employee-related costs. During the quarter, we continued our strong focus on lowering our overall cost to serve which resulted in a 3.4% reduction in our SG&A cost over the prior year. Our operating cash flow also improved significantly reflecting our team’s sustained efforts to drive our working capital initiatives. As we enter our seasonally strongest quarter of the year, we remain confident in our ability to execute our operating plans and achieve our full year guidance. Before turning to our segment performance, I would like to provide an update on our ongoing efforts to reposition our balance sheet in support of our growth strategy. On our second quarter call, we discussed the sale of two international locations, one of which closed in the first quarter and the second one which accounts for $250 million of gross proceeds remains on track for a 2020 close. We also announced on our Q2 call that we closed the sale of our print logistics business representing an important component of our portfolio optimization plan. Since then, we took another important step to reposition our balance sheet by successfully closing on a $550 million term loan B facility that matures in January 2024. The net proceeds from this facility were used to retire a significant portion of our 2020 and 2021 notes and to reduce borrowings under our revolving credit facility. Together, these actions represent key milestones on our path to improved financial flexibility. Turning to Slide 4 as companies continue to refine how they communicate with their target audiences, we are providing our clients with the tools in the optionality they need to better connect with their customers across the entire customer relationship. From the marketing programs they used to acquire new and inspire repeat customers to the business communications they utilized to service, inform and transact with those customers over time. In our Business Services segment we are focused on enabling our clients to more efficiently service and strengthen their relationships with their customers. With our commercial and digital print capabilities as well as our business communication solutions we are providing our clients with the ability to make each interaction personalized and representative of their brand. With our packaging and labels offerings we are playing an important role in helping our clients to further convey their brand promise. And with our supply chain global outsourcing and logistics expertise we are supporting the entire customer engagement process with speed and efficiency. In our Marketing Solutions segment, we are focused on helping our clients optimize and activate their marketing campaigns through a powerful combination of insights, inspirations and interactions. Our data driven insights assist our clients in optimizing their marketing spend. Our inspired award winning creative work captures customer attention across all media. And our print and digital capabilities enable our clients to create meaningful interactions through their online, offline and on-site marketing communication. And as our clients’ needs continued to evolve, we continued to enhance our capabilities. Within business services, we recently expanded our business communications offering to include digital delivery across voice enabled assistance like Alexa and Google Home. With this new offering consumers can access their personal statements through the smart devices in their home to ask questions, set reminders, retrieve status updates, learn how to lower their bills and more. This launch comes on the heels of our SuperDoc offering that we announced on our last call which also leverages our DC+ technology platform to transform fixed business statements into interactive dynamic customer communications. And within marketing solutions we have recently launched Acuity by RRD, a testing program that marketers can use to predict direct-mail performance and validate campaigns preproduction at a fraction of the price and time. Acuity by RRD provides marketers the information they need to conduct data driven analysis and better understand projected response rates before they invest significant time or money in their campaigns. With our extensive and expanding portfolio of capabilities we are well positioned to assist our customers to simplify their supply chain complexity, lower their operating cost and increase the effectiveness of their marketing and business communications. Now let’s turn to our segment performance on Slide 5, Business Services delivered a strong quarter with increases in organic sales, income from operations and operating margins. Organic sales grew 2.7% as our packaging, logistics, supply chain services, BPO and labels offerings all reported favorable performance. This was our fifth consecutive quarter of organic growth for this segment. Adjusted income from operations of $77 million represented a significant improvement over the prior year as we continued to execute our strategic initiatives to drive top line growth, lower our cost to serve and enhance our operating margins. I would like to next share a few examples of how our business services teams are successfully expanding our client relationships. We began working with Juul the leading electronic cigarette company over a year ago. The partnership began when Juul needed a small order – label order produced very quickly and as Juul continued to grow so did our business relationship. In 2018 we became the primary production partner in North America for several projects and we will continue to help with Juul’s packaging worldwide. We engaged our creative production team to help support this effort and were recently awarded additional work on artwork development and production for Juul’s packaging. We also recently expanded our relationship with a large audio equipment designer and retailer. As part of this new agreement we will provide full color rigid box printing and packaging as well as inbox booklet and manual printing for a new line of audio headsets that will be distributed throughout North America in mid-2019. Our national product design team created all the prototypes in-house and we will produce all of the packaging inbox materials in China. Turning to Marketing Solutions, total net sales were down 2.7% versus the prior year, primarily attributable to our strategic shift away from traditional pre-media services for non-core market segments. As a partial offset we delivered our fourth consecutive quarter of organic sales growth in our direct mail offering. Adjusted income from operations of $12 million declined from the prior year due primarily to lower sales volume. Our marketing solutions teams are focused and working hard to improve our performance by capturing new business opportunities, improving our sales mix and lowering our operating cost structure. I’d like to provide a few examples of how we are using our marketing solutions capabilities to execute our clients marketing programs. We recently extended our relationship with a large full-service national restaurant chain. Under this new agreement, we are replacing their front-end menu design and development technologies with our own menu management platform. Our end-to-end menu management solution will provide this client’s corporate and franchise employees the ability to directly access and customize individual menu content in creative assets on demand. We will produce the menus using our regional distributed print platform in order to reduce delivery time to each location. This solution provides complete vertical integration for menu management that ensures brand consistency, while reducing cost and increasing speed to market. In two other recent examples, we extended our work with current clients to include in-store marketing services through our retail solutions group. First, we won the monthly store kit assignment for a large nutritional supplement retailer, because of our front-end management system that includes user profiling for greater kit customization and accuracy for the store. Our technology solutions will allow this client to combine store reorders with their monthly kits further reducing waste and reorders. We also built on our direct marketing relationship with Sally Beauty Holdings, a large beauty supply company to include in-store marketing services. By tapping into a common set of content assets, we will utilize our distribution system to bring more consistency, efficiency and effectiveness to the clients’ overall marketing efforts. Before turning the call back to Terry, I would like to share a number of recent awards we have received related to technology and operational excellence. First, we were presented with a 2018 NASSCOM Customer Service Excellence Award in the category of Process Efficiency. We are honored to have been recognized as one of the largest business process outsourcing and information technology outsourcing events in the world for our successful implementation of robotic process automation for Experian UK. Second, we were recognized by one of our vendors, ETQ, a leading provider of quality management software. RRD won first place in the 2018 ETQ Innovation Excellence awards, which acknowledges customer ingenuity in implementing ETQ-reliant software in innovative ways to solve business challenges. Finally, we are recognized by the Johnson Controls Building Technologies and Solutions division with the 2018 Leadership in Quality Award for Supplier Excellence. The award was presented to our supply chain solutions business at the Johnson Controls’ annual Supplier Recognition and Procurement Excellence event, which recognized key suppliers for outstanding performance and contributions. And with that, I will turn the call over to Terry to provide more details on our financial performance and outlook. Terry, over to you?

[Terry Peterson:]

Thank you, Dan. The primary focus of my comments will be on certain non-GAAP results and measures. For those participants who are following along with the supplemental slides, please refer to Page 6 in the deck as I begin my remarks. Page 6 provides a snapshot of our third quarter products and services net sales performance by segment and by geography for consolidated RRD. On a reported business, net sales were down 4.9% in the quarter, which included a reduction of 6.1 percentage points associated with the print logistic sale at the beginning of the third quarter. Organic net sales were up 1.8% on a consolidated basis in the period. After adjusting for the sale of our print logistics business, we experienced growth in 6 of our 11 products and services categories, packaging, logistics, supply chain management, direct mail, BPO and labels. Page 7 shows the organic sales trend by quarter and by year. This is the fourth consecutive quarter we have reported organic growth. These results were in line with our expectations for the quarter as we continue to see the benefit of new client wins and expanded work with existing clients. On Page 8, adjusted income from operations of $67.4 million was favorable $1.8 million versus the third quarter of 2017 and up $30.9 million sequentially from the second quarter. Our corresponding margins also increased from 3.8% last year to 4.1% in 2018. Changes in foreign exchange rates of approximately $13 million positively impact – impacted results in 2018 versus the same period in 2017, driven primarily by China's RMB exchange rate returning to early 2017 levels and the weakening of the Indian Rupee against the U.S. dollar. However, the majority of the FX improvement was offset by inventory – by an inventory reserve benefit and a favorable legal settlement, both of which were recorded in 2017, as well as the impact of the sale of the Print Logistics business. In addition, higher volumes and our cost reduction initiatives were offset by unfavorable product mix, higher healthcare and performance-based compensation expenses, and modest price pressure in Business Services. Adjusted diluted earnings per share was $0.25 in the quarter as compared to $0.30 reported in the prior year period. Although adjusted income from operations and interest expense were both favorable to the prior year, the 2018 reduction was driven by a higher effective tax rate. The adjusted effective tax rate was 41.2% in 2018 as compared to 22.3% in the 2017 period. As expected, the 2018 rate has improved significantly from the previous two quarters, but continues to be negatively impacted by tax reform, discrete items, and the mix in our pretax profits by jurisdictions as compared to 2017. We expect our ongoing efforts to reduce interest expense and improve profitability among other initiatives will help reduce our effective tax rate in the future. Our GAAP results for the quarter included pretax restructuring and other charges of $11 million primarily related to our ongoing cost reduction initiatives. These charges are $22.8 million lower than the same period last year, which included a $21.3 million charge for the impairment of goodwill in the Marketing Solutions segment. In addition, 2018 results for the quarter also included a favorable tax benefit of $19.6 million related to adjustments to the provisional taxes recorded last December associated with tax reform. Next, I will discuss the highlights for each of our segments. On Page 9, third quarter 2018 net sales in our Business Services segment of $1.36 billion were down $77.4 million or 5.4% compared to the prior year. After adjusting for the effect of the Print Logistics disposition, which accounted for a decline of $106.4 million and foreign exchange rate changes, organic sales increased 2.7% in the quarter. Excluding the sale of our Print Logistics business, we reported volume growth in five of our eight product categories in this segment. Our teams continue to successfully execute our go-to-market strategies to win new business in markets we serve. Adjusted income from operations of $77.4 million was up $20.7 million versus the 2017 period. Profitability improved as a result of favorable foreign exchange rate changes, cost reduction initiatives and volume gains, which more than offset the impact of unfavorable product mix, a favorable inventory reserve adjustment in 2017, modest price pressure in the Print Logistics sale. Turning to Page 10, net sales in our Marketing Solutions segment of $286.3 million for the third quarter of 2018 were down $8 million or 2.7% to the prior year quarter and both are reported in an organic basis. The modest increase in our Direct Mail products was more than offset by declines in other product categories. Adjusted income from operations of $12 million was down $3.9 million from the prior year as the impact of lower volumes and an unfavorable mix in products sold was partially offset by productivity initiatives. Third quarter 2018 non-GAAP unallocated corporate expenses of $22 million increased $15 million driven primarily by higher healthcare expenses, a favorable legal settlement in 2017, and higher bad debt expense. On Page 11, net cash provided by operating activities was $64.1 million, which was an improvement of $26.4 million as compared to the 2017 period. As expected, the unfavorable working capital build reported in the first quarter has continued to reverse and we believe our ongoing working capital initiatives will provide further benefits in the fourth quarter of 2018. Capital expenditures of $24.7 million in the third quarter of 2018 were $1.7 million higher compared to the 2017 period. Net proceeds from the sale of our print logistics business were $50.2 million in the quarter, which included a preliminary working capital adjustment. Turning now to the balance sheet as of September 30, we had total cash on hand of $247 million and total debt outstanding of $2.18 billion, including $242 million drawn against our credit facility. Remaining availability of the credit facility was $445 million as of September 30. Before I shift to our expectations for 2018, I would like to provide you with an update of our ongoing capital priorities. On October 15, we announced that we closed on a new $550 million senior secured term loan B credit facility. Net proceeds from the borrowing were used to fund a $430 million cash tender of certain of our 2020 and 2021 senior unsecured notes and a $75 million repayment of amounts borrowed under our asset-based revolving credit facility. Page 12 of the supplemental slides show that various maturities of our outstanding debt by year as of September 30 in addition to the pro forma maturities after giving it back to the October 15 financing and use the proceeds. As the slide shows, we have now significantly reduced our 2020 and 2021 maturities. We initially launched an offering seeking $400 million of financing and given the demand we were able to opportunistically increase the size of the financing to $550 million. This allowed us to extend more of our mid-term maturities than initially planned. Our tenders increased from $350 million to $430 million and we paid down our credit facility by $75 million. As a reminder, we plan to utilize availability under our asset-based revolving credit facility to repay our $172 million of senior notes coming due in February 2019. As I have stated in past quarters, we expect to make strategic investments in our business, including both organic investments and potential acquisitions and we continuously evaluate our portfolio for strategic opportunities to optimize stockholder value like the sale of our print logistics business and the sale of facilities and other assets. In regards to the pending sale of an international facility and land used rates in 2020, we continued to make planned progress with constructing a new facility that we will move our existing business into during 2019. We also expect that we will meet the required milestones that will enable us to collect two additional nonrefundable deposits in 2019. We expect to use these deposits to help fund remaining construction cost as well as the associated relocation cost in 2019. We also believe the project remains on track to receive final governmental approvals in 2020. At which time the transaction will close, we will require a significant gain on the sale and collect the unpaid portion of the purchase price. Our expectations for the full year 2018 are reflected on Page 13 of the supplemental slides. For the full year, we expect net sales to range from $6.75 billion to $6.9 billion. Adjusted diluted earnings per share is expected to range from $0.80 to $1.10, but on a GAAP-only basis, we do expect to record a pre-tax charge of approximately $32 million related to the senior note tenders completed on October 15. Shifting to our 2018 cash flow, we expect cash flow from operations to range from $175 million to $210 million. Capital expenditures are expected to be approximately $105 million. And now operator, let’s open the line up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from the line of Charlie Strauzer of CJS Securities. Please go ahead.

[Charlie Strauzer:]

Hi, good morning.

[Dan Knotts:]

Good morning, Charlie.

[Terry Peterson:]

Hi, Charlie.

[Charlie Strauzer:]

Hey, a couple of questions. Just starting on kind of the business side of things with you looking at the business services segment, you got good growth there and then market services had kind of almost an equal percentage decline. Can you talk about little bit more about the growth drivers of business services and what’s sustainable there and then also declines in the marketing and services side, what’s causing those declines, are they starting to shift in other way and then how might we think about the mix in Q4? Thanks.

[Dan Knotts:]

Yes. So Charlie, it’s Dan I will take the question. I think starting first with business services, as we think about the key drivers of the performance of the growth in that segment our packaging, our logistics, our supply chain management, our BPO, our labels were all delivered favorable performance for the quarter. And as we think about those product lines, we think about those markets going forward we continue to believe that we have the opportunity to continue to drive organic growth in those particular product lines to continue that favorable performance within business services. As I think about marketing solutions, there is a key dynamic that’s going on there one is that strategic shift away from what I will call the traditional pre-media services for our non-core markets. And a shift to expanding – towards expanding our capabilities to include data analytics and insights as well as digital channel and digital media, programmatic media execution and building our capabilities to do that to really capture the available opportunities that we believe exist in that space that better aligns with our client base. So the impact of the shift away from traditional pre-media services will be there for another couple of quarters. While we are continuing to shift our focus from the Marketing Solutions segment to the clients within the targeted segments we have in expanding our capabilities around data analytics, digital channel and media execution.

[Charlie Strauzer:]

Got it. And then maybe Terry if you can help us a little bit with the Q4 and the guidance you have given, how might the split be between the two segments there?

[Terry Peterson:]

As we look ahead to the fourth quarter, you can kind of back into what our guidance is for the quarter given that we are going to have one quarter left with the full year guidance. But our fourth quarter last year this is a reminder, it was a pretty strong quarter, so the comps are going to get a little more challenging on the revenue side. But we feel like we will see that actually reflected in both segments. Our Marketing Solutions is going to continue for a couple of more quarters to reflect that strategic shift away from some of the non-corporate media services that we used to be more active with, so that will also continue into fourth quarter and into early part of next year. But we do – we are expecting good strong performance and some of our business services product categories again would be a little bit of help on the election side more that will come through in the fourth quarter. But again in many of our businesses product categories we expect to deliver good strong performance in the quarter, but we will be up against stronger comps.

[Charlie Strauzer:]

Got it. And in the Q4 obviously when you look at the guidance that you have given out there and think about the organic growth that you have seen in the last four quarters, do you think that to continue into Q4, do you think it looks the comps will be too tough there?

[Dan Knotts:]

Yes. I think it’s certainly possible, I mean fourth quarters are our biggest quarter by far. But I think that will be more challenging for us to continue that against the strong fourth quarter last year.

[Charlie Strauzer:]

Got it, great. And then shifting gears to the balance sheet, obviously there is a big refi just now and if you can give us a – kind of a better roadmap over the next 3 years to 5 years of de-leveraging and the other kind of longer-term goal and plan there, now that you have got much more flexibility to de-lever the balance sheet?

[Dan Knotts:]

Yes. I think Charlie the answer of that question would be our as we have stated previously we are going to absolutely maintain a disciplined approach to our capital allocation and find that appropriate to maintain a balance between investing back into our business, to build out our capabilities and in particular within the marketing solutions space where we have the opportunity to expand our offering and expand our position within addressable market – capture addressable market opportunities for us in that space. So the balance of investing back into business with our ongoing commitment to reduce our overall operating leverage and maintain that financial flexibility that we believe is required to operate the company going forward. As we laid out on our Q2 call and it took another step on our Q3 call, our focus will continue to be looking at monetizing those non-core asset sales like we announced in Q2. Our focus will also continue on a portfolio optimization and looking at the appropriate opportunities to continue to align our portfolio of capabilities with our strategy over time. And it also will include on the other side of that the potential evaluation of M&A activity and the trade out there or the choice between organic investments and M&A activity to truly build out the capabilities that we need. So we have a path forward. We are confident in that path forward and we will absolutely maintain our focus on the disciplined approach to our capital allocation.

[Charlie Strauzer:]

And picking up on your kind of asset sales, I know there been some talk in the media recently, but there are some additional assets that come, potentially could come for sale and maybe you can complement a little bit more on that if you can?

[Terry Peterson:]

Yes. Charlie, this is Terry. Obviously our practice is not to comment on specific rumors or potential transactions before we have made a more structured public announcement. So regarding the specific media that I think you are referring to, we certainly won’t be able to comment on that. But as Dan said and as I also reiterated in my prepared comments, we are continuing to evaluate the portfolio and looking for opportunities to optimize that portfolio where it makes sense, where our strategy is not dependent upon necessarily owning a capability and we will continue to evaluate those options and take action as we feel is in the best interest of our shareholders and our business.

[Charlie Strauzer:]

Okay. And just Terry just sticking with you for once again just on the balance sheet, the sale in that’s going on with the property that’s going to close in 2020, net proceeds of that obviously will be lower than the gross proceeds, but when you look at the net proceeds, can you use those full proceeds to pay down debt that’s patriated here in the U.S. or are you going to have that tax this year that you think?

[Terry Peterson:]

We will be able to use a significant portion of those proceeds to pay down debt back here in the United States. It will just take a little extra time to get that money sent back over here. And there will be some small tax withholdings related to that repatriation back to United States. But certainly we expect to get that money back after the sale closes and use that all likelihood to retire debt.

[Charlie Strauzer:]

Excellent. Thank you very much.

[Dan Knotts:]

Thanks, Charlie.

[Operator:]

Thank you. The next from BRG in the line of Jamie Clement, your line is open.

[Jamie Clement:]

Good morning gentlemen.

[Dan Knotts:]

Good morning Jamie.

[Terry Peterson:]

Hi Jamie.

[Jamie Clement:]

So just following-up on the last question from Charlie there, I mean do you all have more any additional kind of guidance you can give us in terms of what the land transaction would mean on a net basis after you move the business to a new facility, after you pay taxes there, now we are kind of three months after the initial announcement give more clarity on that?

[Dan Knotts:]

Yes. That like I said a substantial portion – procedure will be available to bring back, but by the time we fund local taxes as well as retroactive taxes and fund some of the other costs with relocating that business. We think that’s going to be well in excess of $100 million perhaps even approaching as much as $150 million think of it in that kind of a range.

[Jamie Clement:]

Okay. And then so that’s all-in, that’s local taxes, that stuff here and the cost of moving the business and constructing the…

[Dan Knotts:]

Absolutely.

[Jamie Clement:]

Okay, great. Shifting gears back to the business, obviously paper prices are up, freight costs are up, can you go through Dan some of your business, there has been kind of help us understand where you have got the ability to more immediately pass through inflation to customers versus other product lines where there is a little bit more of a lag, can you talk in general terms of about that because I mean obviously a lot of companies are dealing with inflation?

[Dan Knotts:]

Sure. Yes, I think Jamie the way that we think about that is not necessarily by individual business, but it really is around the contractual obligations or contractual opportunities we have with our clients regardless of what business that is in. And as you're well aware in long-term – long time covering the industry is – was contractual, and as we talked about before, there is contractual limitations in terms of timing of when you can pass things on and when you can't pass things on build within those contracts. What I would tell you is, is our focus is really on as we look at securing new wins, new contracts and making sure that, that we’re appropriately addressing those inflationary challenges and contractual rights, if you will, going forward. And at the same time as we renew our existing contracts we are escalating that, that focus as well. We’re operating in a very different environment climate. If you think about the material costs particularly related to paper, if you think about the freight costs as you talk about, if you think about rising labor cost and labor availability et cetera, all those factors are coming into play and having the ability to pass those on more frequently is a critical component of driving our long-term profitable growth and we’re very focused on making that happen.

[Jamie Clement:]

Okay, alright. That's right. It doesn't, I mean, just on a surface it doesn’t look like you’re all in that squeezed during the third quarter. Is there any expectation that you might get squeezed a little bit more from some of these factors in the fourth or you – you’re feeling pretty good about? Thanks.

[Dan Knotts:]

I would answer it by saying that we're working very hard to continue to drive the top-line growth and convert that top-line growth into incremental earnings, while at the same time we’re working very hard to minimize the impact of those rising costs through alternative actions and effectively managing our supply chain. And the third component of that is we’re working extremely hard to lower our overall cost to serve as a company in all three of those initiatives, or workstreams are critically important to our future performance.

[Jamie Clement:]

Okay. And then last question, if I may. The international packaging business, some of that business came on last year, you were hiring, you were training, it was very, very new business for you guys. Would you expect that business to be more profitable for RRD in the fourth quarter here in ‘18 versus ‘17 just because you got an extra year under your belt?

[Dan Knotts:]

Yes. That’s one of those situations where you take on the business and it was a very real opportunity for us last year and you go through the challenges associated with starting up a new facility and hiring the people and the inefficiencies associated with that, and your focus is really on making sure that you deliver a quality product on time for your clients, and that, that trumps everything that you’re doing to establish that credibility and build that relationship. And then over time you go to work on figuring out how to drive and improve the overall efficiency of those operations and aligning your cost structure to better match the revenue profile that you have from that particular client or groups of clients, whatever situation may be. So as we look at our ongoing progress in 2018, we’ve been very, very focused on that latter part, which is improving our operating efficiency, our waste et cetera that, that went along with the start-up and we feel good about our performance heading into Q4.

[Jamie Clement:]

Right. Very good.

[Terry Peterson:]

Yes, the other thing, Jamie, the other thing, Jamie, was fourth quarter of last year, I mean, our facility was fairly new in terms of being up and running, so we were still actually incurring some start-up cost to that, that also were a headwind for us a year ago quarter that obviously were past now.

[Jamie Clement:]

Right, right. Yes, that’s part of what I was talking about. Appreciate that, Terry. Thank you very much.

[Operator:]

Thank you. The next from Citi, we’ll go to the line of Dave Phipps. Please go ahead.

[Dave Phipps:]

Hi. Thank you for taking my question. Can you talk a little bit about some of the European growth, that remained strong and what's driving some of that?

[Dan Knotts:]

Yes. We’ve got much like we’re seeing in other parts of the geographies too, we’re seeing actually the growth coming from not just one area or one geography or one product to that category, but several. So, Europe in particular, we’re seeing our supply chain services has been having a really good year and we actually have some packaging business over in Europe and then certainly Commercial Print is also sold in Europe, and all three of those are having a nice growth to them this year that is contributing to that European growth. And on the Asia front, it still has nice double-digit growth, but that’s slowing and it’s been slowing for the past few quarters, is that more FX, is it more units based, is it more FX based or just lot of large numbers?

[Terry Peterson:]

Yes. The FX piece would be a small negative for that now in the third quarter here, but really what’s happening there is we are starting to lap some of the new packaging business from last year, so that does have a little bit of an impact. But that business is still continuing to bring on new customers and grow in other way as well so that growth is still quite strong in the double digit range right now.

[Dan Knotts:]

David as you may recall we in Q2, Q3 last year we announced the additional facility that we were starting up to support insisting a new product offering for insisting a client, so what you are seeing there is that lapping effect that Terry talked about as we ramped up Q2, Q3 and Q4 last year, so Q4 becomes the annualized lapping of the activity from last year.

[Dave Phipps:]

Fair enough. And then that leads to my question about this fourth quarter, so you were starting a facility last year and the fourth quarters is I would assume the largest quarter, so we probably should expect a little better operating margins out of that facility as we look into the fourth quarter, is the a fair assessment?

[Dan Knotts:]

Yes. Absolutely, I mean that’s the biggest volume for that particular product family and in our business extra volume brings better leverage and helps our margins out.

[Dave Phipps:]

And then finally if you had $172 million maturity on February 1, I would assume that you are going to repay that with cash on hand?

[Dan Knotts:]

Yes. We will actually use really driving the asset based lending credit facility to repay that.

[Dave Phipps:]

Okay. Thank you. Those are my questions.

[Dan Knotts:]

Alright. Thanks David.

[Operator:]

Thank you. Then from Baird and Company we will go to the line of Bill Mastoris. Please go ahead. Mr. Mastoris your line is open on this side, if you muted please un-mute.

[Bill Mastoris:]

Sorry about that. Dan you mentioned in your prepared remarks that there were some industries that have been doing better than others and you hinted that the fact there were certain industries that were really kind of falling off, could you – I would like to drill down a little bit more what are the industries that are actually doing fairly well that are holding up if you will that organic sales increase and what are some of the other industries that are kind of falling by the wayside?

[Dan Knotts:]

Yes. I think – so if we think about industry when we really refer to what I was referring to in my comments are really the products and services that we provide versus the industry perspective. And as we have talked about we had six of our 11 products and service offerings that delivered organic growth for the quarters. We continue to see that that happening across a broad base of our product mix. Overall if you look at some of challenges for us or some of the unfavorable performance has come from we think about our forms business, forms products if you will the ongoing secular decline associated in the forms we do expect that to continue. And the other is in the digital and creative space I talked about is continuing to shift away from the non-core products within the digital and creative space that is driving some unfavorable year-over-year performance on that front. But the other product offerings are doing nicely and delivering organic growth. I would tell you that didn’t go through each one of those and look at the industry projections for the going-forward projections for those different products and services offerings and those are important to get a feel for what projections are for those product lines. However, we look a little bit differently and with our extensive client base that surpasses 50,000 clients in our differentiated and broad based offering, we expect to continue to further penetrate and extend our relationships with those clients and sell all of our product offerings to those clients. So I think you are seeing that as the impact of that and a large part of why we are able to continue to drive organic growth we have been driving.

[Bill Mastoris:]

Okay, alright. Thank you. And a question for Terry, Terry right now what do you feel should be the liquidity position that you need to maintain kind of throughout the seasonal year that would be a prudent level. And then the follow-up question is if you have any excess cash, would you then now consider given your emphasis on near-term debt maturities and actually easing that burden of actually repurchasing bonds in the open market?

[Terry Peterson:]

Well, as it relates to the 2019 I mean, the plan there is just to let that maturity right out to its due date in first part of February of next year and then just use the availability either for cash on hand or more likely a draw in the credit facility to retire that facility. But certainly as excess cash does become available, there are provisions in our term loan B agreement that allows us to take out up to $400 million of inside maturities, so those maturities there coming due before the term loan B is due before those debt repayments would have to be redirected to the term loan B facility itself. So we will typically see the end of the year as being our low point in terms of borrowings on our credit facility that will be true again this year and kind of in that going into third quarter and early fourth quarter is where we see our peak needs as we have built up working capital for our kind of our busy season if you will. So this is kind of the time of the year where we tend to be our cash needs and our borrowing needs tend to be the highest. So we are pretty comfortable with where we are at right now. I mean obviously we are able to use the proceeds from selling the print logistics business and then now with the refinancing in October, we were able to make extra payments down on the credit facility to really provide the capacity to comfortably use that facility to retire the 2019 debt. And as we go into next year, we will have to kind of – we will make those decisions based on activities and events that happened and we have got plans and thoughts in terms of how we would approach those inside maturities as extra cash becomes available.

[Bill Mastoris:]

Okay. So just to kind of recap really any excess cash that you have or any excess cash flow is all I am going to go basically go towards our term loan B facility, do I have that correct?

[Terry Peterson:]

No. On a day-to-day basis, my borrowings on the asset-based lending facility those go up and down. So I try to manage all excess cash flow and get used to lower that interest expense through pay-downs. There are days when I need to borrow depending on receivable collections versus accounts payable payments and other items. But day-to-day, we have managed that through that asset-based lending credit facility. The asset-based lending saw to the extent that there were proceeds from something like a business sale or some other qualifying event under that agreement, there are different things that I can use that money for, I can use it to reinvest back into business, but I can also use it retire maturities that are coming due earlier than the January 2024 time period. So I have got options in terms of how I would use those proceeds to either retire debt or invest back into business through M&A or normal CapEx.

[Bill Mastoris:]

Okay. And then final question with the combination of both Quad Graphics and LSC, does that change your strategy in anyway I know that in the past you really haven’t had that much as far as overlap, but what’s been created there certainly seemed to be a behemoth in the industry. And I am just wondering does that cause you to rethink about some of your products and services and maybe how you approach your customers?

[Dan Knotts:]

We learned, this is Dan, we learned the transaction through the newswires this morning. And what I would tell you about that is we are intently focused on continuing to advance RRD as a marketing and business communications company. We believe we have a deep understanding of our clients evolving needs in the emerging market opportunities. And to your question about strategy, we remain confident in our strategic path to drive long-term profitable growth for RRD.

[Bill Mastoris:]

Okay, thank you very much.

[Operator:]

Thank you. Then with no other questioners, we will turn back over to Dan Knotts. Please go ahead.

[Dan Knotts:]

Great, thank you. Thank you for joining us on our call today. A recap of the key messages for the quarter, are listed on Slide 14 of the deck. Before closing, I’d like to share an example of our focus on sustainability. I am proud to share that we have reaffirmed our commitment to sustainability through a new renewable energy agreement with Apple. In support of Apple’s commitment to reduce its carbon footprint by transitioning its entire supply chain to a 100% renewable energy, we have transitioned our facilities in China to be powered through a series of renewable power purchase agreements. And while this commitment to Apple is new, it is consistent with our longstanding commitment to protect the health and safety of our employees, our clients and the public. So in closing, I’d like to say thank you to all of our employees for your dedication and commitment to our clients and/or company. Each and everyday, we are delivering solutions around the world to help our clients create better connections with their customers through the power of words and images. Your efforts are greatly appreciated. And with that, I will turn the call back over to Brian.

[Brian Feeney:]

Thanks, Dan. I would like to inform everyone that RRD’s management team will be participating in the Bank of America/Merrill Lynch Leveraged Finance Conference in Boca Raton, Florida on Tuesday, December 4. Also as a reminder, information to access the telephonic replay of RRD’s third quarter 2018 results call can be found in our third quarter press release. A copy of which is posted on the Investors section of our website at rrd.com. Thank you for joining us and that concludes the RRD third quarter 2018 earnings call.

[Operator:]

Ladies and gentlemen, thank you for your participation and for using AT&T executive teleconference services. You may now disconnect.