R. R. Donnelley & Sons Company
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Welcome to the R.R. Donnelley Fourth Quarter of 2017 Results Conference Call. My name is Justin and I'll be your operator for today's call. At this time, all of your participant phone lines are in a listen-only mode. And after remarks from company’s representatives, we will conduct a question-and-answer session. [Operator Instructions] Please note that today’s call is being recorded. I would now like to turn the call over to Brian Feeney, R.R. Donnelley’s Senior Vice President of Investor Relations. Please go ahead.

[Brian Feeney:]

Thank you, Justin and thank you everyone for joining R.R. Donnelley's fourth 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 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 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 provide 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 Investors section of our website under the Presentation tab. I will now turn the call over to Dan.

[Dan Knotts:]

Great. Thank you, Brian. Good morning, everyone and thank you for joining us on our call today. We delivered a very strong fourth quarter to close out a successful year for RRD. Our fourth quarter results demonstrate our ability to grow revenue, manage cost and generate strong cash flow to invest in our future and improve our balance sheet. Our results also validate our strategic path forward as a marketing and business communications services company and I'm proud of the significant progress we made in 2017 to advance our strategy. We're creating value for our clients by helping them connect with their customers across a full breadth of the customer journey, from the marketing programs that generate new customers to the critical business communications, serve those customers and reinforce their brand. We’re aggressively driving our business improvement initiatives to reduce our cost. We're investing for long term growth and we're improving our balance sheet. While there's more work to do, we are focused, committed and working hard to drive our ongoing transformation. Let me review the highlights for the quarter. We posted year-over-year top line growth of 3.6%, driven by strong growth in our international segment and improved performance within our variable print and strategic services segments. Our international and variable print segments delivered their best quarterly sales performance of the year. On an organic basis, we grew sales by 2.6% versus the prior year, which represents our best quarterly organic sales performance since 2014. Eight of our thirteen reporting units delivered organic growth for the quarter. Through the combination of our increased sales and the ongoing execution of our business improvement initiatives, our non-GAAP income from operations increased by 11% to $113 million, which also represents our best performance since 2014. We delivered $0.81 of non-GAAP diluted earnings per share, up 59% as compared to Q4 of last year, driven primarily by our improved operating performance, the actions we completed in the year to lower our interest expense and the favorable tax impact for the quarter. To summarize, despite some sizable external headwinds, including the negative impact of foreign currency rates, raw material cost increases in Asia, and increased freight cost within our logistics business, our teams did a terrific job of servicing our clients and executing across our operating platforms to deliver our favorable performance for the quarter. I’d now like to shift from our financial results to provide an update on our transformation journey. In the fourth quarter of 2016, which was our first quarter as a standalone company, I introduced our five strategic priorities to further evolve RRD as a leading marketing and business communications services company. Those strategic priorities remain as follows; profitably growing our core businesses, extending our differentiated platform of products and services, scaling our multi-channel capabilities, delivering operational excellence and maintaining a disciplined approach to capital allocation. More than ever, our clients are seeking better ways to connect with their customers. As the pace of innovation accelerates and communication challenges increase, our clients recognize that in order to be successful they must put their customers at the center of everything they do. We are providing innovative solutions that optimize our client's engagements with their customers across all touch points, online, offline and on site, while simplifying complexity and reducing their operating cost. Together, our powerful platform of marketing solutions and business communications services helps our clients improve customer engagement and drive business performance. I'd like to share a couple of examples of how we're leveraging our marketing solutions and business service capabilities to drive value for our clients. We're working with the national retailer to help them maximize customer reach through a strategic customer segmentation initiative. Utilizing [ph] data generated insights as well as quantitative and qualitative market research, we're developing behavior based customer segments that will enable our client to better classify current and future customers and improve the effectiveness of the loyalty and customer resource management efforts. As their marketing execution partner, we’re leveraging our multichannel capabilities to maximize the impact of this client's marketing spend. We're also working with a client that services dental practices to provide on-demand highly customized welcome kits for their customers. We created a custom web portal for this client that enables them to request both offset and digital materials and promotional items based on the specifications of each customer, which we then collate, assemble and ship. This solution enables our clients to use a highly personalized and customized touch point to engage their new customers in a simple, efficient and streamlined manner. I’d also like to share with you how we’re continuing to execute our two equally important strategic objectives; optimizing our business performance through operational excellence and maintaining a disciplined approach to capital allocation. We are continuing to implement business improvement plans to streamline our operations and lower our cost to serve. Our teams are aggressively driving out cost, eliminating waste and identifying process improvements to improve our overall operating results. And while we execute our strategic growth objectives and aggressively manage our cost structure, we are deploying a disciplined approach to our capital allocation. Over the past year, we’ve reduced our debt by $278 million, while we invested $108 million back into our business to accelerate our marketing solutions capabilities, and expand our business communications offerings. With that, I’ll 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 following schedules in our press release and under the presentation tab in the Investors section of our website for a reconciliation of GAAP to non-GAAP results. On our call last quarter, I shared that we expected to see the combination of new client wins and seasonal sales benefit our results and that our fourth quarter net sales and non-GAAP diluted earnings per share would be higher, both on a year-over-year basis and sequentially from the third quarter. I am pleased to report that we delivered against those expectations. Net sales exceeded the top end of our expectations, as we delivered better than expected performance across most businesses, within our variable print segment, most notably a significant lift in our commercial and digital print and direct mail businesses as well as Asia and the international segment. Non-GAAP diluted earnings per share was also strong, coming in near the top end of our previous guidance. Fourth Quarter 2017 net sales of $1.93 billion grew $66.9 million or 3.6% as compared to the fourth quarter of 2016. On an organic basis, net sales increased 2.6%, primarily due to double digit growth in the international segment. Organic performance in the variable print segment was flat year-over-year and in the strategic services segment, we reported a slight decline. This is the strongest organic performance we have reported since 2014 and it compares to an organic decline rate of 0.8% in the fourth quarter of last year. Client wins reported earlier in the year and expanded relationships with existing clients drove the strong performance, as we continue to successfully execute our strategic priorities. Non-GAAP gross profit for the fourth quarter of 2017 was $365 million, up $1.3 million versus $363.7 million in the fourth quarter of 2016. The 2017 amount benefited from our cost reduction initiatives, productivity improvements and higher volume in the quarter and the 2016 amount included a one-time charge of $8.4 million in our logistics business. The favorable impact from these factors was partially offset by higher raw material costs and startup production inefficiencies in Asia, modest price erosion across all segments and higher costs of transportation and logistics. As a percentage of net sales, gross profit was 19% in the fourth quarter compared to 19.6% in 2016. Fourth quarter 2017 non-GAAP SG&A of $204.2 million was $7.2 million lower versus last year's quarter. The current period included benefits from our cost reduction initiatives and lower variable incentive compensation, which were partially offset by unfavorable changes in foreign exchange rates. Fourth quarter 2017 non-GAAP SG&A, as a percentage of net sales, was 10.6% as compared to 11.4% in 2016. Fourth quarter 2017 non-GAAP income from operations was $112.5 million, up $10.7 million from last year. Lower SG&A and depreciation and amortization expense and higher gross profit more than offset the negative impact of changes in foreign exchange rates, which accounted for a decline of nearly $10 million. As a percentage of net sales, non-GAAP income from operations of 5.8% increased from 5.5% reported last year. Non-GAAP diluted earnings per share of $0.81 per share in the 2017 quarter was up significantly from $0.51 reported in the prior year period. Higher income from operations, lower interest expense and a lower effective income tax rate, each contributed to that increase. Our GAAP results for the quarter included a $110.3 million charge to tax expense or $1.57 per share related to tax reform. The charge includes a $103.5 million tax on the deemed repatriation of accumulated untaxed foreign earnings and $6.8 million for the revaluation of deferred tax assets and liabilities. The charge represents the company's provisional estimate of the new legislation’s impact under recent SEC guidance. As new information becomes available, the company may update this estimate during 2018. Results for the quarter also included pretax restructuring and other charges of $7.9 million, related primarily to our ongoing effort to reduce our cost structure. GAAP results for the prior year included a pretax asset impairment, restructuring and other charges of $568.7 million, primarily for the impairment of goodwill and other intangible assets in our variable print segment. Next, I will discuss the highlights for each of our segments in more detail. Organic net sales in our variable print segment were flat in the quarter, which was our strongest organic performance since 2014. Our direct mail business improved significantly with reported growth of 16.4% in the quarter. We saw an increase in direct mail programs, particularly in the financial services sector plus our results reflect the impact of new client wins from earlier in the year. In addition, continued growth from new wins in our statement printing and labels businesses also helped offset the softness in commercial and digital print and secular declines in forms. While net sales in commercial and digital print exceeded our expectations for the quarter, prior year amounts included a higher election related and higher specialty card volumes. Non-GAAP income from operations of $75.8 million was up $11.1 million versus the 2016 period, due primarily to cost reductions, which were partially offset by modest price erosion. In our strategic services segment, organic net sales declined 1.2% in the quarter. Volume growth in logistics plus a $7.6 million increase in fuel surcharges were offset by lower postage pass through sales of $12.4 million and softness in our sourcing and digital and creative services businesses. Non-GAAP income from operations of $11.4 million was up $9.8 million versus the 2016 period. The 2016 amount included a one-time charge of $8.4 million. While we continued to achieve reductions from our cost savings initiatives, as expected, going into the quarter, higher cost of transportation negatively impacted the period by nearly $4 million as compared to the 2016 period. Organic net sales in our international segment were up 10.3% for the quarter. Net sales in Asia grew on a reported basis over 25%, which was primarily driven by continued growth in our packaging business. We also reported growth in our global turnkey solutions, business process outsourcing, Latin America and Canada businesses. Non-GAAP income from operations of $39.1 million was down $12.7 million versus the prior year period. Unfavorable changes in foreign exchange rates, raw material cost increases, start up inefficiencies in Asia and modest price erosion were only partially offset by lower variable compensation expense, cost reduction initiatives and additional volume. Fourth quarter 2017 non-GAAP unallocated corporate expenses of $13.8 million improved by $2.5 million versus the fourth quarter of 2016. Cost reduction initiatives were the primary drivers of this reduction, partially offset by higher bad debt expense. Before I discuss the cash flow and balance sheet, I would like to briefly summarize our full year results from continuing operations. Net sales for 2017 were $6.94 billion, up 1.6% on a reported basis and flat for the year on an organic basis. Our organic sales results represent our best performance since 2014. Non-GAAP income from operations of $284.4 million increased slightly from $284.1 million reported in 2016. And 2017 non-GAAP diluted earnings per share of $1.20 was up substantially from the $0.69 per diluted share reported in 2016. Our 2017 performance represented a significant step forward, as we achieved our goal of returning to growth. Our teams responded well to the many challenges throughout the year and in the end, we either achieved or exceeded all components of our P&L guidance issued last February. Net cash provided by operating activities for the full year was $217.9 million in 2017 as compared to $127.2 million in 2016. The 2017 amount includes approximately $9 million of spinoff related cash payments. As a reminder, prior your cash flow amounts include approximately $90 million of spinoff related cash payments plus the cash flows from LSC and Donnelley Financial through September 30 and have not been restated. Capital expenditures were $108.5 million in 2017 versus $172.1 million in 2016, $49 million of which related to discontinued operations. Turning now to the balance sheet. As of December 31, we had total cash on hand of $273.4 million and total debt outstanding of $2.11 billion, including $216 million drawn against our credit facility. Remaining availability on the credit facility was $550 million as of December 31. Versus last year, we reduced our debt outstanding by $277.7 million and we lowered our debt to adjusted EBITDA ratio by nearly 10%. Also, at year-end, our pension and other post retirement benefit plans were under funded by $179 million, which has improved from the $234 million underfunded level at the end of 2016. Required contributions in 2018 under all pension and other post retirement plans are expected to be flat to 2017 at approximately $16 million, as will the income from all plans at approximately $15 million. As a reminder, beginning in 2018, most of this income is required to be reclassified from SG&A expense to non-operating income in accordance with US GAAP. While the impact of this reclassification will lower income from operations and increase non-operating income, it will have no impact on earnings per share and prior period results will be reclassified to maintain consistency in presentation. I would now like to shift to our expectations for 2018. For the full year, we expect net sales to range from 6.8 billion to 7.0 billion as compared to 6.9 billion in 2017. Non-GAAP diluted earnings per share is expected to range from $0.90 to $1.20 as compared to $1.20 per share in 2017. The 2018 range includes an estimated $0.30 per share negative impact due to a higher effective tax rate. There are several key factors that impact our outlook for the year as compared to 2017, including the following. We expect net sales to be flat to 2017 at the midpoint of our range, reflecting higher volumes and modest price erosion at rates comparable to the past few years. We expect increases in raw material costs as well as cost of transportation, which started in 2017 to continue throughout the year. We expect to further normalize our variable compensation expense in 2018, which may result in an increase in expense if we achieve our target. 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. We expect a negative impact of foreign exchange rates to be less in 2018 on a year-over-year basis. However, we do expect further unfavorability in the first quarter, as we have one more quarter before we have comparisons with prior year quarters, which reflect the negative impact. Depreciation and amortization expense is expected to range from $185 million to $190 million. We expect interest expense to be between $165 million and $170 million. And our full year non-GAAP effective tax rate is now anticipated to be approximately 40%, which is significantly higher than the 22.3% in 2017. The higher tax rate accounts for a roughly $0.30 per share reduction in diluted earnings per share. The higher rate is due primarily to new limitations on the company's domestic interest expense deduction as a result of tax reform. In addition, the 2017 rate also included the benefit of certain discrete adjustments, which are not expected to recur in 2018. Shifting to our 2018 cash flow, we expect cash flow from operations to range from $190 million to $225 million, which compares to $217.9 million reported in 2017. This range contemplates higher tax payments, which will include an estimated $20 million related to tax reform, working capital improvements and lower interest payments. Capital expenditures are expected to range from $100 million to $115 million. Next, I would like to comment on our expected performance for the first quarter of the year. While we estimate our net sales to be comparable to 2017, we expect our results to be negatively impacted by higher raw material and transportation costs and unfavorable foreign exchange variances. Additionally, our effective tax rate will be significantly higher after taking into consideration the impact of tax reform and a significant one-time benefit of nearly $0.05 per diluted share in the first quarter of 2017. All of these factors have been considered in our full year guidance. Before we open up the call for questions, I would like to remind you 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 strategic opportunities to optimize stockholder value. In addition, we remain committed to our quarterly dividend, although our board does review our dividend recommendation each quarter. And 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] First, we’ll go to the line of Charlie Strauzer with CJS Securities.

[Charlie Strauzer:]

Hey, good performance in international. I guess that's driven by the money we’re putting into ramping up that facility in Asia and I assume it's for that customer that you have mentioned previously that the main driver of the international growth there?

[Terry Peterson:]

Yeah. Absolutely. That revenue really started producing at the very, very tail end of third quarter, but we did have a full fourth quarter impact. So, you did see that increase coming through.

[Charlie Strauzer:]

And how should we think about that segment for the balance of 2018 and particularly in the international and Asia. Is that kind of growth going to be continuing through the year or is it just more kind of a Q1 starts to tail off, kind of thing?

[Terry Peterson:]

Yeah. We're very optimistic on our international performance, primarily in Asia. We do essentially have the first three quarters where we'll continue to produce and generate net sales off of that new contract, which is a significant contract, so that will benefit the first three quarters nicely. Some of that growth rate will taper off a little bit, in all likelihood, by fourth quarter, because that, at that point in time, we will be lapping the initiation of the revenue generation from that contract in the fourth quarter of 2017 here. So, but overall, we feel pretty good about that growth continuing throughout 2018 here.

[Dan Knotts:]

And Charlie, it’s Dan. Just to chime in there a little bit -- to add a little bit more to that, I think there are two important points there to think about. The first one is that actual growth of the launch and the startup of the new facility is related to a new product that we are producing for that particular client. So there's growth associated with producing that product that we didn't have in the past. And as we think about 2018, the second point to capture there is how that product actually performs because how that product performs will drive the overall demand that we have or that they have for our products in support of how that product performs in the market. So it's the growth associated with adding a new product and then the volume levels are going to be predicated on the performance of that particular product. And then, as you know, the other potential impact there is the launch of new -- or opportunities, the launch of additional products towards the end of 2018. So we'll see how that plays out. We'll see how that plays out as well.

[Charlie Strauzer:]

Great. And if you look at the other two segments in kind of strategic and variable, especially variable that you've got midterm elections coming up this year, how should we think about growth versus declines in those two segments for the year?

[Dan Knotts:]

Yes. So Charlie, it’s Dan again. I’ll start with the variable print segment and kind of put this on the continual mode of growth relative to the market. As we’re thinking about commercial and digital print, which is primarily where the election related revenues come in, that market, as we talked about all year, continues to be on the lower end of the continuum, to be a challenged market in general, what I’ll call, general commercial printing. So our teams are working extremely hard to further penetrate our existing client base and leverage our network there. That's a combination of the former Consolidated Graphics and the RRD Commercial Print platform to expand our position there, but that market in general continues to be, as you read in here, continues to be a challenged market. On the other hand of the continuum, we've got direct mail and labels. And as we talked about in 2017, particularly in the fourth quarter, our direct mail performance was very strong, our labels performance was good and our statement printing was good as well. So, it's a bit of a across that continuum of growth businesses of direct mail, statement printing and labels and on the other end, commercial digital print. It also could include, to a smaller extent, the secular decline that continues to happen within forms. As I think about strategic services, we continue to expect to see the growth that we saw historically in logistics. From a digital and creative solutions standpoint, two parts of that. One is truly the digital side and the creative offering that we have there versus the physical servicing of print production and that, particularly for a more traditional publishing retail catalog type segment. And then from a sourcing standpoint, we are consciously evaluating those opportunities going forward and making sure that the margin thresholds that we expect from sourcing business on the outside meet our expectations. So looking for a continued growth there, but we're going to do it at a rate that drives the margins that we're looking for and not at a rate just to grow the top line within sourcing.

[Charlie Strauzer:]

And then Terry maybe we could have a little discussion in terms of about the Q1 and how should we think about modeling for Q1, any abnormal variances that we should take into account year-over-year and thoughts on just how to kind of model it out a little bit?

[Terry Peterson:]

Yeah. If you look back at last year and first quarter, it was about $0.14 per share. Probably the biggest contributing factor is the tax benefit that we had last quarter from some tax changes internationally. That was nearly a $0.05 per share help in the quarter. And then from there, it's really just looking at really some of the key drivers that I mentioned that will be creating a little bit of a headwind for us in the first quarter compared to the prior year. We're going to see, FX, we’ll have a little bit of a lingering negative impact there, not at the same extent that we've seen in the past couple of quarters, but it still will be, in all likelihood, a bit on the negative side. We're still seeing cost of transportation elevated and although we can pass much of that on to our customers, there is a delay of varying length and time to when we can actually recover that through pass along charges. And then also our -- some of our other raw material costs in Asia, in particular, but other parts of the world as well will create some headlines -- headwinds for us. Again, those can be passed along to customers, but there's typically a bit of a lag there too before we’re able to get that passed along. So, those are really kind of the big drivers.

[Charlie Strauzer:]

That impacts mostly on the profitability side, right, the pass throughs and all those stuff, right?

[Terry Peterson:]

Yeah. That is correct. That is the profitability side, not the revenue side.

[Charlie Strauzer:]

And how should we think about revenue for Q1 in terms of just trends year-over-year?

[Terry Peterson:]

Pretty flattish overall is really what we're expecting there. I mean, you will have some lift in international, like we just got talking about, but we'll have secular declines coming from some of our print businesses in the variable print side, specialty cards will be down a little bit as well. That had a very -- almost abnormally first quarter last year. So, we don't expect that strength to repeat either.

[Charlie Strauzer:]

That's a pokémon stuff you’re talking about, things like that?

[Terry Peterson:]

Specialty cards.

[Charlie Strauzer:]

Got you. Okay. Great. And then just going back to kind of full year guidance, if you look at -- you gave kind of EPS and top line, how should we think about EBITDA for the year?

[Terry Peterson:]

Yeah. If you look through the pieces of the guidance I gave, you should be able to model that pretty efficiently, but taking the tax rate, the D&A, the interest and taking all that into consideration, the ranges are going to be up some of the top side from last year's actual and down some on the bottom side, but using the data that we gave you there, you'll get into a pretty reasonable range.

[Charlie Strauzer:]

Yeah. Because I am – it’s kind of flattish year-over-year at the midpoint. Does that sound reasonable?

[Terry Peterson:]

That’s not out of line. No.

[Operator:]

Next up, we have David Phipps of Citigroup.

[David Phipps:]

Can you talk a little bit about some of the sales components, because when I look at the strong organic growth you had in the fourth quarter and I guess I'm factoring in continuing growth in the international sector, a little bit surprised to see that the high end of the range was a little bit -- was only as high as it was. So are there things, factors in the strategic services and variable print the transition away from that or are there any big things that are kind of one time-ish during the year that called things out, are you just being a little bit conservative?

[Dan Knotts:]

David, it’s Dan. I would describe our guidance for 2018 as taking a balanced approach. As I’ve mentioned with Charlie's question there, if we look at all of our reporting along the continuum of growth and those that are having secular challenges like forms, so, as we look at the top line, I wouldn’t say there's an anomaly that happened in 2017, but as we look at the top line of growth in Asia and logistics to in particular take Asia, as I mentioned, it’s pretty much predicated on the product performance or the demand for our products go as the demand for our clients' products go in that particular case. So looking at trying to project that for 2018 is always a bit of a challenge. So we’re trying to maintain that growth, but a balanced approach to the growth from an Asia standpoint. Logistics, we continue to expect growth. We saw in Q4, a return in our direct mail business. As Terry mentioned, the financial services performance, but we also had new wins that came into play there, compare that or contrast that to Q4 of ’16 when we saw a sudden stop or decline in direct mail volume. So, there's a bit of a unknown there and we're confident about our position in the direct mail space by taking a balanced approach. As I mentioned, if you jump to the other side and think about commercial and digital print and forms, I mentioned commercial digital print, a challenged -- a bit of a challenged market in terms of the overall demand for that product. We strongly believe we outperformed the market in 2017. We believe we’ll outperform the market and again in 2018. So, there is a number of different factors if we go through each of the individual businesses, but I would describe it as a balanced approach towards top line guidance for 2018.

[David Phipps:]

And then if we can touch on the tax impact, back to more cash taxes, so I believe you quoted maybe $20 million high in cash taxes. Is that kind of one-time or is that in addition to what you would have paid in 2017 if you recast it?

[Terry Peterson:]

That’s really looking at, if we had computed what our tax cash payments would have been under old taxes, under old tax law versus under tax reform, we're seeing that the impact of tax reform is about a $20 million increase. I would say for some years that that's probably going to be more in the line of normal, absent any new and developing guidance coming out from the regulatory bodies or other shifts in where our income is generated. So I'd say that that is more of a norm until we can get past that transition task for the past foreign earnings that that gets paid out over an 8-year period. So obviously, cash payments after that is behind us, we’ll come down because that will be done.

[David Phipps:]

Did you call out what the 2017 cash taxes were?

[Terry Peterson:]

Cash taxes were -- overall for the company were pretty nominal.

[David Phipps:]

Okay. And then when you look out into 2018, are there any unusual restructuring charges or what do you expect the cash pension expenses would be versus what they were in 2017?

[Terry Peterson:]

The cash payments will be flat for pension and will add about $16 million. I think, there was 16.4 million for 2017. So we would say flat there. The income side of that, we actually have pension OPEB income, not net expense flowing through our P&L. That too would be flat at $15 million between ’17 and again in ‘18.

[Operator:]

Next, we’ll go to the line of Carey Bosch of RBC.

[Carey Bosch:]

So I'm a bond holder. I've got a couple of bond holder centric questions. One, previously, you guys had put in your investor presentation that you were targeting leverage of 2.25 to 2.75 turns. I didn't see that in the most recent investor presentation. So I just wondering if that is a target you guys are still committed to and I guess if so, could you provide a little sort of color on how you think you might be able to get there? I think we're at about 3.8 turns now if my math is correct? And then the other question just back to EBITDA, not to be difficult because I know you said we could back into it, but since that’s guidance you guys have specifically provided in the past as far as a range, is that something you're going to be providing going forward or something you're still working on it and not comfortable providing it.

[Terry Peterson:]

Let me go ahead and take that. This is Terry. So, first of all in reference to the leverage, the leverage target, we have not updated that guidance from a few quarters ago, the 2.25 to 2.75 times. And it still does remain a long term target for us. We are very committed and very focused on looking to continue to reduce the both the gross as well as the net leverage for this company as we continue to execute our strategy, but it will take a number of years to, in the absence of a larger event driven opportunity, to reduce, it will take a number of years to do that. So we are looking at continuing to do it through free cash flow generation as well as what other sorts of opportunities or initiatives might we take advantage of that would also help us to accelerate bringing that down. So again, the media focus is continuing to bring that leverage down and we have not updated that long term target of 2.25 to 2.75. And then regarding the EBITDA guidance, we have -- it's not a situation where we're not comfortable providing it, but we have given all the pieces to compute it. So I mean if you look at the ranges between EPS and the range for D&A and the range for interest, you can compute and calculate a very reasonable range that might have looked very similar to something we had published if we had provided that information. So, the data is all there to come up with a range and I think using that at both the top and the bottom end and anything in between would come up with, say, would produce a very reasonable estimate for our EBITDA for next year.

[Operator:]

Next, we’ll go to the line of Bill Mastoris of Baird.

[Bill Mastoris:]

I'd like to follow up on a prior question and Terry maybe you could kind of articulate a little bit about how you're thinking about your debt reduction. You have the 11.25 that are coming due in next February. And if you think beyond that, should we expect that the reduction is going to be in bank debt, which is a little bit easier to do or maybe open market purchases of maybe some of your longer dated bonds, how are you thinking about that?

[Terry Peterson:]

Yeah. I mean, we took the opportunity to opportunistically go and pull out some of our longer term stuff at pretty reasonable rates with the $200 million tender that we did earlier in the year and our focus now, as we start to plan and to look ahead here is to really focus on those more immediate maturities. I would say the 2019s are coming up in first quarter of next year, so that’s our most immediate. Depending on where we're at on the credit facility, we would consider an opportunity just to take those out and put them on the credit facility. That's depending upon really what happens between now and say the next handful of months as we need to finalize those plans, but that is certainly an option, a strong option that is on the table for us. On a day-to-day basis, our focus is on continuing to pay down debt, but that is the bank debt that will come down because it's just easy to take out on a day-by-day basis. As I've said, although we wouldn't consider some opportunistic opportunities to take out some of the, again, focusing on the more current maturities like the 2020s or maybe even the 2021s, we would consider something there as well. First and foremost, focus is on the 2019s and finalizing those plans and obviously the day-to-day stuff on the credit facility and reducing it through credit facility reductions.

[Bill Mastoris:]

And you mentioned a number of other initiatives that also could be used to reduce debt, if maybe you could expand on that a little bit that would be greatly appreciated?

[Terry Peterson:]

Yeah. I mean, I did mention that we always look at other opportunities to monetize parts of our portfolio. That's not just strictly focused on selling a business. That can also include too selling assets where we've got, it’s either an idle or an asset that is -- we can utilize another location or another property more efficiently. So sometimes, consolidation provides opportunities to liquidate things like real estate. You saw -- so those types of things that are the opportunities that we look at that would be more event driven opportunities to reduce our debt and leverage.

[Operator:]

Next we’ll go to Michael McCaffery of Shenkman Capital.

[Michael McCaffery:]

I guess I have a couple. The first is, if I can just follow up on the last question as far as using free cash flow to retire debt. You did use that to pay down some of the term or not the term loan, the revolver during the quarter, but I guess, is there a particular reason why you haven't been more aggressive in buying back some of the longer dated bonds in the open market, given the discount, where those trade and what the return is to take those out at a discount versus paying down the plus 150 revolver?

[Terry Peterson:]

Yeah. Again, we did go after some of those longer-term maturities. And if you recall, when we did the $200 million tender, collection of maturities that we looked at which included the longer-term ones and mid-term ones, we did get those taken out at below par for the group. So, we felt very good about the execution on that tender. And also if you recall, the further start was the 2029s, those were also the biggest discount and as part of that tender and we did not reach our maximum on that. So literally everybody that was willing to turn those into us did. So, so we feel pretty good about having attacked that opportunity pretty aggressively through that tender process from mid-2017. And in terms of going after some of the more opportunistic stuff currently versus paying down on the credit facility, again, we're really looking hard at the options and trying to maintain the flexibility right now to have multiple options for addressing the first quarter 2019 maturity that’s coming up here and having the flexibility on that credit facility to accommodate, not only month end or quarter end balances, but inter-quarter, inter-month balances as well and being able to maintain enough flexibility to have that as an option to retire those bonds by putting it around the credit facility. We're still trying to keep that option very alive. So we've not been aggressively in the open market, actively picking off opportunistic repurchases.

[Michael McCaffery:]

And then I guess just a couple of clarifying questions. As I think about the comments you made during the call, as it relates to international, can you just explain, was the growth driven by a single customer or is it more broad based and is this something that should continue to follow through throughout 2018.

[Terry Peterson:]

Yeah. I mean, our international segment on a top line standpoint had a very, very good quarter. Every single one of our businesses had reported growth, not just the Asia business and certainly not just the one piece of new packaging business that we have talked about quite a bit, but every single one of our businesses actually had reported growth to varying degree. It’s just the Asia piece has just a large part of that overall results. So, we tend to talk about that a little bit more, but we had a really good fourth quarter and we would expect some of that strength to continue, not only in the Asia piece, but other parts as well.

[Dan Knotts:]

Yeah. And just to add to that, as we think about, we talked about the one particular product, which is the new product for us, but in China and Asia, reporting unit, we certainly serve a significant number of clients there. So it’s spread out across multiple clients. Our expectations are continuing to grow there across that broader client base. In addition to what Terry said, we also drove growth in Latin America in our BPO and global turnkey Canada businesses as well. So, a very strong performance overall international, it is not directly tied to just one client.

[Michael McCaffery:]

Would you characterize the growth, the international growth, largely a function of just GDP, I guess not GDP, but the economies in which you operate, just having organic strength and growth as well or is it market share gains that drove that?

[Dan Knotts:]

I would describe it much more as the latter versus the former.

[Michael McCaffery:]

And then I guess just more broadly on balance for 2017, you had made the comment that a lot of the positive impact in the fourth quarter was from clients that you had signed on earlier in the year that were really starting to ramp. On balance, did you add more new clients in 2017 than 2016? How much of the growth is volume versus rate?

[Dan Knotts:]

So I would say in general, you go back to the Q2, Q3 calls we had, we talked a lot about the new wins that we had with clients and we're continuing to try to provide updates on as examples only on our subsequent calls and we’ll continue to do so on our going forward calls. I would say across the company, our overall client base continues to expand and we're looking to, in every single one of those clients, we bring onboard represents through a particular product or service offering, represents a significant opportunity for us to sell our other products and service offerings to them and we are acutely focused on doing that. It's one of the things that we believe differentiates our performance from a lot of others within the industry as once we get those clients in, we have a significant portfolio of products and services to sell to that client base. So new wins, certainly expanding our position through those new wins, number of clients, but also then aggressively going after selling them additional products or services to help simplify the complexity of their supply chain as well as help them reduce costs. And operator, we have time for one more call please.

[Operator:]

Lastly, we’ll go to the line of Ron Gutfleish of Elm Ridge.

[Ron Gutfleish:]

Thank you. I think you answered this later, because, but I want to check. You mentioned with capital deployment that you are possibly thinking of acquisitions. That would seem as a very penalizing thing to do, given that your interest is nondeductible.

[Terry Peterson:]

Yeah. Ron, so like we've talked about in past quarters as well, we're -- we would consider acquisitions that helped us with either cost synergies, take out advancing strategy and the likes, but with the tax reform, you're right, there is another consideration to take into place as we evaluate opportunities and that is what does the interest deduction look like associated with additional debt on the books associated with that acquisition. So, obviously there's a lot of factors to consider there, but where that income is generated, so that is domestic income in a hypothetical acquisition. That would create -- that would open up potentially more interest to be deducted. So it may or may not, again depending on the circumstances and the geography of where that acquisition is, it may be impacted by tax reform or may not be.

[Ron Gutfleish:]

It would seem that the hurdle though would be still, even if it's domestic, you have to do it at a leverage underneath what you get penalized for? And also I thought on tax reform that although you can't deduct interest above a certain level, but that carries forward and backward. So that if you get out of this pickle and if you don't get out of this pickle, it doesn't really seem to be in the call, if you get out of this pickle, you're going to get this back.

[Terry Peterson:]

That is absolutely true that the interest that is not being deducted and causing the rate to go up is something that can be carried forward indefinitely and so again as we look for planning opportunities and looking for ways to get access to that, that will and would provide future tax rate relief for us.

[Dan Knotts:]

And Ron, I would just like add a little bit color to what Terry said earlier, relative to acquisitions, we are going to, as we have in the past and will continue going forward, we're going to continue to evaluate our overall portfolio of businesses and as we look at the capabilities that we need to service our clients going forward and extend our position into newer growth markets, we're going to look at all options of our businesses or all elements of our portfolio, the businesses that make up our portfolio on a going forward basis. So as we think about acquisitions, to answer your specific question, I think the commentary is accurate relative to -- it has to be at a level in which there are opportunities to look at acquisitions, particularly on the cost side buying them at the right multiple and driving the appropriate level of synergies actually help with the interest rate deduction scenario, because of the increased EBITDA relative to the increased interest associated with those particular acquisitions. So we are going to continue to evaluate all of those opportunities as we execute our long-term strategy to drive profitable growth and enhance shareholder value and we will evaluate our portfolio of businesses that we need to do that along the way. Okay. Well, thank you, everyone. Operator, turn back over please?

[Operator:]

Certainly. So with no further questions in queue, I’d certainly be happy to turn it to our host for any closing remarks.

[Dan Knotts:]

Okay. Great. So thank you again everyone for joining us on the call today. I'd like to take a minute to thank our talented team members around the world for your dedication and commitment to serving our clients. Our employees are experts in the markets in which they serve. They develop, implement and execute powerful solutions for our clients, support their marketing and business communication strategies. We have a great team to carry us forward as we continue on our transformational journey. As I mentioned earlier, we are confident in our strategic path as a marketing solutions and business communications company. We're well positioned in our core markets. We're expanding our presence in new growth markets. We’re enhancing our business models. We’re sharpening our go to market execution to support the evolving needs of our clients. We’re aggressively managing our cost to increase our operating performance and cash flow as we invest in our future and improve our balance sheet. We’re entering 2018 as a stronger company with a clear focus on executing our strategy to drive long-term profitable growth for RRD. With that, I'll hand it over Brian for some final points. Brian, over to you.

[Brian Feeney:]

Thanks, Dan. As a reminder, information to access the telephonic replay of R.R. Donnelley’s fourth quarter 2017 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 this morning and that concludes the R.R. Donnelley fourth quarter 2017 earnings call.