R. R. Donnelley & Sons Company
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Welcome to the R.R. Donnelley Third Quarter 2017 Results Conference Call. My name is Janet and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After remarks from the company’s representatives, we will conduct a question-and-answer session. Please note that this call is being recorded. I will now turn the call over to Brian Feeney. You may begin.

[Brian Feeney:]

Thank you, Janet and thank you everyone for joining R.R. Donnelley's third 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 will be reviewed during this call is addressed in more detail in our third 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 yesterday. Throughout this call, we will 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 further detailed 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, 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 and the Investor 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'll begin today's call with a summary of our Q3 performance and then I'd like to provide an update on the progress we're making in advancing our strategy to drive long-term profitable growth as a leading provider of marketing and business communications. Following my remarks, Terry will provide additional details on our financial results as well as an update on our guidance for the full year. For the third quarter, we delivered solid performance that was within the range of our expectations. We reported growth in both net sales and non-GAAP diluted earnings per share over the prior year quarter, despite the unanticipated negative impact of foreign exchange rates and increased logistics cost related to the devastating hurricanes. Collectively, these two items negatively impacted our income from operations in the quarter by more than $10 million dollars. Our net sales for the quarter were $1.73 billion, which represents a $9 million or 0.5% increase over the prior year that was mostly driven by volume growth in our international segment. On an organic sales basis, while still representing a slight decline, we delivered our best quarter of performance since the spin occurred on October 1 of 2016. Our non-GAAP diluted earnings per share improved $0.12 per share, a 67% increase over the prior year quarter, primarily driven by our cost reduction actions, lower interest expense and lower taxes. During the quarter, we continued our focus on developing and implementing our business improvement plans to increase our operating efficiency and reduce our overall cost structure. We attained our cost reduction target for the quarter and we remain on track to deliver against our full year expectations. While we continue to execute our strategic growth priorities and aggressively manage our cost, we also remain focused on deploying a disciplined approach to our capital allocation in order to improve our capital structure. As such, I'm pleased to report that in late September, we replaced our credit facility with a new, more flexible asset based lending facility, which will help lower our interest expense in future quarters. I’d now like to shift to our performance for each of our business segments. In our international segment, we posed positive organic sales growth for the quarter of 5.7%, which is primarily driven by increased packaging and increased book volume in China and to a lesser extent, educational testing volume in Chile. The growth in Asia and Latin America was partially offset by sales declines in global turnkey solutions, business process outsourcing in Canada. In China, we made significant progress during the quarter, relative to the ramp up of our new packaging facility. With now over 3700 new employees, we commenced production and began shipping products late in the third quarter. We remain optimistic about this opportunity as we reached our targeted production levels in mid-October. Our Asia business led by our operations in China has delivered strong double digit growth since the spin and we expect that trend to continue in Q4. Our strategic services segment posted an organic decline of 2%. Sales growth in logistics, which was primarily driven by increased volume in our freight brokerage business was largely offset by lower pass through posted. Sales in our sourcing business declined mostly due to a reduction in pass through sales as well. As I mentioned previously, our logistics business was negatively impacted in the quarter by higher transportation cost, following the hurricanes and we do expect that cost pressure to continue through the fourth quarter. In our Variable Print segment, we delivered mixed results with an overall organic sales decline of 3.4% for the quarter. Our statement printing and our labels businesses both delivered growth for the quarter, primarily due to increased demand and new wins with existing clients. While we continue to on board new clients in the quarter, our commercial and digital print and our direct mail businesses were negatively impacted by softer client demand that began in Q4 of last year. Within commercial digital print, general commercial print activity and retail volumes remain challenged with our results also being impacted by a comparison to stronger election related volumes in the third quarter of 2016. Within our direct mail business, we did see a sequential improvement in net sales from the second quarter as volumes from the financial services sector improved. Shifting now to our strategy, during the quarter, we continued to execute our strategic priorities; to profitably grow our core businesses, to leverage our industry leading portfolio of services, to fuel growth with our existing clients and to scale our multi-channel solutions, all while aggressively managing our cost structure and maintaining a disciplined approach to capital allocation. In an effort to drive an even deeper understanding of our clients' evolving marketing and communications needs, over the last six months, we've performed a comprehensive market evaluation by engaging with over 1000 participants across a broad range of industries. While our market and client research serviced a number of critical findings relative to the future of multi-channel marketing communications, I would like to highlight three areas of critical client need that represent key growth opportunities for RRD and support our strategic growth initiatives. First, multichannel execution, offline and online. Managing communications across so many channels in a coordinated, consistent and cost effective manner. Second, intelligent content management, accessing, leveraging and delivering content in real time to their target audiences through multiple channels and connected workflows. Third, data analytics and insights, maximizing the effectiveness of their communications and ultimately their marketing ROI using data captured across both offline and online channels. Simply put, multi-channel communication execution continues to be challenging and costly and marketers are increasingly searching for more connected solutions to reduce cost and improved performance. RRD is uniquely positioned to address these critical pain points for our clients as we leverage our core capabilities in content, data and channel execution. And going forward, we will continue to innovate and invest to further scale our content management, data analytics and insights and multi-channel execution capabilities as a key element of our growth strategy. I’d now like to provide a few examples of where we're currently providing these types of comprehensive marketing and business services as we continue to expand our relationships with our current clients and win new clients. One of our long term clients, Ace Hardware is a great example of the breadth of our marketing services capabilities. With more than 5000 independently owned stores worldwide, Ace is committed to maintaining brand consistency across all of their locations, while allowing local entrepreneurs to customize in-store merchandising circulars, direct mail and digital marketing for their specific markets. To support their marketing objectives, we are developing and driving creative concepts that range from in-store displays to email templates. We’re managing all of their digital assets and workflows to ensure quality and brand consistency across all of their marketing, advertising and publishing communications and we are printing and distributing majority of their marketing materials to their stores around the globe. By leveraging our extensive capabilities, including business intelligence and data analytics, we’re optimizing Ace's marketing communications to elicit greater response rates from current and prospective Ace customers. A prime example of our ability to win new opportunities within business communications is our recently awarded program with a very large electronics contract manufacturing company. Under this multi-year award, we will provide this new client with a full range of end-to-end supply chain solutions, including the production of in box literature, labels and packaging and the sourcing of additional components as they launch and grow their presence in the US. We are excited to be their partner of choice. As the marketing and business communication needs of our clients continue to evolve, we are confident in our ability to provide innovative and differentiated solutions that position us to capture these types of growth opportunities going forward. Before I turn the call over to Terry, I'd like to comment on the recent natural disasters. While we were challenged by the hurricanes that impacted a number of our employees, facilities and operations, I am thankful to report that all of our team members are safe and our facilities were not significantly damaged. I also want to acknowledge the tremendous effort put forth by our teams to move production to other RRD facilities in an effort to minimize the impact on our clients. I will now turn the call over to Terry. 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 enter the presentation tab in the Investors section of our 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 last year. On our call last quarter, I mentioned that we expected to see seasonal sales increases begin to benefit our results and that we expected our third quarter net sales and non-GAAP EPS to be higher, both on a year-over-year basis and sequentially from the second quarter. I'm pleased to report that despite some unanticipated headwinds related to unfavorable foreign exchange rates and higher than expected transportation costs in our logistics business due to the recent hurricanes in the south, we delivered against those expectations. In addition, we reported last quarter that we were awarded a significant piece of new packaging business in our Asia business and that we expected to begin shipping product in the third quarter. That activity started a little later in the quarter than we had estimated, but as of mid-October, the volume has ramped up significantly and we are producing at expected levels. Overall, results for the third quarter were within the range of our expected performance as both our net sales and non-GAAP EPS increased from the prior year period. A lower effective tax rate and lower interest expense more than offset the lower income from operations, which included a negative FX impact of $7.8 million. Third Quarter 2017 net sales of 1.73 billion grew $9.3 million or 0.5% as compared to the third quarter of 2016. On an organic basis, net sales decreased 0.4% as net growth in the international segment was a little more than offset by declines in the other segments. However, this was our strongest organic performance since the spin and compares to organic decline rates of 1.4% in Q2 and 1.0% in Q1, in each instance, after giving effect to the sales revision related to our Asia reporting unit, which we described in our press release yesterday afternoon. Non-GAAP gross profit for the third quarter of 2017 was $324.4 million, down 23.4 million versus $347.8 million in the third quarter of 2016. While we achieved the expected benefits from our cost reduction initiatives and productivity improvements in the quarter, they were more than offset by unfavorable sales mix and modest price pressure in all segments as well as startup costs in Asia and the previously mentioned hurricane related costs. As a percentage of net sales, gross profit was 18.7% in the third quarter, down 1.5 percentage points from 2016. Third Quarter 2017 non-GAAP SG&A of $207.7 million was down $12.7 million versus last year's quarter. The current period included lower cost versus the allocated pre-spin cost in 2016, benefits from our cost reduction initiatives and a legal settlement in 2017, which were partially offset by unfavorable changes in foreign exchange rates and higher variable incentive compensation in all segments. Third quarter non-GAAP SG&A as a percentage of net sales was 12.0%, an improvement of 0.8 percentage points from 2016. Third Quarter 2017 non-GAAP income from operations was $69.7 million, down $6.7 million from last year. The negative impact of changes in foreign exchange rates accounted for a decline of $7.8 million. Aside from FX, lower SG&A and depreciation and amortization expense more than offset lower gross profit. As a percentage of net sales, non-GAAP income from operations of 4.0% decreased from 4.4% reported last year. Our GAAP results for the quarter included a pretax asset impairment charge of $21.3 million, related to goodwill in our digital and creative solutions reporting unit within our Strategic Services segment, primarily due to lower than expected profitability as a result of a customer's plan to in-source certain pre media business over the course of the next year plus lower sales from other existing customers. Results for the quarter also included a pre-tax charge of $6.5 million, primarily related to the write-off of certain debt issuance costs associated with our previous credit facility and restructuring charges of $11.8 million related to our ongoing effort to reduce our cost structure. GAAP results for the prior year quarter included a pre-tax OPEB curtailment gain of $19.7 million dollars associated with the change in the plan and restructuring charges of $10.3 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 difference varies by segment and has both positive and negative impacts to the comparisons depending on the segment, but on a consolidated basis, the net difference has a positive impact to our year-over-year comparisons. I'm happy to report that this is our last quarter of having to describe these differences as beginning in fourth quarter, we will have lapped the effective date of the spin and we expect that the comparisons will be more routine. Organic net sales in our variable print segment were down 3.4% for the quarter. Growth in our statement printing business, which is driven by recent wins and our labels business partially offset declines in commercial and digital print and direct mail. Softer demand in our commercial and digital print business that began at the end of 2016 continued in the third quarter. We also faced a tough comparison, given a ramp in election related print volume in the third quarter of 2016, which did not recur in 2017. For direct mail, we experienced unfavorable sales performance year-over-year as we continued to see softer demand primarily from our retail clients, but the business is improving as third quarter net sales were up sequentially from the amount reported in second quarter. In the Strategic Services segment, organic net sales declined 2.0% in the quarter, primarily due to lower postage pass through sales in logistics of $19.4 million, which accounted for a 440 basis point reduction in the organic decline rates. Volume growth in logistics during the quarter was primarily driven by our freight brokerage business, while fuel surcharges were also up $5.1 million year-over-year. We also experienced a decline in our sourcing business, driven by lower pass through revenues. As I mentioned earlier, cost of transportation increased significantly after the recent hurricanes. Shortages in drivers and trucks have caused prices to rise and we expect those prices to remain elevated through the remainder of the year. We estimate these higher transportation costs negatively impacted income from operations by nearly $3 million in the third quarter predominantly in the strategic services segment and are expecting an additional negative impact of approximately $4 million in the fourth quarter. Organic net sales in our international segment were up 5.7% for the quarter. Net sales in Asia grew over 24%, which was primarily driven by growth in our existing packaging and book volumes. The volume growth in Asia and to a much lesser extent Latin America was partially offset by volume declines in our global turnkey solutions, business process outsourcing and Canada businesses. Our global turnkey solutions and business process outsourcing units were primarily impacted by continued lower volumes from existing clients, while Canada's client decline was mostly due to one-time business in the third quarter of 2016, which we did not expect to repeat in 2017. Third quarter 2017 non-GAAP unallocated corporate expenses of $3.9 million compared favorably to our expectations and improved by $23.0 million versus the third quarter of 2016. Cost reduction initiatives, lower healthcare costs and favorable legal settlements were partially offset by unfavorable changes in foreign exchange rates and lower pension and other post-retirement benefits income. The prior period also included higher allocated costs from pre spin operations. Net cash used in operating activities during the first nine months of 2017 was $12.6 million compared to $7.8 million provided by operating activities during the first nine months of 2016. In the third quarter alone, operating cash flow was positive at $39.2 million. The 2017 year to date amount includes approximately $9 million of spinoff related cash payments. As a reminder, prior year cash flow amounts include the cash flows from LSC and Donnelly Financial and have not been restated. Similar to past years, our operating cash flow is expected to be seasonally strongest in the fourth quarter. Capital expenditures were $77.2 million during the first nine months this year versus $147.9 million in the first nine months last year, which included $49 million related to discontinued operations. As Dan mentioned earlier, we successfully closed on a new $800 million asset based lending facility, which provides us with greater flexibility and an estimated $7 million annual reduction in interest expense depending on our actual borrowing levels. This new facility replaced the $800 million revolving credit facility that we had in place since September 2016. Maturity on the new facility was extended one year and expires in September of 2022. Turning now to the balance sheet. As of September 30, 2017, we had total cash on hand of $225.8 million and total debt outstanding of $2.25 billion, including $350 million drawn against our new credit facility. Remaining availability on the credit facility was $385 million as of September 30. During the third quarter, we also completed a debt for equity exchange for the remaining 99,594 retained shares of common stock of Donnelly Financial for certain of our outstanding senior notes. Before I review our guidance for the full year, I would like to comment on our expected performance for the last quarter of the year. In commercial and digital print business, net sales are expected to be unfavorable to the prior year as we expect to see softer client demand, similar to previous quarters and approximately $20 million of lower election related spend as compared to 2016. Sequentially, we do expect to see additional seasonal volume in the fourth quarter as compared to the third quarter due to holiday related print spend. In Asia, we expect to see normal seasonal increases continuing in our packaging business as technology companies continue to release new products and fulfill holiday sales demand. Additionally, we expect to continue to see additional sales growth from the new packaging business and our teams are continuing to utilize a disciplined approach to drive our strategic growth initiatives and execute our business performance plans, which we believe will positively impact our performance in the fourth quarter. Also as a reminder, fourth quarter 2016 included a one-time charge of $8.4 million in our logistics reporting unit, plus a $7.5 million benefit from favorable changes in foreign exchange rates, neither of which we expect to repeat in 2017. For full year 2017, we expect net sales to range from $6.8 billion to $6.9 billion, as compared to $6.8 billion in 2016. The current year estimate and the 2016 amount have been reduced by approximately $80 million and $60 million respectively for a reporting change related to certain contracts with an inventory buyback option in our Asia reporting unit. Sales from these contracts are now reported on a net basis instead of a gross basis. So there is no impact to income from operations, earnings per share or cash flow. Non-GAAP income from operations is now expected to range from $280 million to $290 million and fully diluted non-GAAP earnings per share is expected to range from $1.10 to a $1.23. The earnings guidance reflects a tightening of both ends of the ranges previously provided and takes into consideration the significant unfavorable impact from changes in foreign exchange rates during the year and higher transportation costs in the third and fourth quarters Additionally, there are several key factors that impact our outlook for the year as compared to 2016 including the following. In our variable print segment, we expect to see continued strong performance in our statement printing business, increased volume in our direct mail business, including acquisition of Precision Dialogue and stronger labels activity as we onboard recent wins in this business. We expect these gains will be more than offset by secular volume reductions in forms and commercial and digital print, less election related volume and modest price erosion across most product categories. In our strategic services segment, we expect continued volume growth in logistics, including a modest increase in fuel surcharges, increased net sales from Precision Dialogue’s data analytics services offering, plus net spin related sales increases. As expected, these factors will be partially offset by lower postage pass through sales, modest price erosion and higher costs of transportation as a result of the recent hurricanes. In our international segment, we expect increased sales in Asia to be partially offset by lower volumes in global turnkey solutions, business process outsourcing in Canada as well as the continued negative impact to income from operations related to changes in foreign exchange rates. Through the third quarter, unfavorable changes in foreign exchange rates have negatively impacted 2017 non-GAAP income from operations by approximately $15 million as compared to 2016 results. And we expect that amount to increase to approximately $24 million for the full year. We expect to normalize our variable compensation expense in 2017, which may result in an increase in expense if we achieve our target. We expect pension and other post retirement benefits income of $15 million, which is $7 million unfavorable to 2016, primarily due to reductions in OPEB income. We are continuing our strong focus on executing our business improvement plans which we expect will 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 approximately $195 million. We expect interest expense to be between $175 million and $180 million. And our full-year non-GAAP effective tax rate is now anticipated to be between 23% and 24%, which is favorable to our previous guidance due to additional discrete items in the third quarter. Shifting to our 2017 cash flow, we expect cash flow from operations to range from $210 million to $240 million, which is slightly below our previous estimate primarily due to higher expected working capital mostly in our international segment from new business that is ramping late in the year and miscellaneous timing adjustments. Capital expenditures are expected to be approximately $105 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 delever over time and accelerate achieving our strategic goals. We also continuously evaluate our portfolio for strategic opportunities to optimize shareholder 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:]

[Operator Instructions] And our first question comes from Charles Strauzer of CJS Securities. Please go ahead.

[Peter Lukas:]

Good morning, it's Peter Lukas for Charlie. Just wanted to touch on direct mail, you had mentioned improvement there, seeing improvement there. Can you expand on any evidence you see of a pickup heading into the holidays. I think you mentioned tech companies, but didn't know if there was more to be looking at there.

[Dan Knotts:]

This is Dan, from a direct mail standpoint, we did see in Q3 as we mentioned from the financial services sector some improved performance. As we head into Q4 as Terry mentioned, we do see activities being stronger in the fourth quarter and that goes across a number of different industry verticals. So we feel pretty good about the progress that's occurring in that segment.

[Peter Lukas:]

And then with regards to commercial print, I think you said you expect next two to see less election related volume, but just wanted to get your early thoughts on the midterm elections, which have historically been good for the commercial print.

[Terry Peterson:]

We do have, our guidance does reflect some print volume related to midterm elections. So the $20 million that I quoted for a difference for next quarter already takes that into consideration. That is actually the difference between the midterm election versus the primary elections from last year.

[Peter Lukas:]

And last one for me, in terms of margins, you had mentioned pressure from my transportation which you expect to continue as well as mix pricing in the hurricane. But what should we be looking at in terms of margins say ex-transportation going forward.

[Dan Knotts:]

We haven’t provided long-term guidance on the margins, but I think as you're thinking about your models and how you're looking at that business, I will tell you that looking at patterns and trends that you see this year, which reflects kind of our cost structure on a post spin basis that is a much better basis for which you would provide future estimates versus looking back to at times prior to the spin where we had differences in the cost structure. So I’d encourage you to take a hard look at where those levels have been this year.

[Operator:]

Thank you. And our next question is from Jamie Clement of Macquarie. Please go ahead.

[Jamie Clement:]

I was wondering if we could get into the weaves a little bit in the transportation business. The 3PLs that have reported, the logistics that have reported this earnings season have, generally speaking, knocked the ball out of the ballpark. And I was - first question is sort of like within logistics, how much of your business is contractual fixed revenue versus how much of that business is spot? Because, I mean, even before the hurricanes, it seemed like capacity was tightening, rates were going up. We're looking at the ELD mandates taking effect in the not-too-distant future which theoretically may further tighten capacity. So can help me understand kind of the mix of spot versus contract? What's going on here? And kind of what really the drivers of profitability in this business are right now?

[Dan Knotts:]

Hi Jamie, it’s Dan. Relative to the fixed versus spot, I think as we have a number of different businesses within our logistics business including our mail sortation business, our expedited business, our international business as well, the 3PL business being a part of that too. So looking that from the standpoint of from a contractual standpoint it's in the neighborhood of 50-50 or so of contractual business, but what's also important to note is that contractual business doesn't necessarily connotate guaranteed volumes as those volumes fluctuate under those contracts we have with those particular clients.

[Jamie Clement:]

So basically, what I'm getting at is - I mean, generally speaking, my view of brokerage companies is that it benefits them when capacity tightens and when rates improve, as long as they don't have this high percentage of onerous fixed revenue contract business. So I'm just trying to, like - I'm trying to get a sense also of, like, the duration of your fixed - basically, like, if capacity gets tighter from here on out, at what point in time, like, can you new basically go back to customers, re-bid for that business, whatever, to start benefiting from these kinds of dynamics within the transportation industry?

[Dan Knotts:]

And Jamie, it’s critical stand again, it’s critical point that you just made there and the key there is as COT, cost of transportation, freight cost go up because the market tightens, there's a lag there. And that's really based on the contractual versus the spot market, really drives the timing of when you can pass along those transportation cost increases to your client. So we are actively involved in that process. So over time we do expect some improvement to happen as a result of being able to pass along price increases to a number of clients. And a lot of that is going to be driven by the competitive spot market as well.

[Terry Peterson:]

Jamie, I was just going to add to that you commented on the volumes and what we should be seeing there. I'll tell you that on an organic basis we did have nicer organic growth there. And if you really even stripped out the noise around postage passthrough, which was a negative to that organic growth. The organic growth was on the upper single digit for that business. So we have seen really good performance and more volume in that business. Again, in the cost side we got hit little bit with the higher cost of transportation, but we hope and expect that that would be temporary.

[Jamie Clement:]

And then I guess the last question on this, and then I'll just hop back in the queue is, is there anything about the spinoff agreements? The work you're doing with LSC Communications, it would create a kind of a distortion where over the next couple of quarters, your Logistics business shouldn't benefit the same way that other publicly traded companies with big freight brokerage operations seem to be benefiting right now?

[Dan Knotts:]

I would say that the companies that we spun off we have commercial agreements with them that are tied and have time periods on them. And they especially in the case of LSC they do represent a very significant customer to us. So to the extent that something was happening in the broader industry that didn't affect them the same way. That would shield our performance from say more of a normal mix to the broader industry. But there are agreements that do govern those relationships and that the pricing et cetera. So that would be the biggest thing, but they are significant to our customers to us and to the extent they are different than the broader industry. That could impact how we perform.

[Jamie Clement:]

I guess, Terry, what I was getting at is, I mean, obviously volume is not guaranteed, right? But is your - I mean, is your revenue on that volume guaranteed? So that, essentially, RR Donnelley is taking the risk of going at the market and having to procure the transportation. I mean, is that how I should think about this?

[Dan Knotts:]

Yeah that is true that the mechanisms to adjust pricing for changes in cost of transportation is not as good for us as it is in the case of fuel surcharge.

[Operator:]

Thank you. And our next question comes from David Phipps of Citi. Please go ahead.

[David Phipps:]

Could you talk a little bit about some of the startup costs and how we might think of those dwindle a little way down as we go forward with the company.

[Dan Knotts:]

The startup costs really kind of elevated in the second quarter. And we continue to see them in third quarter. They weren't unanticipated for us this quarter as we issued our most recent guidance. But we have effectively started up a brand new manufacturing facility in the second and third quarters. We have about 3,700 employees that have been hired and trained and are now producing. So the bulk of the startup costs really are done in third quarter. I will say that there's perhaps just a little bit of inefficiencies that we’ll still incur in fourth quarter as the work is still a little bit newer to these employees. But unlike second and third quarter, we've got much more revenue that's be produced in that facility now whereas it was only start up costs in second quarter and mostly start up costs in our third quarter.

[David Phipps:]

And one other on the segment EBITDA, the corporate was a lot lower than it has been historically in the third quarter for this year. And it looked so, is that a change as you reallocate some of the corporate expenses or there were one-time items that changed what corporate was. How do we think about that? And then maybe can you talk about some of the different margin potentials in international business or in variable print or strategic services or are we kind of running into rates near where we should be long term.

[Terry Peterson:]

In the corporate segment, if you look at the quarter since the spin, you'd see a notable decline in that corporate segment kind of in that 10 to 15-sih million dollar range, which is down substantially from - on a pre-spin basis where the allocations and the cost structure and the initiatives - for our cost structure have been quite different. And the corporate segment does benefit nicely from that in some cases that the expense of some of the segments, but the numbers are lower. It was even further benefited this quarter. We had some really nice favorability in our healthcare cost. And that was partially driven by more of an elevated level of healthcare expense in the third quarter of last year that didn't repeat in this year, but that does come through some nice favorability, still a strong performance in that category of expense for the current quarter. We had a couple of bad debt recoveries that gave us some positive expense on the bad debt side in the current third quarter. And then we did have a small legal settlement that also came through the corporate segment that benefited this quarter. So I would say that on a go-forward basis which you really saw in the first couple of quarters and perhaps even in the fourth quarter of the last year post spin that is a more normal level for that corporate segment than what you saw previous to the spin or in third quarter of 2017.

[David Phipps:]

So when we look for the FX impact kind of a current FX rate you gave for the fourth quarter and will we have these comparisons continue for the next, I guess, third quarter was one. So this will continue also in the first and second quarter if we were at the same rates?

[Terry Peterson:]

Yeah, I would say that the fourth quarter impact that we are forecasting is really just the absence of a favorable FX adjustment that came through in fourth quarter of last year. So I think of that more as a positive from last year that we're not forecasting to repeat this year. And we saw some of the difference was contributed to the third quarter difference as well. But it's hard to forecast or predict exactly what will happen in the upcoming quarters. Certainly in second quarter and now the third quarter we’ve had charges from some of our balance sheet exposures, net of the hedging that we do that even if we are just neutral next year that would create some favorability in second and third quarters primarily just related to the absence of those negative charges that we have seen in second and third quarter of this year. So it's hard to say what's going to happen going forward. The impact on our revenues and expenses that is still been a little bit elevated this year, but that's a lesser portion or component at a profit level then what we see from the activity around some of the balance sheet exposures.

[David Phipps:]

And then when you tie together all the commentary about cost and revenues, where do you think we should see the largest margin pickup in the fourth quarter by segment.

[Terry Peterson:]

The largest margin pick up by segment, I would say that we would certainly expect to see with some of the seasonal volume in our international segment that's going to benefit and create a nice pick up there. We should see better - a little better volume in our strategic services segment that will give us some added leverage and benefit. And then likewise in our variable print segment, we'll see a bit of a lift from the third quarter. But the looking here, you know, with some of the added volume too it will help cover fixed costs better. So we will see a little bit of a lift there. So I mean each of the three operating segments will show an improvement. And then I would say that at the corporate level, we wouldn’t expect quite the same level of favorability that came through in third quarter. So that would offset a little bit from the segments.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Michael McCaffery of Shenkman Capital. Please go ahead.

[Michael McCaffery:]

Thanks a couple, can you clarify the commentary about the negative FX impact. I think you mentioned in your prepared remarks 7.8 million. And I'm just trying to reconcile that against the table were you item out the aspects of the net organic sales change. And to there the line for FX shows that FX was actually a positive contributor. So can you just help me understand that?

[Terry Peterson:]

On the sales side it was just a positive, a very small amount about $5 million in the quarter, but it's when you get to the cost structure and to some of the balance sheet exposures. So you really have to dig down into which countries we have exposure in. One of the things to that can cause a bit of a disconnect on the sales and the cost side too is, in our Asia business a lot of that business on the sales and revenue side is actually transacted in US dollars but the cost structure is entirely in the local currency. But it's again where which countries have those balance sheet exposures. And the ones that have hurt us the most this year would be China and secondly to a lesser extent, but still an impact is India.

[Michael McCaffery:]

And then secondarily following up from the prior - one of the prior questions regarding the start-up cost in China. Can you quantify how much that impacted this quarter on a year-over-year basis.

[Terry Peterson:]

It was just about $3 million.

[Michael McCaffery:]

In your commentary about the impact of the storms on your higher transportation costs, can you comment on either lost business or postponed business as a result of the storms.

[Dan Knotts:]

A small amount of that impact for the quarter was product that just couldn't be picked up and we had to delay. So a little bit there. But most of it was really just around the cost structure and the cost of that transportation.

[Michael McCaffery:]

So I guess, if I look at the fact that you brought down the full-year EBITDA guidance by about $20 million at the high end. If I'm just looking at your commentary, you said the FX impacts from 3Q is probably going to be similar in 4Q. You gave about 4 million of logistics transportation higher costs. So what else I guess on the EBITDA, it looks like the FX and higher transportation is driving most…

[Dan Knotts:]

The transportation cost between third and fourth quarter was certainly something that we hadn’t contemplated going into the quarter. We also didn't expect that the FX as we look at the full year now would be nearly at the level that it is currently at. So that has certainly provided some headwinds and challenges for us we feel to be able to deliver at the top end there.

[Michael McCaffery:]

And just finally, back to the startup in China, at this point is it a net positive contribution to revenue minus expenses.

[Dan Knotts:]

Fourth quarter, yes. Third quarter, no.

[Operator:]

[Operator Instructions] And we have no further questions at this time.

[Dan Knotts:]

Great, thank you operator. Thanks again everyone for spending time with us on the call today. In the final weeks of 2017 we're looking forward to a strong finish to the year as we continue to strengthen our relationships with our existing clients, we continue to expand our sales pipeline and we continue to execute our strategic priorities. I want to thank all of our employees, clients, and partners for helping to make this a successful transition to the new RRD. We see tremendous opportunities ahead for our company and I look forward to speaking with you again in the New Year. Here's Brian again for some final housekeeping.

[Brian Feeney:]

Thanks Dan. As a reminder a replay of RR Donnelley’s third quarter 2017 results call will be posted on the investor section of our website at rrdonnelley.com. I would also like to remind everyone that RR Donnelley management will be presenting at two upcoming events. On November 8, we will be in New York City at the 2017 Wells Fargo Media and Telecom Conference and on November 29 and 30, we will be in Boca Raton, Florida at the Bank of America Merrill Lynch 2017 Leverage Finance Conference. Thank you for joining us this morning and that concludes the RR Donnelley’s third quarter 2017 earnings call.

[Operator:]

Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.