R. R. Donnelley & Sons Company
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Brian Feeney:]

Thank you for joining R.R. Donnelley's Fourth 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 on the Investors section of our website at rrd.com. As we review fourth 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 fourth 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:]

Thank you, Brian. Good morning, everyone and thank you for joining us on our call today. 2018 was a strategically significant year for RRD as we continued our journey as a marketing and business communications company. Throughout the year, we successfully navigated a challenging and rapidly evolving business environment to deliver our second consecutive year of organic growth improvement and our best organic sales performance since 2014. Further, we completed a number of important strategic initiatives including reorganizing the company under new segments, launching new technology-driven products and services, investing to strengthen our platform, optimizing our business portfolio, and improving our financial flexibility. I'm also pleased to share that we concluded the year by being awarded a $115 million contract to produce the 2020 Census. The census is one of the most complex communication programs in the world requiring the production of more than 600 million documents mailed to 130 million households across the United States. We will leverage our leading data, logistics, print, and operational platform to complete the questionnaires, letters, inserts, post cards, and envelopes required for this program. Our teams are moving full speed ahead with the implementation process and they are laser-focused on completing this critical program with the same impeccable production quality that we provide every day to our clients around the world. On our call today, I will first recap our fourth quarter performance and then review several of our strategic accomplishments for the year. Before turning the call over to Terry, I will also share a few examples that demonstrate how we are leveraging our differentiated capabilities within our Marketing Solutions and Business Services segments to continue to win new clients and expand existing client relationships. Please turn to side 3. We delivered a solid quarter performance to conclude the year. On the top line our results were in line with our expectations with our overall reported sales decline primarily attributable to the disposition of our Print Logistics business and the planned exit of low-margin sourcing business. Marketing Solutions returned to organic growth with digital print and fulfillment and direct marketing both reporting favorable performance. Business Services organic sales performance was negatively impacted by the planned sourcing reductions with BPO, Packaging, Logistics and Forms all delivering organic growth in the quarter. Overall, adjusted for the sale of Print Logistics six of our 11 total products and service categories reported favorable organic sales versus the prior year. Our adjusted income from operations was roughly flat to a strong fourth quarter last year which we included our Print Logistics business. And we delivered our highest quarterly adjusted operating margin as a post-spin company. Additionally, I'm pleased to report that we generated a 21% increase in our operating cash flow versus the prior year. Turning to slide 4, we achieved a number of important milestones during the year to drive our strategy forward. First to best meet the evolving needs of our clients we reorganized our businesses into two client-centric segments

[Terry Peterson:]

Thank you, Dan. Before I begin speaking to the slides, I would like to share my high level perspective on our fourth quarter performance. Overall, we performed well against an exceptionally strong quarter last year. Our operating cash flow in the quarter was up significantly versus the prior year. And despite higher than expected inflationary cost increases, we delivered our best adjusted operating and EBITDA margin since we have operated as a standalone company post-spin. Our overall sales declined mainly due to the sales from our former print logistics business and our planned exit of certain low margin sourcing production to outside providers that was not meeting our minimum profit requirements. But overall, net sales were in line with expectations. Finally, our adjusted diluted earnings per share was below our previous guidance because of higher inflation and a significantly higher effective tax rate which I will more fully address later in my remarks. Page 7 in the supplemental slides provides a snapshot of our fourth quarter products and services net sales performance by segment and by geography for consolidated RRD. On a reported basis net sales were down 8.4% in the quarter which included a reduction of 6.2 percentage points associated with the print logistics sale at the beginning of third quarter. After adjusting for this disposition we experienced growth in six of our 11 products and services categories, BPO; Packaging; Logistics; Digital, Print, and Fulfillment; Direct Marketing, and Forms. Page 8 shows the organic sales trend by quarter and by year. We are happy to report that we delivered organic growth of 1.1% for all of 2018 which is our strongest annual topline organic performance since 2014. Our fourth quarter organic sales were down 1.2% due to the planned reductions in sourcing work. We continue to see the benefit of new client wins and expanded work with existing clients while lapping the significant new packaging work we produced in the fourth quarter last year. On page 9, adjusted income from operations of $107 million was $1.2 million lower versus the fourth quarter of 2017. The 2017 results included our Print Logistics business, which was sold in July of 2018. Our corresponding operating margins increased from 5.6% in 2017 to 6.1% this year. The combination of our ongoing cost reduction initiatives, improved efficiencies in our Asia packaging operations, and an approximate $8 million benefit from changes in foreign exchange rates, positively impacted our results in 2018 versus the same period in 2017. However, the quarter's results were negatively impacted by unfavorable product mix, modest price pressure in Business Services and higher than expected paper and labor costs. Adjusted diluted earnings per share was $0.64 in the quarter as compared to $0.81 reported in the prior year period. The 2018 reduction was primarily driven by a higher effective tax rate. The adjusted effective tax rate was 35% in fourth quarter of 2018, as compared to 19.7% in the 2017 period. As expected, the 2018 rate improved significantly from the first three quarters, but continued to be negatively impacted versus 2017 by tax reform, including the unfavorable impact of recently issued guidance from the IRS. We expect our ongoing efforts to reduce interest expense among other initiatives will help produce our effective tax rate in future years. Our GAAP results for the quarter included pre-tax restructuring and other charges of $16 million, including pre-tax impairment and other charges of $9.7 million, primarily related to our operations in Brazil. During the quarter, we wrote down the value of our long-lived assets in Brazil, as we have commenced aggressive actions to address profitability shortfalls. In addition, 2018 results for the quarter also included a net unfavorable tax charge of $18.4 million, primarily related to an adjustment to the provisional taxes previously recorded associated with tax reform. Next, I will discuss the highlights for each of our segments. On page 10, fourth quarter 2018 net sales in our Business Services segment of $1.43 billion were down $166.2 million or 10.4% compared to the prior year. After adjusting for the effect of the Print Logistics disposition, which accounted for a decline of $119.5 million, and foreign exchange rate changes, organic sales decreased 1.7% in the quarter due primarily to the previously mentioned planned reductions in sourcing sales as well as volume shortfalls in Latin America, both of which are reflected in our Commercial Print product category. We reported growth in our BPO, packaging, logistics and forms product categories for the quarter. Adjusted income from operations of $104.5 million was up $4.9 million versus the 2017 period, which included the results of our Print Logistics business disposed of earlier in 2018. Profitability improved as a result of favorable productivity and foreign exchange rates, partially offset by unfavorable product mix and inflationary cost increases as well as modest price pressure. Turning to page 11, net sales in our Marketing Solutions segment of $332.6 million for the quarter, were up $3.8 million or 1.2% to the prior year quarter on both, a reported and an organic basis. Increases in our digital print and fulfillment and direct marketing products were partially offset by a decline in digital and creative solutions. Our results included the continued impact of a strategic shift away from traditional pre-media services for non-core market segments, which, as expected, impacted our digital and creative solutions sales performance for the quarter. This strategic shift will continue to negatively affect sales comparisons for the first two quarters of 2019. Adjusted income from operations of $22.1 million was down $3.6 million from the prior year, as productivity gains were more than offset by an unfavorable mix and inflationary cost increases. Fourth quarter 2018 non-GAAP unallocated corporate expenses of $19.6 million increased $2.5 million from 2017. On page 12, net cash provided by operating activities was $267.4 million, which was an improvement of $46.3 million as compared to the 2017 period. As expected, the unfavorable working capital build reported in the first quarter of 2018 fully reversed, plus our ongoing working capital initiatives and lower tax payments provided further benefits in the quarter. Capital expenditures of $31.7 million were $0.4 million higher compared to the 2017 period. Turning now to the balance sheet. As of December 31, 2018, we had total cash on hand of $370.6 million, which was up from $273.4 million last year end. The significant increase in cash on hand in 2018 is due to growth in China's cash position, including the $45 million in non-refundable deposits collected from a prospective buyer of our printing facility. Total debt outstanding of $2.09 billion was down from $2.11 billion last year. Remaining availability on the credit facility was $524 million as of December 31. Also at year end, our pension and other post-retirement plans were underfunded by $122 million, which is down significantly from the $179 million unfunded level at the end of 2017. Planned contributions in 2019 under all pension and post -- other post-retirement plans are expected to be approximately $8 million, which is $10 million less than actual contributions of $18 million in 2018. The expected reduction is due primarily to lower contribution requirements in our OPEB plans. Income in 2019 from all plans is expected to be approximately $16 million as compared to $22.5 million recorded in 2018. Before I shift to our expectations for 2019, I would like to provide you with an update of our ongoing capital priorities. 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 opportunities to optimize stockholder value, like the recent sale of our print logistics business and the sale of facilities and other assets. In regards to the pending sale of an international facility, which I can now report is a printing facility in Shenzhen, China, we continue to make planned progress to construct a new facility that we will utilize to relocate our existing business in mid-2019. We also expect that we will meet the required milestones that will enable us to collect one additional non-refundable deposit in 2019 and we plan to use this deposit to help fund remaining construction cost in 2019. We also believe the project remains on track to receive final governmental approvals late in 2020 at which time the transaction will close and we expect to record a significant gain on the sale. We also continue to focus on improving our balance sheet flexibility. As demonstrations of this commitment, we previously announced that we closed on a $550 million senior secured Term Loan B credit facility early in the quarter. Further on February 1, our 2019 senior notes with an outstanding balance of $172 million matured and we repaid those notes using proceeds from our credit facility. As a reminder, these notes bore interest at 13.25% which was the most expensive issuance in our capital structure. Page 13 of the supplemental slides show the various maturities of our outstanding debt by year as of December 31 in addition to the pro forma maturities after giving effect to the repayment of our 2019 notes on February 1. We have now significantly reduced our 2019, 2020 and 2021 maturities since September 30 of 2018 and have improved our balance sheet flexibility. Our expectations for full year 2019 are reflected on page 14 of the supplemental slides. For the full year, we expect net sales to range from $6.5 billion to $6.7 billion. Versus 2018, the net sales comparison will be negatively impacted by approximately $200 million of sales in 2018 related to the Print Logistics business sold last July. Aside from the impact of the disposition, the mid-point of our range assumes flat organic performance, including approximately $25 million of sales from the recently awarded 2020 Census project. As a point of clarification, the full sales value of the Census contract is approximately $115 million, but the split between the portion to be recognized in 2019 versus 2020 can be impacted by a variety of factors. We expect that increases or decreases from our mid-point estimate will fall within the range of our stated guidance. Adjusted income from operations is expected to range from $225 million to $265 million which include both the impact of higher paper and labor cost and our continued strong focus on cost reduction initiatives. The mid-point of our range assumes a neutral impact from foreign exchange rate changes. Adjusted diluted earnings per share is expected to range from $0.60 to $0.90, reflecting a continued higher effective tax rate. In addition, our interest expense is estimated to decrease in 2019 as a result of the repayment of our 2019 senior notes. Shifting to our 2019 cash flow. We expect that our operating cash flow will be between $150 million and $180 million. We had higher tax refunds last year which we expect will not repeat in 2019. In addition, we will be relocating our printing facility in China mid-year and expect to incur additional severance and relocation cost, as well as increased operating cost when we outsource work to third-party printers while the move is being conducted. The total estimated impact to our 2019 operating cash flow related to this relocation is a use of cash of approximately $25 million, which will not repeat in 2020. Capital expenditures are expected to range from $135 million to $145 million. Our capital spend is expected to be temporarily higher than 2019 due to two large projects. First, we expect to complete the construction of the previously mentioned China printing facility early in the second quarter. This adds approximately $20 million to $25 million of capital spend to our plan in 2019. Second, as previously announced, we plan to make additional investments in binding, printing and other equipment early in the year related to the 2020 Census contract. Looking beyond 2019, we expect our capital expenditures to return to our previously stated range of 1.5% to 1.7% of revenue, which translates to a $30 million to $40 million reduction in CapEx versus the 2019 amount. We also expect to collect a non-refundable deposit of approximately $25 million in 2019 related to the sale of our China facility. As you may recall, the agreement to sell this facility provided for specific non-refundable deposits to us from the buyer, which are intended to help offset required payments for severance and moving costs and incremental capital expenditures. As of December 31, 2018, we have collected non-refundable deposits of approximately $45 million from the buyer. As I conclude my comments on our cash flow expectations for 2019, I would like to emphasize one key point. Our 2019 guidance includes $45 million to $50 million of cash spend related to the relocation of our printing facility in China, none of which will repeat in 2020. That range includes both the impact to our operating cash flow and the higher CapEx associated with the new facility construction. We expect to fund this with cash on hand in China, which has been given to us from the buyer. And specifically, we do not expect to increase our debt outstanding for the project or use cash from the United States. Before I wrap up my comments, I would like to comment on our expected performance for the first quarter of the year. We will continue our focus on on-boarding new large clients and reducing our cost structure through productivity initiatives and the execution of our business improvement plans. In addition, we will be intensely focused on the two significant initiatives, I have highlighted

[Operator:]

[Operator Instructions] Our first question today comes from the line of Jamie Clement of Buckingham. Please go ahead.

[Jamie Clement:]

Hey good morning gentlemen. Dan, I'm not totally clear sort of what the history of your sourcing business was and kind of why it doesn't -- other than just low margin and maybe that's it why it doesn't fit in kind of with the marketing services and business communications strategy. Can you just give a little bit of a history lesson there?

[Dan Knotts:]

Sure Jamie. And just to clarify, our sourcing business itself absolutely continues to play a key role as we manage the entire supply chain on behalf of our clients. So as an overall business, it still remains a core part of our strategy. What we are referencing on our call here, as we think about our business improvement initiatives that goes beyond our cost-reduction actions to looking at how are we improving margins collectively across the company within each of our businesses? From the top all the way down to the bottom of the -- the top line down to the bottom line of the company. And as part of that, we have some legacy contracts, sourcing business contracts that from a margin standpoint just do not meet that threshold. And a little bit of the history there is as we take on -- and I want to emphasize that these particular contracts, the vast majority of the work in some cases, all of the work is sourcing work. So none of its being produced on our platform, it's being produced outside of our company. And our history has been to engage in those contracts and work to do two things, work to bring work on to our platform where it makes sense to do so and then work to expand our relationships with those clients over time as we help them simplify the complexity and increase the efficiency of their communications. At some point as those opportunities are pursued and we don't see any development there and we see ongoing volume reductions against the backdrop of a rising cost to serve those particular clients, it doesn't make sense for us to continue with those relationships. So as we go through those contract negotiations, we move forward with the intent to improve the profitability. If we don't think those opportunity is there, we are making the difficult choices to walk away from those pieces of business.

[Jamie Clement:]

Okay. And I may have missed the number and if I did, I apologize. But how much of the year-over-year Commercial Print decline was related to that business?

[Terry Peterson:]

Jamie, I'll take that. We've not broken that piece of business out separately in our reported product sales, but I will tell you that it was the difference between reporting organic growth for the company in fourth quarter versus an organic decline.

[Jamie Clement:]

Organic growth for the company not just -- not the reporting segment. Not the Commercial Print segment.

[Terry Peterson:]

It would have had a similar impact to that segment as well.

[Dan Knotts:]

So, the answer to your question is, yes, Jamie. For the entire company it would have had organic growth. That's correct.

[Jamie Clement:]

Okay, got it. So Terry, moving to your guidance particularly around the Chinese relocation and that sort of thing. Obviously you're going to have -- so you're going to have severance. You're presumably going to have – you are going to have training costs all of those kinds of things. What's not totally clear to me is -- is all of that going to get non-GAAP-ed out of adjusted income from operations, or is some of that going to be in there? I'm kind of unclear about how that's going to be treated.

[Terry Peterson:]

Yes, thank you, Jamie for the question. I referenced that it would have -- all of those activities related to the relocation would have about a $25 million impact on our operating cash flow. Most of that roughly $20 or so million of that $25 million will actually be in restructuring and about $5 million related to some of the business disruption lower margins from outsourcing while we are relocating. That part will hit the non-GAAP stuff. So most all of that is going to be called out as restructuring in that part of our non-GAAP numbers.

[Jamie Clement:]

Okay. And in terms of -- so we talked about the outflows related to that so the inflows you've already collected $45 million? Now you have the other $25 million and we should expect the balance in 2020. Is that the right way to think about it?

[Terry Peterson:]

Yes, so we've already collected $45 million through the end of 2018. We're expecting another $25 million in 2019 and then the balance will come late in 2020 when we close late 2020/early 2021.

[Jamie Clement:]

Okay. Thank you all very much. I will get back in queue.

[Terry Peterson:]

All right. Thank you, Jamie.

[Dan Knotts:]

Thank you.

[Operator:]

Our next question comes from the line of Charlie Strauzer representing CJS. Please go ahead.

[Charlie Strauzer:]

Hi. Good morning.

[Terry Peterson:]

Good morning, Charles.

[Charlie Strauzer:]

Hey, just picking up on Jamie's last question there. The remaining cash is coming in from China in 2020. What do you think the remaining net amount will be? Obviously you got the $45 million on hand another $25 million coming in this year so that's $70 million. Of the remaining cash what do you think the net to you would likely be of that?

[Terry Peterson:]

Yes. Thanks for asking that Charlie. If you recall on past calls I've referenced that by time all the cost and all the taxes are paid and the gain is recorded and everything, we expected to bring back -- have enough left over cash to bring back about $125 million to $150 million, bring that back for debt repayment likely in 2021. That estimate is still the same. That multiyear view of all the cash outflows and the eventual cash inflows all of that was factored everything we're talking about today and everything that we've put into our guidance. Just 2019 now is the year when a lot of the stuff is starting to come through the core financials meaning the operating cash flow section and the CapEx. But all of that has always been contemplated. Every time I've spoken about net amounts to come back for debt paydown all of that has been contemplated and that amount has not changed. Our current estimate is still about $125 million to $150 million. Of course all that is subject to a exchange rate with the Chinese RMB.

[Charlie Strauzer:]

Got it. And that's basically net of the construction cost and all the other things and the taxes and all the other stuff right, correct?

[Terry Peterson:]

Yes, the $125 million to $150 million is net of everything. That is basically what we expect to be able to bring back to the United States.

[Charlie Strauzer:]

Got it. Excellent. Great. You talked about the pension being down. Can you just remind me what those numbers were again? I think you said it was what $119 million is where the pension liability is?

[Terry Peterson:]

Yes, the unfunded pension liability as of the end of 2018 is now $122 million and that's down from $179 million at the end of last year.

[Charlie Strauzer:]

Got it. And then just thoughts on how much kind of cash payments might be in this coming year related to that.

[Terry Peterson:]

Yes, we've made some really good progress with some changes and modifications and a good asset performance as well. We expect it to be $8 million of cash outflow in 2019 and that is down $10 million from the 2018 amount, which was an outflow of $18 million.

[Charlie Strauzer:]

Got it, okay. And then you referenced the U.K. sale of another asset. Have you quantified that yet? And I mean, when do you expect that to close? And then other asset sales are there still other asset sales you're pursuing as well?

[Terry Peterson:]

Yes, the property in the U.K. was at $12 million of proceeds. That was actually first quarter of last year, so it's still being reported in our full year numbers for 2018. So that is absolutely behind us. And we do have -- we have other smaller assets that we have. Part of our cost-reduction activities has generated some closures of facilities some of those are leased, some of those are owned. And we have generated proceeds small individually, but we have generated proceeds from selling those facilities and we certainly continue to expect that smaller activity to continue as we move into 2019 and beyond. And we'll continue to look for other larger opportunities as well.

[Charlie Strauzer:]

And then the other larger opportunity, if you look at the kind of pieces of your business and maybe Dan, you could chime in on this as well. But are pieces still that you feel are not essential to the core business that you could potentially monetize?

[Dan Knotts:]

Yes, Charlie, Dan. I'll take that one. Yes, the short answer is, yes. We talked about the sale of our Print Logistics being an important first step in our portfolio optimization efforts. As we go forward looking to do two things is we reshape our core and we build for the future. Reshaping our core essentially means that do we have the right mix of businesses that fits our strategy going forward? And we believe we have some opportunities there. And the other part of building for the future is we believe we need some additional capabilities to match up to the market opportunities we see ahead. So the balance between those two of adding new capabilities and optimizing our core remain very much in our sights going forward.

[Charlie Strauzer:]

Right. And then lastly, Terry, on the -- you talked about additional cost reduction opportunities. I know kind of Q4 SG&A was basically flat with last year. It seems like that's kind of -- that program has ended. If you can maybe talk about what are the opportunities around to reduce SG&A going forward?

[Terry Peterson:]

Yes, I mean, when we talk about cost reductions I mean, we actually refer to both those that hit our gross profit or cost of goods sold as well as the SG&A pieces. And both of those generate meaningful savings for us. Neither one of those has hit the end. I will say that we had more favorable adjustments to some of our long-term incentive compensation last year than what we did this year that helped to offset some of those reductions. But again, if you look at the year, our SG&A is actually down about $30 million. And over the past two years, it's down about $66 million. And that comes right off the face of our income statement. So, those are still active, those are still generating and we will continue to drive those initiatives going into 2019 as well. The other thing too that we really don't sweep into that discussion around cost savings, but it is very meaningful and I want to take a minute just to highlight it, is what we've done with interest expense. If you look at kind of our base year being that year of our spin, if we hit our guidance for next year, we will have reduced our interest expense annually by about $40 million. So that's another really big meaningful contributor to bottom line results. It's just not part of our margins above. But still nonetheless, we put a lot of energy in managing that element of the income statement as well. So, $40 million is what we're looking at, $30 million of that is already reflected in our 2018 results and almost another $10 million is what's guided for next year which brings it to $40 million.

[Dan Knotts:]

Hey, Charlie, it's Dan. I'd just add to -- by no means are we done exploring opportunities to further reduce our cost to serve and in particularly as it relates to the SG&A front. And our efforts heretofore has been to eliminate redundant activities, consolidate activities within SG&A and in other parts of our platform. I think the real opportunity that we're proceeding with and pursuing going forward is really using technology around AI, around machine learning to actually change the way that we are performing a number of those activities and automate a significant number of standard rinse and repeat type functions that are being performed. So, by no stretch of the imagination have we stopped pursuing or will we stop pursuing those opportunities. There's investments that are going to be required to automate a lot of that stuff, but it remains a very front and center for us as a company to lower our overall cost to serve.

[Charlie Strauzer:]

Excellent. Thanks. I'll jump back in queue.

[Operator:]

Our next question comes from the line of David Phipps representing Citi. Please go ahead.

[David Phipps:]

Hi. Thank you very much for taking my questions and clarifying the organic growth, it's quite helpful. Can you -- when you have all the data for the sale for the divested businesses except for the second quarter. If you have that handy that, would be helpful for modeling. And maybe while you're looking at the European business trend was plus 6.3% in the third quarter and reversed it went minus 5.7% in the fourth quarter. Can you talk about that a little bit?

[Terry Peterson:]

Sure. This is Terry. Thanks for the question, David. First of all, with the Print Logistics, for the first six months that was $200 million last year, $107 million of which is in first quarter, so the balance of that will be your second quarter adjustment for modeling purposes there. And then -- your second question again was? Yeah, the difference in trend there versus the past is in the fourth quarter we have -- in the quarter we generally produce in part of our business photo books, photo books as we move into the holiday season. That was actually off this quarter. That's kind of a one quarter where that volume is larger. And we did, as we put out a new product, we had some challenges with capturing those revenues this year that caused kind of a dip in those sales that impacted the European results. And again, those results are smaller, a smaller number, so smaller impact has a greater percentage impact.

[David Phipps:]

Good. And maybe some clarification on some of the guidance. So we've got an organic growth rate of sales about flat, given the adjustments. And if we start building EBITDA which you don't directly reference, the things you would start with was adjusted operating income which at midpoint is $245 million the D&A of $175 million so that gets you to $420 million. But there are typically some extra add-backs into that number. Are there other -- anything that you can call out that we should think about, or is $420 million a reasonable baseline at midpoint?

[Terry Peterson:]

No, I do have one more thing to call out. You need to remember the other income line which is where a lot of our pension income shows up. Last year that number was $22 million. That needs to be added in there. And there's a couple -- we've given you enough information to kind of go at that EBITDA number a couple of different ways. And you described probably the shortest and easiest way. But if you kind of look at the multiple ways to do that and kind of come up with an implied range you'd see that the midpoint of that range too is roughly flat to what we delivered last year.

[David Phipps:]

Okay. That is fantastic. And the last you talked about some of the puts and takes of cash tax the -- one of the impacts in the operating cash flow for this year. Can you -- and restructuring, kind of what order of magnitude could we think about?

[Terry Peterson:]

Cash taxes will have a slightly larger impact than the reference that I made to the relocation cost, the China costs associated with restructuring and the business -- higher business cost during the transition. Taxes will be a little bit higher than that. And then there's many things that actually offset both of those factors one of which I highlighted in my prepared remarks which was around lower pension and OPEB contributions. There's $10 million of savings there and we expect that funding level to improve even further from that $8 million level once you go past 2019 and into 2020 in later years.

[David Phipps:]

Okay. Those were my questions. Thank you for your time.

[Terry Peterson:]

All right. Thank you.

[Operator:]

And next we'll have a follow-up from Jamie Clement with Buckingham. Please go ahead.

[Jamie Clement:]

Yeah. Hey, good morning, again. Dan, one of the things I've always sort of struggled in looking at RRD was trying to get a sense of like just like kind of how much paper exposure you actually have. And given the shortages and the increases and those kind of things, like do you have a rough percentage in mind of how much of your print business is for lack of a better word spot? Where you can kind of pass the stuff along? Plus business that is quasi-contractual where the contracts allow you to pass it along. Versus other business lines where you've been trying to pass it along the, you're just -- you're kind of -- you just have to kind of roll with it you have to eat it. I know that's not a real specific question but I'm trying to get my arms around that.

[Dan Knotts:]

I guess, Jamie. The short question is I don't have a number that breaks down from contracts between the contractual aspect of being able to pass along versus the spot piece of it. But not to add complexity to the question but even in cases where you have contracts the contracts kind of govern the overall relationship you're still….

[Jamie Clement:]

Right.

[Dan Knotts:]

…competing on individual programs as they come through, right?

[Jamie Clement:]

Right.

[Dan Knotts:]

And I think the – if you look at just different business dynamics. If you look at the Commercial Print platform more volatility within that. If you look at a statements platform where you're primarily running statements every month you know what you're getting you know what you're buying -- what type of paper you're using et cetera, et cetera, so significant differences between our product lines and businesses there too. But here's what I would tell you of how you should think about that. Regardless of -- so paper is an issue. It's been an issue all year its compounding effect of price increases has been a problem. And the way I would think about that is in contracts -- I'll break down a couple of forms. In contracts where we have the ability to pass it along oftentimes that's at specific intervals.

[Jamie Clement:]

Got it.

[Dan Knotts:]

So as those intervals come up we are pushing to pass that along. In other cases where we're competing on transactional work that's in the marketplace we're embedding those new prices into that transactional work that we're quoting in the marketplace. So as you know from your extensive experience covering the industry there's a lag there.

[Jamie Clement:]

Yeah.

[Dan Knotts:]

But rest assured, we are aggressively pursuing catching up to that lag with every contractual opportunity and with new work and new contracts that we are signing. And we believe we will make sizable progress on that over time.

[Jamie Clement:]

All right and then switching to the other kind of major cost item that's not only R.R. Donnelley but just about everybody else who puts ink on paper for a living has called out is obviously labor. And obviously other industries have said the same thing. Is this -- are your retention rates still pretty strong? Obviously tighter labor market. Is -- can you kind of give us a sense kind of at the local level like at the plant level how the tighter labor market is kind of manifesting itself in terms of challenges from operations and that sort of thing?

[Dan Knotts:]

Yeah, sure, so I'd give you a two-part answer to that Jamie. The first answer is historically our turnover at the entry level unskilled level has always been higher than our skilled level. And once folks are here for a number of years they tend to stay for quite a long time. With the recent labor shortage that has -- that dynamic has changed a bit at the skilled level where we are seeing a bit more turnover at the skilled level. The other important -- the second important dynamic there is it really is dependent upon the labor pool around the location of that particular -- around that particular facility. In some cases, where they're in small communities your labor pool is not very large so that turnover is much more impactful. In other cases where they're in larger geographies your ability to attract from other businesses and pull them in to solve your shortfall takes time but you have the better opportunity to do that. One of the core elements for us in managing this going forward is looking at each of our individual locations to truly understand the labor dynamic that exists there in a lot of cases changing our approach. So just as an example if our skilled turnover is going high going higher and there's not a lot of opportunities for us within that local labor market to bring in skilled people who can step right into that role then obviously our focus on developing our own folks internally much quicker into those skilled position becomes the utmost priority. So we are -- the short answer is we are seeing the impact of labor shortages. It has ticked up a bit on the skilled side. On the unskilled side, everybody's competing for the same base and there's less of a pool there. So that's a challenging issue as well. But we are focused on developing labor strategies for each of our locations because we think this will be here for a while.

[Terry Peterson:]

Hey, Jamie, it's Terry again. The other thing, that's a bit more unique for us in the fourth quarter, is the fact that we bring on historically and this year as well a lot of temporary labor to help with the seasonal demands of our business. And we saw very similar challenges there with the rates being higher, the availability of those temp resources being more scarce than we've seen in the past. And all of that -- although more unique and specific to fourth quarter, certainly we did see impact there as well in Q4 of 2018.

[Jamie Clement:]

So Terry, I'm going to take a shot at this. So if I look just big-picture R.R. Donnelley $6.8 billion of 2018 revenue versus 2017 of the margin compression that you saw, I mean would it be fair to say were it not for paper and were it not for labor your margins would have been up a lot year-over-year?

[Terry Peterson:]

They would have been up absolutely. I cited that as one of a couple key factors for why we missed the bottom end of our guidance. So that absolutely would have been the case. And remember fourth quarter of last year, we were seeing this issue in China in particular and then a little bit with our logistics business in the cost of transportation. We were seeing the paper inflation in China this time last year and that's over a couple of quarters we worked at and we were able to successfully pass all of those increases on to our customers. It's not impacting us anymore, but now it's more about the -- doing and executing the same thing in the United States.

[Jamie Clement:]

Thank you all very much for your time as always.

[Dan Knotts:]

Thank you, Jamie.

[Terry Peterson:]

Thanks Jamie.

[Operator:]

Our final question today will come from the line of Charlie Strauzer representing CJS. Please go ahead.

[Charlie Strauzer:]

Hey just one follow-up. If you can talk about -- maybe Terry can answer this. But we're starting to come up on lapping I think the asset sales about midyear specifically the Print Logistics business. Can you call out the impact by quarter for Q1 and Q2 year-over-year decline there if you have those numbers?

[Terry Peterson:]

Yes. On the revenue side, it's $107 million for Q1 and it would be about $193 million for -- I'm sorry $93 million for Q2, $200 million in total.

[Charlie Strauzer:]

Got it. And then roughly the EBITDA impact for each quarter?

[Terry Peterson:]

That was low-margin business for us, so that's much less of an impact than the revenue side. So smaller impact there plus they were battling cost of transportation increases last year so low profitability there for that period.

[Charlie Strauzer:]

Got it. And then just thinking about Q1, how should we think about modeling kind of year-over-year excluding Print Logistics just in terms of organic growth rates and then margins as well for that...

[Terry Peterson:]

Yes I'd take the -- like I mentioned in my remarks, I would -- we are expecting an organic decline because that sourcing stuff is going to continue to come out in first quarter, and our Census work as well as a new client that we've been looking for a couple of quarters now on on-boarding. That will start to produce and generate what we expect to be organic growth in the last half of the year. I cited a number of cost factors. Certainly, some of the China relocation is going to hit us, even in the non-GAAP numbers too with outsourcing that the print production while we are moving that business. So our margins will be a little bit less for a very short period of time, but that will start to hit us in first quarter. We are continuing to work on passing along our inflationary cost increases, but that will progress as we go through the quarter and into future quarters. So bottom line, if you kind of take a small organic sales decline and adjust for some of these pluses and minuses, you're going to end up, we're expecting an overall EPS mark that’s pretty -- perhaps pretty close to where we were last year.

[Charlie Strauzer:]

So, flattish EPS versus last year. Maybe you could even...

[Terry Peterson:]

Yeah, flattish. Plus or minus, but flattish yeah.

[Charlie Strauzer:]

And flattish kind of EBITDA margins do you think as well?

[Terry Peterson:]

On an EBITDA margin basis, that's a yes, because last year would have had that client bankruptcy charge.

[Charlie Strauzer:]

Got it. Okay, great. Thank you very much.

[Terry Peterson:]

You’re welcome.

[Operator:]

I'll turn the call back over to the speakers for final comments.

[Dan Knotts:]

Great. Thanks, everyone. I'd like to take a moment to thank -- in closing here, I'd like to take a moment to thank our RRD team around the world for your ongoing tremendous commitment to our clients and to our company. Your hard work has resulted in a year of significant accomplishments as we continue to advance RRD as a leading marketing and business communication company, and I want to thank you for your efforts. With that, I'll turn the call back over to Brian.

[Brian Feeney:]

Thanks, Dan. As a reminder, information to access a telephonic replay of R.R Donnelley's fourth quarter 2018 results call can be found in our fourth 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 fourth quarter 2018 earnings call.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and using the AT&T executive teleconference. You may now disconnect.