R. R. Donnelley & Sons Company
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Welcome to the Q2, 2017 RRD Earnings Call. My name is Victoria and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. And later we will conduct the question-and-answer session. I will now turn the call over to Brian Feeney. Brian you may begin.

[Brian Feeney:]

Thank you, Victoria and thank you everyone for joining R.R. Donnelley's second quarter 2017 results conference call. Joining me on today's call are Dan Knotts, R.R. Donnelley'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. The information that we'll be reviewed during this call is addressed in more detail in our second quarter press release, a copy of which is posted on the Investor section of our website at rrdonnelley.com. This information was also furnished to the SEC on the Form 8-K we filed today. Throughout this call, we will refer to forward-looking statements, including comments on our financial outlook and strategy, all of which involve risk and uncertainties. Therefore, our actual results can 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 further detailed in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our 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, however, provided for informational purposes only. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in our press release in the Investor section of our website under the Presentation tab. I now will turn the call over to Dan.

[Dan Knotts:]

Great, thanks, Brian. Good morning, everyone and thank you for joining us on today's call. I'd like to begin today's call with summary of our Q2 performance and then provide an update on our strategic priorities to drive long-term profitable growth for RRD. I will then turn the call over to Terry, who will provide more details on our financial performance for the quarter as well as a perspective on our outlook for the full year. Our second quarter results were within the range of our expectations. During the quarter we saw a continuation of industry headwinds that impacted customer demand particularly in certain areas of our business. Our second quarter organic sales declined to 0.8%, which is similar to last quarter's organic declined rate of 0.7%. From a segment perspective our international segment posted positive organic growth for the quarter, driven primarily by our packaging and book volume in Asia. In our strategic services segment, we delivered volume growth in both logistics and sourcing, that was offset by a decline and postage pass through sales. And in our Variable Print segment we experienced an overall decline in volume, that was primarily driven by our direct mail in our commercial and digital print businesses. Also impacting our results for the quarter, were significant changes in foreign exchange rates and startup costs incurred in Asia as we quickly began to ramp up an addition packaging production facility to support a significant new business opportunity. We expect this new business opportunity to begin generating incremental sales later in the third quarter. Our teams are very focused on taking actions to help address the challenges we faced this quarter. We continue to utilize a disciplined approach to aggressively drive our growth initiatives including leveraging our industry leading capabilities and focus sales channels to successfully capture new business opportunities and improve our sales mix. We have a robust sales pipeline and our teams continue to win and on-board new business such as the new packaging business mentioned previously. And earlier this year, we launched a comprehensive business review initiative to help identify opportunities to further streamline our cost structure. Our teams have embraced this effort and we are making good progress in this area as well. During the quarter, we also maintained a strong emphasis on advancing our strategic priorities as a leading provider of multi-channel marketing and business communications. We continue to see that many companies face the significant task of effectively executing their marketing and business communications in an ever expanding multi-channel world. While the ongoing expansion of communication channels is providing more opportunities to communicate with consumers that increased optionality is further challenging the effective coordination of print and digital communications. And as consumer expectations for personalized communications and content across all channels continue to increase effectively executing those targeted communications across organizational silos, disparate systems and a fragmented supply base is becoming more difficult for many companies. Marketers and business leaders are under mounting pressure to deliver measurable results and increase the ROI for the communication spend and are increasingly looking for more connected solutions to manage and execute those multi-channel communications. With our differentiability to provide connected solutions for our clients' communications, whether they entail creating and managing personalized marketing or product communications, providing secure and compliant business communications, our managing and expansive multi-channel marketing campaign, that includes data analytics, content optimization and digital and print channel execution, we are providing end to end solutions to meet the complex communications of our requirements. Let me give you a few examples of recent wins that demonstrate how we are supporting our clients in executing their marketing business communications. Orange 30 Fitness, a fast growing organization focused on fitness training, needed a marketing communications partner to ensure that their existing facilities, consistently have their designated site support materials as well as their proprietary heart rate monitoring exercise bands at all times. For new side openings, those locations need access to kits of materials onsite at the critical point of launch. Our solution entails providing an online supply chain access for all their print, promotional and in-store marketing products for both their franchise and their corporate locations worldwide. To execute this new offering we will be providing translation services, product design, commercial and digital print, in-store marketing materials, promotional items, logistics, warehousing, fulfillment and inventory management services. PG&E, a large utility company in the U.S. recently awarded us a new five year agreement based on our business communication management capabilities and technology solutions. This new win highlights the strength of our expansive product portfolio as we will manage all of their commercial print, direct mail, bill inserts, forms, labels and stationary products. One of the largest diversified financial services institutions in the United States expanded our long standing relationship by awarding us all of their commercial print, envelope and ATM roll business. We secured this business through the combination of our strong historical performance, innovative technology solutions, vendor management program and consultative services that we will drive cost savings and accelerate their marketing supply chain. Through our direct mail business, we expanded our relationship with Crate and Barrel to provide CRM data support and campaign management to coordinate mail for their marketing engagement programs including customer reactivation, acquisition and new movers. To effectively execute these marketing programs we are utilizing our analytics and customer insights capabilities to precision dialogue as well as our personalized digital print capabilities within our direct mail platform. We're also expanding our client relationships internationally. Last quarter I discussed our contract with Alibaba Chuntao [ph] to provide production fulfillment and country level logistics as many as 20,000 stores throughout China. I'm pleased that Alibaba has chosen us as their partner to launch Alipay with variable printed codes to all retail allocations across China. To succeed in the world of mobile, our clients need speed and innovation and we're expanding our multi-channel engagements by delivering those capabilities to our clients around the world. As we continue to execute our strategy every day we are having conversations with our clients and prospects regarding how we can utilize our extensive multi-channel capabilities to help them more effectively optimize and execute their marketing and business communications. And as the complexity of managing their communications, including data management and analytics, content optimization and channel execution, continues to increase, we are working side-by-side with our clients to deliver innovative solutions that simplify complexity and drive ROI. Thank you. And I will now turn the call over to Terry.

[Terry Peterson:]

Thank you, Dan. The primary focus of my comments will be on certain non-GAAP results and measures. Please refer to the supporting schedules in our press release and under the presentation tab in the Investor section of our IR website for a reconciliation of GAAP to non-GAAP results. References and comparisons of income statement amounts to prior periods will be on a continuing operations basis after giving effect to the spin-offs of LSC and Donnelly Financial effective October 1, 2016. On our last call, I mentioned that we expected to see normal seasonality impact on our second quarter results and we did indeed see that happen. Overall results for the second quarter were within the range of our expectations. While net sales increased slightly, income from operations was negatively impacted by unfavorable mix in a few of our businesses which prevented us from fully overcoming the negative impacts related to foreign exchange rates, higher variable incentive compensation and startup cost in Asia as we quickly ramp-up production capabilities in a packaging plant designated for an opportunity recently awarded to us. This is an exciting new piece of business and as Dan mentioned earlier, we expect to begin generating sales from this win later in the third quarter. I'll talk more about this and provide additional perspective and how we plan to deliver on the guidance we reaffirm in the press release issued yesterday. But let me first get into the details of our financial performance for the quarter. Second quarter 2017 net sales of $1.65 billion grew $13.4 million or 0.8% as compared to the second quarter of 2016. On an organic basis net sales declined 0.8% as net volume growth in the International and Strategic Services segments was more than offset by lower postage pass through sales of $32.2 million in the Strategic Services segment, and volume declines in the Variable Print segment. Gross profit for the second quarter of 2017 was $303.1 million down $13.3 million versus $316.4 million in the second quarter of 2016. Unfavorable sales mix modest price pressure in all segments; unfavorable changes in foreign exchange rates and the previously mentioned startup cost in Asia were only partially offset by our cost reduction initiatives and productivity improvements. As a percentage of net sales gross profit was 18.4% in the second quarter, down one percentage point from 2016. Second quarter 2017 non-GAAP SG&A of $212 million was nearly flat as compared to last year's quarter. The current period included unfavorable changes in foreign exchange rates and higher variable incentive compensation expense in all segments. These factors were offset by higher bad debt expense and allocated class from pre-spin operations in the prior year period. Second quarter non-GAAP SG&A as a percentage of net sales was 12.9% essentially flat compared to the second quarter of 2016. Second quarter 2017 non-GAAP income from operations was $43.6 million down $11.1 million from last year. The negative impact of changes in foreign exchange rates accounted for approximately half of the decline. In addition lower gross profit was partially offset by lower depreciation and amortization expense. As a percentage of net sales non-GAAP income from operations of 2.6% decreased from 3.4% reported last year. Our GAAP results for the quarter included a net pretax gain of $92.4 million related to the disposition of most of our Donnelley financial shares through a debt-for-equity exchange. Although the gross gain was structured as a tax free transaction, we are able to deduct certain transaction related costs which is why the net after tax gain is actually higher at $94.4 million. Next I will discuss the highlights for each of our segments in more detail. As a reminder the prior period cost structure was derived in part by allocating many costs from our pre-spin operations, while the current period cost structure represents our actual costs on a post spin basis. The magnitude of these differences varies by segment and it has both positive and negative impacts to the comparisons, depending on the segment, that on a consolidated basis the net difference has a positive impact to our year-over-year comparisons. Organic net sales in our variable print segment were down 1.9% for the quarter. As I mentioned on the last two calls the commercial and digital print business had been experiencing softer demand since the end of 2016, and that softness continued in the second quarter. During the last several weeks we have seen our backlog in this space improve but given the transactional nature of this business it is too early to tell that, that improvement will hold for the balance of the year. We also experienced unfavorable performance in our direct mail business partly because we are comparing against an exceptionally strong quarter last year, plus we saw softer demand from financial institution customers who utilized direct mail to solicit new credit card customers. Growth in our statement printing business which was driven by new wins, served to partially offset declines in commercial and digital print and direct mail in the quarter. Strategic services organic net sales declined 6.1% in the quarter due primarily to lower postage pass-through sales in logistics up $32.2 million which accounted for an 800 basis points reduction in the organic decline rate. Volume growth and logistics during the quarter came primarily from our freight brokerage and courier businesses plus field surcharges were up by a $0.2 million year-over-year. We also experienced volume growth in our sourcing business which has now grown organically for five consecutive quarters. Organic net sales in our international segment were up 5.4% for the quarter. Net sales in Asia grew over 30% which was primarily driven by continued growth in our existing packaging and book volume. Volume declines in our business process outsourcing, global turnkey solutions and Canada businesses partially offset the volume growth in Asia. Our business process outsourcing unit was primarily impacted by lower volumes from existing clients while global turnkey solutions was negatively impacted by lower than expected volumes from publishers and technology related clients, some of which are seeing delays in consumer spend on technology accessories pending new product rollout scheduled for later in 2017. Lastly, Canada was down due to one-time business in 2016 which we did not expect to repeat in 2017. Second quarter 2017 non-GAAP unallocated corporate expenses of $10.8 million, were a favorable to our expectations and an improvement of $17.3 million from the second quarter of 2016. The prior year period included a higher allocated costs from our pre-spin operations. In addition, lower bad debt expense and cost reduction initiatives were partially offset by lower pension and other post-retirement benefits income. Net cash used in operating activities during the first half of 2017, was $51.8 million compared to a $100.3 million during the first half of 2016. The 2017 amounts include approximately $9 million of spin-off related cash payments. As a reminder prior year cash flow amounts included the activities of LFC and Donnelley Financial and have not been restated. Similar to past years, our operating cash flow is expected to be seasonally stronger in the second half of the year, especially in the fourth quarter. Capital expenditures were at $54.2 million during the first half this year versus a $101.4 million in the first half last year, which included $31.2 million related to discontinued operations. Turning now to the balance sheet; as of June 30, 2017, we had total cash on hand of $224 million and total debt outstanding of $2.25 billion, including $350 million drawn against our credit facility. Remaining availability on the credit facility was $329 million as of June 30. During second quarter 2017, we completed a debt for equity exchange for most of our retained shares of Donnelley Financial for certain outstanding senior notes. Following the debt for equity exchange, we retained 99,594 shares of Donnelley Financial which we're currently in the process of disposing of via another tax free exchange. Before I review our guidance for this year, I would like to comment on our expected performance for the second half of the year. In our commercial and digital print businesses, we expect to see continued softness and lower election related spend as compared to 2016. However, we expect to start seeing additional seasonal volume in the third quarter associated with back to school and open enrolment for healthcare as well as holiday related print spend in the fourth quarter. In Asia, we expect to see normal seasonal increases in our packaging business in both the third and fourth quarters as technology companies gear up for new product launches and holiday sales. Additionally, we expect to see revenue growth from the new packaging business we were awarded. Lastly, our teams are continuing to utilize a disciplined approach to drive our growth initiatives and execute our business performance plans that will positively impact the second half of the year. While we expect non-GAAP diluted earnings per share to be higher than 2016 in both third and fourth quarter, the increase will be significantly greater in the fourth quarter as we achieve a full quarters benefit from the new packaging business and additional cost reductions. Also as a reminder, fourth quarter of 2016 included a one-time charge of $8.4 million in our logistics reporting units that will not repeat in 2017. For full year 2017, we continue to expect net sales to range from $6.8 billion to $7 billion. Non-GAAP income from operations is expected to range from $275 million to $300 million and fully diluted non-GAAP earnings per share is expected to range from $1 to a $1.30. This guidance remains unchanged from what we provided previously for full year 2017. There are several key factors that impact our outlook for the year as compared to 2016, including the following. In Variable Print, we expect to see continued strong performance in our statement printing business and increases in net sales in our direct mail business including the acquisition of Precision Dialogue and stronger labels volume as we onboard recent wins in the space. We expect that these gains will be more than offset by secular volume reductions in forms and commercial and digital print and modest price erosion across most product categories. In our strategic services segment, we expect continued volume growth in logistics including an increase with the all surcharges, increased net sales from Precision Dialogue data analytics services offering, plus net spin related sales increases. We expect these factors will be partially offset by lower postage pass through sales and modest price erosion. In the International segment, we expect a significant increase in volume in Asia partially offset by lower net sales in global turnkey solutions, business process outsourcing in Canada, as well as the continued negative impact of changes in foreign exchange rates. We expect to normalize our variable compensation expense in 2017, which may result in a significant increase in expense if we achieve our target. We expect pension and other post-retirement benefits income of $15 million, which is $7 million lower than the 2016 primarily due to reductions in our OPEB income. We are continuing our strong focus on cost reductions in order to offset the impact of various items including cost inflation and modest price erosion in each of our segments. Depreciation and amortization expense is expected to be in the range of $200 million to $205 million. We expect interest expense to be between $175 million and $180 million. And our full year non-GAAP effective tax rate is anticipated to be between 24% and 25%. Shifting to our 2017 cash flow, we expect cash flow from operations to range from $230 million to $280 million. Capital expenditures are expected to be between $100 million and $115 million. Before we open up the call for questions, I would like to review our ongoing capital priorities. Although I stated earlier that we plan to lower our leverage in 2017 and beyond, we will continue to make strategic investments in our business, including both organic investments and potential acquisitions that help us de-lever over time and accelerate achieving our strategic goals. We also continuously evaluate our portfolio for strategic opportunities to optimize stockholder value and we remain committed to our quarterly dividend, although our Board does review our dividend recommendation each quarter. Finally, we do not expect to repurchase shares in the foreseeable future. And now operator, let's open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Charles Strauzer from CJS Securities. Please go ahead.

[Charles Strauzer:]

Hi, good morning.

[Dan Knotts:]

Hey good morning Charlie.

[Terry Peterson:]

Hi Charlie.

[Charles Strauzer:]

So, let's talk about couple of think first. First in the quarter you talked a lot about the impact of currency in the Far East [ph] and in Asia and if you kind of - if you were to back those out, what would have - the impact or benefit back to EPS would have been, would it have been more in line with expectations do you think?

[Terry Peterson:]

Yeah, I mean, as I mentioned, Charlie, this is Terry, in my prepared remarks, the foreign currency impact on our EBIT was about half of our $11 million decline in income from operations. And that's roughly between $0.05 and $0.06 per share if you were to translate all the way down. So that's the difference year-over-year. And I would like to just may be elaborate on that just a little bit further too. Most quarters we don't have a significant impact on bottom line profitability from the FX. But occasionally we do have a larger impact like we did this quarter. And that's largely comes from couple of our businesses internationally where we actually we bill there and collect revenues in U.S. dollars. But the cost structure and the local resources are denominated in foreign currency. So occasionally those currencies move a little bit, we don't get the natural offset from the revenue benefit. So that did happen that to us this quarter and that's really what helped drive just a larger impact in what we have seen in most quarters. Again occasionally it can be at this level, but most quarters it's quite a bit smaller and lower. And I think the second part of your question was on the start-up cost with the packaging business in Asia?

[Charles Strauzer:]

Correct.

[Terry Peterson:]

Yeah, and regarding that, I mean that's - as I mentioned it's a pretty exciting opportunity for us. It came up relatively fast. We were just recently awarded that business and just given the volume we have had to open up and set up a whole new manufacturing facility for that packaging business, that was pretty short period of time. So I would just strong kudos to our Asian operations team for being able to pull that off in such a fast order here. But it did - because the revenues have not started down there yet, the start-up cost there did negatively impact our quarter and that certainly was not planned as went into the year. In order of magnitude, it's not as large as the impact from FX, but it was still, still a good couple of million dollars for us that we had to invest in the quarter from a P&L perspective. And some of those investments will continue into early part of our third quarter which is baked into our thinking in the context of our full year guidance. But Dan and I both mentioned we will start to see revenue from that in the third quarter and be fully ramped on that by fourth quarter. So at point that's pretty positive business for us.

[Dan Knotts:]

So, Charlie, it's Dan. Just to kind of summarize that, the net impact of those two, as Terry mentioned, ought to be in the neighborhood of $0.07 share. So as you think about that from the standpoint of the $0.05 difference it certainly covers all of that difference and would have put us ahead of the - would have put us ahead of the expectations.

[Charles Strauzer:]

Excellent. And then shifting to the guidance if you look at kind of Q3, Q4, top line anything that we should be factoring in from an anomaly basis, or I know you gave the kind of guidance a little bit on the bottom line but anything that we should be paying attention to the seasonality wise et cetera on the top line that we should bake into our models.

[Dan Knotts:]

Yeah, Charlie, it's Dan again. I think - let me take a second and just summarize Q2 and then I'll talk a little bit about the go forward on Q3 and Q4. So as you heard Terry say in his comments our sales volume shortfalls were primarily driven in five areas between commercial, digital print is one, direct mail you mentioned is two, global turnkey, three, BPO, four, and Canada five. So as we look at those different dynamics that exist within that, so as we mentioned commercial and digital print it will softer demand to kind of the ongoing continuation of headwinds that we saw starting late in Q4 of last year. From a direct mail standpoint significant reduction in mailings associated with credit card solicitations and that started early in the year as well late last year actually. From a global turnkey standpoint, we mentioned from a book publishing standpoint that actually rolls up through that business impacted our sales there. BPO client volumes impact our overall softness and client volumes impacted that in Canada, it was relate to a very sizable opportunity that we completed last year, that we knew was not going to complete this year. On the plus side, if we look at our statement business, we had solid performance, as Terry mentioned again in his remarks, in our statement business. Our sourcing volumes were up, our Asia volumes were up and our logistics volumes were up. So it's clearly a combination between those two. Now logistics just to remind everyone it was also offset by posted pass-through sales but the volume levels that run through logistics were up on a year-over-year basis. So as we think about that profile and we extend into Q3 and Q4, what we also talked about are shared in those remarks, is that commercial digital print will see a seasonal improvement as we move through Q3 and Q4, purely due to the nature of the seasonality that exists within that business. RMS, we expect the volume performance and the sales performance to pick-up for the second half of the year. That's driven by new wins but also seasonal volume exists within that platform. We are also expecting our labels business volume to increase in the back half. It's driven by new wins in that platform as well, that we are currently on-boarding. As I think about DCS, we expect continued strong performance in the statement printing business. Asia we expect strong performance in Asia, predominantly in Q4 as we ramp up the new business that we talked about. In logistics we expect that volume to continue to - the volume portion of logistics continue to grow in Q3 and Q4. So the back half of the year. So all told that's kind of the backdrop of performance in Q2. And expectations as we move into Q3 and Q4 and relative to an anomaly the only one, I would call an anomaly although it's not really an anomaly is the lift that we are going to see in Asia as a result of that new business we're bringing on board.

[Operator:]

Our next question comes from David Hip [ph] from Citi. Please go ahead.

[Unidentified Analyst:]

Hi, thanks for taking my questions. In the past you have given out organic growth by business segment, do you still supply that?

[Terry Peterson:]

Yeah, that is actually provided in the tables to the back of the press release. So that should be out there.

[Unidentified Analyst:]

Okay, sorry I missed that. And when we talk about seasonality should we think about inventory changing or is it from the second to third quarter, I mean I guess as we go into fourth quarter with your new business mix?

[Terry Peterson:]

There in all likelihood would be a little bit of inventory build going into third quarter, as I mentioned at some of the ancillary businesses around - in our global turnkey business that kind of support technology our product sales with accessories. We have seen some deferral we believe in some of the volume there that caused us to build up inventories a little bit I think that's going to continue until we really see those new product releases come out. And then as the expectations are greater around those new product releases, we would expect that business to pick up and that will start to pull back on that inventory and we will start consume that inventory there. Likewise too with the new packaging business. We are starting to put into inventory right now. So again as we start to shift those packages later in the quarter, at that point we'll start to relieve that out of our inventory and consume it and actually build it. But definitely just because of the volume associated with that business, we are building inventory on that just to be able to meet the expected demand.

[Unidentified Analyst:]

And then as - when you resolve some of the third party transactions, does that have a cash impact in the current quarter or would you expect it to?

[Terry Peterson:]

The third party, which are you referring to?

[Unidentified Analyst:]

From some of the exchanges?

[Terry Peterson:]

From some of the - are you talking about the DFS shares?

[Unidentified Analyst:]

Yes.

[Terry Peterson:]

This change there. That will have a cash impact for as we liquidate those 99,500 shares. That will - it will be structured as a non, the tax free transaction. It won't actually bring cash in, but it will effectively pay down debt. So it will have a debt reduction impact even though the cash won't technically flow through our accounts.

[Unidentified Analyst:]

Fair enough. And then last - normally your free cash flow is a little bit stronger in the second quarter. Were there some usually items that affect the free cash flow this quarter, particular operating cash flow?

[Terry Peterson:]

Yeah. I would say that our first quarter was probably the biggest impact, is that our first quarter was ahead of our expectations a little bit, what we saw was a little bit of acceleration into the first quarter. So if you really look at the first half versus just the second quarter alone, it's a - it's definitely more inline but second quarter alone would, on its own would have been unfavorable to original expectations. But part of that just because we had a little bit of pull forward into the first quarter.

[Unidentified Analyst:]

Okay. Thank you. Those were my questions.

[Dan Knotts:]

All right, thank you.

[Operator:]

Our next question comes from Michael Brian from Oppenheimer. Please go ahead.

[Michael Brian:]

Yeah. Hi, thanks guys. Hey, maybe just stepping back you mentioned shareholder value on the call, I mean obviously this thing has not worked out, I assume like anyone would have thought. So when you think about generating or driving shareholder value from where we are now, what should we think about?

[Dan Knotts:]

So, Dan here. I think as we - looking forward as we look to execute the strategy that we have in place for the business, we still believe we have a tremendous opportunity for the company focusing on both marketing and business communications and particularly in the multi-channel space. Now with the opportunity that exists in the market, the market needs - represents a - continues to represent a strong opportunity for us going forward purely because the execution requirements for communications are becoming more and more complex on behalf of our client. So we continue to believe with our portfolio capabilities that we have that we are tremendously well positioned to capture those opportunities based on that growing client demand because of the complexity and the challenges that they are facing in their current supply chain. So as we think about driving shareholder value, we are 100% focused on the going forward perspective of driving the topline for our business as we communicated previously talking about winning for change and extend our market position winning new clients. We have a tremendous opportunity to expand our position with our existing 52,000 clients that we have. And as we look to expand and scaling our multi-channel communication solutions that represents the real opportunity for us as well. So obviously 10 months into this thing, the focus that we have is on the going forward perspective and we still think we are well-positioned with our strategy based on a very large market based on increasing client demand to continue to drive long term drive for our shareholders.

[Michael Brian:]

Okay.

[Operator:]

And our next question comes from Mike Meek from Atlantic Invest. Please go ahead.

[Michael Meek:]

Hi, thanks for taking the question. I'd just like to dig into the FX impact a little bit more, the dollars continued to weaken since the end of the quarter. So I mean which implies maybe a $10 million impact in the back half for the year. So I'm wondering are there resets in the contracts because local currency costs are relatively higher or their hedges I'm just wondering how you guys are going to offset that?

[Terry Peterson:]

Yeah. This is Terry. There are no notable resets and contracts that I'm aware of that would offset the impact on that. We do look to hedge some of the cash flows through some forward contracts. So we will continue to evaluate the best way to minimize the fluctuation that really comes out from foreign exchanges. We do, utilize some level of hedging through our forward contracts.

[Michael Meek:]

Okay, and then the at the startup you guys referenced was that in your guidance originally for the year?

[Terry Peterson:]

Startup costs for the new packaging business?

[Michael Meek:]

Yes.

[Terry Peterson:]

No, that was not.

[Michael Meek:]

Okay, all right. So this business that you guys have rolling on in 4Q that was new from when you provided original guidance, the original guidance.

[Terry Peterson:]

Yeah, that is correct.

[Michael Meek:]

Okay, got you. So if I were to look at the FX impact, right, it seems as though this new business is the offset to that, that gives you confidence to be able to hit your guidance?

[Terry Peterson:]

Yeah I mean absolutely that will be a net positive for the year even overcoming the say the year-to-date startup costs but that absolutely is a solid eight in helping us deliver on our full year outlook with adding in that new business.

[Michael Meek:]

Good, and I mean is there anything else that's moving under this surface in terms of things trending worse, or trending a little bit better versus what you guys were envisioning at the start of the year?

[Terry Peterson:]

I mean we talked about a number of things that impacted the second quarter too and we have - certainly, as we have considered our updated views on third quarter and fourth quarter. We have really updated for those some of those trends both positive and negative. So you can get just pretty good candidate view as to what those quarters look like both top line as well as bottom line. So we've really kind of updated perspective in thinking and all of those areas down to the individual reporting units not just at the segment level but all the way down to the reporting units and taken a fresh view on that and try to factor in everything we can anticipate including new and shrinking volumes.

[Michael Meek:]

Great. Thank you for your time.

[Dan Knotts:]

Thank you.

[Operator:]

There are no further questions at this time.

[Dan Knotts:]

All right. So thank you. This is Dan again, just want to close up -. Thank you again for spending time with us on the call. As we as an industry leader we are working every day to anticipate this shifting dynamics in the markets we serve. We are working closely with companies across a wide variety of industries to provide solutions and simplify the complexity, it increase the effectiveness of communications. We continue to develop new products, new services and workflows as we expand our capabilities to meet those evolving needs of our clients. We also continue to drive our operational excellence initiatives through a well-defined and discipline process. As we look to the back half of the year we remain confident in our ability to deliver against our previous guidance for 2017. In closing I'd like to thank the talents of those employees of RD around the world for your ongoing high level of commitment to servicing our clients and continuing to work safely. Here is Brian again for some final housekeeping.

[Brian Feeney:]

Thanks, Dan. As a reminder, a replay of R.R. Donnelley's first quarter 2017 results call will be posted on the Investor's section of our website at rrdonnelley.com. Thank you for joining us this morning and that concludes the R.R. Donnelley second quarter 2017 earnings call.

[Operator:]

Thank you ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.