R. R. Donnelley & Sons Company
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Welcome to the R.R. Donnelley First Quarter 2016 Results Conference Call. My name is Brandon and I will be your operator for today. [Operator Instructions]. I will now turn it over to Dave Gardella. You may begin, sir.

[Dave Gardella:]

Thank you, Brandon. Good morning, everyone and thank you for joining R.R. Donnelley's first quarter 2016 results conference call. This morning we released our earnings report, a copy of which can be found in the investor section of our website at rrdonnelley.com. During this call, we will refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our annual report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provides you with useful supplementary information concerning the Company's ongoing operations and is an appropriate way for you to evaluate the Company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website, in the investor section, a description as well as reconciliations of non-GAAP measures to which we will refer on this call. We're joined this morning by Tom Quinlan, Dan Leib, Dan Knotts and Drew Coxhead. I will now turn the call over to Tom.

[Tom Quinlan:]

Thank you, Dave and good morning, everyone. I will begin today's call with a brief summary of our first quarter performance and provide an update on the progress we're making to separate R.R. Donnelley into three independent public companies. Following that, I will highlight a few of our operational achievements and then Dan Lieb will discuss our financial performance in detail. From a topline perspective, we faced a challenging demand environment, especially early in the quarter. We responded to this challenge by taking a disciplined approach to our cost structure which resulted in an EBIDTA margin of 9.4% flat to the first quarter of 2015. Looking ahead to the balance of 2016, we expect the year-over-year topline trend to improve and as you saw in this morning's press release, we reiterate the full-year guidance that we provided in February. Virtually since its founding, R.R. Donnelley has embraced change, focused on innovation, developed new products and technologies and served the complex and diverse communication needs of customers from all around the world. Our efforts have resulted in opportunities for continued growth and for generating additional value by separating into three distinct businesses, as we announced in August. Representing a significant milestone in this initiative, on March 31, we filed the required Forms 10 with the SEC for the intended new public companies, LSC Communications and Donnelley Financial Solutions. In addition, in the forms of 10 and in an 8-K we recently filed, we announced the Board leadership, chief executive officers and executive leadership of LSC, DFS and RRD. To recap the information shared in those filings, R.R. Donnelley will continue as a global multichannel communications management provider with approximately $6.8 billion in revenue and more than 42,000 employees worldwide. It will provide an extensive portfolio of capabilities, experience and scale that helps organizations efficiently create, manage and execute their multichannel marketing and business communications. R.R. Donnelley's business strategy will focus on driving profitable revenue growth in each of its core businesses, providing integrated communications solutions for targeted market segments, investing in innovative digital technology and workflow solutions, pursuing strategic acquisitions and business partnerships and optimizing its business performance through service, quality and operational excellence. Dan Knotts will be Chief Executive Officer and Jack Pope will be Chairman of the Board of Directors. LSC Communications will be a global leader in providing traditional and digital print in a comprehensive array of print-related services and will manufacture a wide range of branded and private label office products, with 2015 revenue of approximately $3.7 billion and with approximately 21,500 employees worldwide. LSC will create value across the print and office products segments by executing a business strategy with an emphasis on maintaining sharp focus on cost structure and improving efficiency, further expansion into end-to-end supply chain management, selectively pursuing strategic acquisitions, driving growth in core and related businesses and building our market positions through expansion of office product brands. It will be my privilege to be Chairman and Chief Executive Officer of LSC Communications and Judy Hamilton will be the Board's Lead Director. Donnelley Financial Solutions will be a global leader in financial communication services with 2015 revenues of approximately $1 billion and approximately 3,500 employees worldwide. Donnelley Financial have the opportunity to drive sales growth and create value by expanding the existing range of solutions provided to existing and potential clients, developing new service and products, using technology and operational expertise to drive efficiencies, pursuing selective strategic relationships and acquisition opportunities and focusing on growth and expansion into new markets. Dan Leib will be Chief Executive Officer of Donnelley Financial Solutions and Rick Crandall will be Chairman of the Board of Directors. When the transactions are complete, each Company will have an enhanced ability to focus more intensely on its customers' unique needs. Each will be even more nimble with the ability to anticipate and respond quickly to changing conditions and each will have the talented employees, scale, proprietary solutions and the resources needed to be a leader in their industry. Furthermore, each will have executive teams that will bring exceptional experience and leadership to these Companies. The spinoff transactions remain on track to be completed in October 2016 and the leadership appointments will be effective at that time. While all the spinoff activities are taking place, we remain focused on executing our strategy to support organizations in executing their increasingly complex multichannel communications. An integral and critical part of this strategy is to leverage technology and develop strategic relationships with other industry frontrunners to help sustain our industry leadership and fuel growth. In March, we announced the relationship with Adobe to integrate Adobe Marketing Cloud into our technology platform. Their solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences for superior marketing performance. Our relationship with Adobe positions us to deliver an exceptional broad set of marketing solutions and services to our customers. The joint solution enables our customers to reach their audiences with connected communications across multichannel and devices and provides the tools to help increase engagement and manage brand consistency. As you know, our offering includes photography, videography, creative and editorial, digital media interactive services, digital publishing, cloud-based automated marketing, prepress and art production and workflow solutions. By combining the features and capabilities of the Adobe Marketing Cloud with this array of services, we advance the ways in which we effectively deliver enhanced technology and solutions that fit with the increasingly sophisticated communications needs of our customers. Industry-relating technology tools are drivers across the entire R.R. Donnelley product and service offering. For example, our Language Solutions group provides comprehensive language support for organizations worldwide. This team refines the translation and globalization initiatives of our customers using MultiTrans, our proprietary and innovative translation management system technology. This system ranked as a market leader in translation technology by independent market research firm Common Sense Advisory, generates significant cost and time savings while improving both the consistency and quality of the translation. The services provided by our Language Solutions group are particularly critical in today's highly regulated global financial markets. We offer clients specialized expertise in meeting the demanding and fast-changing regulatory requirements inherent in the banking, asset management and insurance areas. For example, we're currently supporting a number of clients in their preparations for an important new European regulation pertaining to packaged retail investment and insurance products. This important regulatory change presents many challenges for our clients, including the requirement to meet these demanding regulations in less than nine months' time. The companies in scope of this regulation are faced with the task of producing large volumes of documents in multiple languages following a very specific template. The documents must also be made available in print and online. Not only are we providing the necessary translations on behalf of our customers, we're participating in sessions with European regulators to make sure we're up to speed on the regulatory changes. Based on our language expertise and in-depth understanding of regulations, the Language Solution group was selected to create the translations of the official regulatory templates as well as the related online glossaries of terminology. In addition to supporting our customers' multilingual communication needs, our financial services group provides the technology and expertise to help our customers create, manage and deliver a myriad of accurate and timely financial communications. Across a spectrum of vertical markets our specialized areas of expertise and our supporting technology enable our customers to quickly and efficiently adapt to the fast-changing conditions of their industries. For example, our investments in digital print solutions for book publishers have helped to transform the book supply chain, bringing innovation and new levels of performance to book production and distribution, by streamlining print production and associated costs, projects can be economically produced in smaller quantities and on shorter schedules than ever before. Our digital book print centers use HP digital presses as well as our proprietary ProteusJet high-speed inkjet presses to provide publishers with a flexible and truly integrated book production model. Our publishing customers are able to order in quantities that are in keeping with actual demand, thereby reducing warehousing costs, minimizing obsolescence and increasing inventory turns. Using a digital print model allows a publisher to reduce inventory and keep titles in print longer. Our customers are able to maintain a more extensive library of current and backlist titles which creates more selling opportunities in the marketplace and enhances revenues. In fact, over a five-year period utilizing digital print, one of our midsize publishing customers reissued 1300 titles that had previously fallen out of print and reduced inventory by more than 30%. Earlier this year we were awarded an exclusive multiyear agreement by a leading education technology organization that provides instructional tools, data analytics and assessments to K through12 market. The Company offers both printed and digital curriculum products to teachers, students and parents. R.R. Donnelley was selected as their primary print and print-related supplier owing to our complete range of print, [indiscernible] product design, warehousing and distribution services. We helped to manage this organization's complex and diverse suite of education products with a breadth of services that include short- run digital print, long-run offset print, product design consultation, inventory management and sourcing of items such as manipulative tools for teaching. And our sophisticated reporting tools are used to identify optimal inventory levels across the board. In keeping with today's evolving education technologies, this customer, a technology-based digital provider of educational information, saw value in using an integrated blend of educational tools that incorporate both digital and print. R.R. Donnelley is ideally positioned to respond with an entire spectrum of services to produce, deliver and manage their printed books and related materials from beginning to end. As we go about our work to support and produce our customers' integrated communications around the world, we never lose sight of our responsibilities to be a good corporate citizen. Last month in recognition of Earth Day, we issued our annual global social responsibility report on our website. This report highlights the many things we're doing around the world to continue to make our operations more sustainable and more efficient. Every day we challenge ourselves to enhance and expand our environmental and socially responsible practices. Promoting positive social and environmental change drives business growth, builds customer loyalty and supports employee engagement. Our success with these initiatives supports our belief that good sustainability practices and good business practices go hand-in-hand. As we've said before, safety is the most important job at R.R. Donnelley and our commitment to this principle is measurable. Recently we proudly reported that another of our facilities was recommended to recertification to Voluntary Production Program Star Status by the Occupational Safety and Health Administration. VPP Star Status is given to companies with exemplary safety and health management systems. It's an accomplishment that directly demonstrates our commitment to working safely and careful attention to detail and exceptional teamwork. Earning the initial VPP certification is a highly demanding process, but recertification adds the challenge of demonstrating continuous improvement. These safety achievements contribute to our outstanding quality and efficiency and are one reason why we consider safety to be a key measure of operational excellence. And now Dan Leib will provide information on our financial performance. Dan?

[Dan Leib:]

Thank you, Tom. As with prior quarters, the focus of my comments will be on certain non-GAAP results and measures. Please refer to the support schedules of our earnings release for a reconciliation of GAAP to non-GAAP results for the first quarter. Our first quarter results were in line with our expectations. Revenue of $2.7 billion represented a decline of 3.4% from the first quarter of 2015. Adjusting for an unfavorable impact of changes in their foreign exchange rates as well as the impact of acquisitions, dispositions and pass-through paper sales organic revenue declined 3.1%. Volume declines in the Variable Print and Strategic Services segments as well as continued price erosion in our Publishing and Retail Services segment were only partially offset by volume increases in our international segment. First quarter gross margin was 21.5%, 36 basis points higher than the first quarter of last year, driven by cost-control initiatives across the Company, the positive impact from changes in foreign-exchange rates and the impact of the Courier acquisition partially offset by price erosion. SG&A expense in the quarter was $319.1 million. As a percentage of revenue, SG&A was 12% or 37 basis points higher than the first quarter of 2015, driven by negative operating leverage related to the decline in revenue and higher legal reserves recorded in the quarter, partially offset by higher pension income. Our first quarter non-GAAP adjusted EBIDTA was $250.2 million compared to $259.3 million in the first quarter of 2015. Non-GAAP adjusted EBIDTA margin in the quarter of 9.4% was flat to the first quarter of last year. First quarter non-GAAP operating margin of 5.4% increased nine basis points from the first quarter of 2015. Our non-GAAP effective tax rate in the quarter was 36.7% or 278 basis points higher than the first quarter of 2015. Now I'll discuss revenue and non-GAAP adjusted EBIDTA performance for each of the segments in more detail. First quarter revenue on our international segment was $518.7 million, declining by 6.7% from the first quarter of 2015. More than all of the decline was a result of unfavorable changes in foreign-exchange rates and the disposition of our operations in Venezuela, Austria and Switzerland. On an organic basis, we achieved positive revenue growth of 1.9%, driven primarily by volume increases in Canada. The non-GAAP adjusted EBIDTA margin in the segment of 8.9% improved 143 basis points from the first quarter of 2015, driven by favorable revenue mix in Canada, the positive impact from changes in foreign-exchange rates and productivity initiatives across the segment which were partially offset by price erosion and wage and inflationary pressure, primarily in business process outsourcing and Asia. Revenue in our Publishing and Retail Services segment was $596.3 million, an increase of 3.9% from the first quarter of last year. After adjusting for the impact of the Courier acquisition as well as the 210 basis point decline related to lower pass-through paper sales organic revenue declined 2.2% year-over-year, primarily due to continued price pressure. Non-GAAP adjusted EBIDTA margin for the segment of 9.6% increased 79 basis points from the first quarter of 2015, primarily as a result of the impact of the Courier acquisition and ongoing productivity initiatives which were partially offset by price erosion. Revenue in our Variable Print segment was $901.8 million, a decrease of 5% from the first quarter of 2015. On an organic basis, year-over-year revenue declined 4.7%, driven by lower volume and price erosion across most of the segment. While the trend in commercial and digital print organic revenue improved from recent quarters, lower volume resulted in an organic decline of 4.5%. Forms and Labels also experienced continued volume declines in line with the last couple quarters. The segment's non-GAAP adjusted EBIDTA margin of 11.6% in the first quarter was flat to the first quarter of 2015. Revenue in our Strategic Services segment was $634.6 million in the first quarter of 2016, a decrease of 4.9% from last year's first quarter. On an organic basis, year-over-year revenue was down 5.7%. In our financial offering, the overall organic decline was 10%, driven by soft domestic and overseas capital markets volume. Though our logistics offering reflected increased volume in freight brokerage organic revenue in logistics was down 2.3%, driven by a decline in fuel prices which negatively impacted revenue growth by approximately 460 basis points and lower pass-through postage revenue that negatively impacted growth by approximately 350 basis points. Our digital and creative services offering reported organic growth of 7.8%, driven by higher volume in the book publishing offering that was part of the Courier acquisition. Non-GAAP adjusted EBIDTA margin of 9.4% for the Strategic Services segment decreased by 174 basis points from the first quarter of 2015, primarily due to lower volume and unfavorable business mix, partially offset by our ongoing productivity initiatives. Our first quarter 2016 non-GAAP unallocated corporate expenses were $17.8 million, relatively flat with the first quarter of 2015 as higher legal and incentive compensation costs were offset by higher pension income. Free cash flow in the quarter was negative $240.9 million or $48.1 million lower than the first quarter last year, primarily due to working capital being a higher use of cash as well as approximately $15 million of spin-related costs. Our controllable working capital rate which we define as accounts receivable plus inventory less accounts payable, was 14.2% of revenue, an increase of 40 basis points on a like-for-like basis when adjusted for the impact of the Courier acquisition. First quarter capital expenditures were $48.1 million, relatively flat to the first quarter last year. On a full-year basis, we expect free cash flow in the range of $400 million to $500 million, unchanged from our previous guidance. As of March 31, 2016, our gross leverage was three times, flat to a year ago. We continue to target gross leverage in the range of 2.25 to 2.75 times on a long term sustainable basis. We ended the quarter with $1.2 billion of net available liquidity and $145 million drawn on our $1.5 billion revolving credit facility. From 2016 to 2018 our annual average maturity is $240 million with our next maturity of $220 million due in August of 2016. As it relates to the spinoff process, we're progressing well against our plans with no material changes to our expected costs or project timing. During the first quarter, we recorded $11.9 million of spinoff-related expenses and, as I noted earlier, we spent approximately $15 million of cash on spinoff-related activities. Project to date, we have recorded $25.5 million of spinoff-related expenses and expended $26.7 million in cash. As Tom noted earlier, we completed the initial Form 10 filings for each of LSC Communications and Donnelley Financial Solutions at the end of March, announced executive leadership in April and we remain on track for an October effective date. Before I recap our 2016 full-year guidance, I'd like to note a pending impact to our pension plan. During the fourth quarter of 2015, we communicated to retirees the option to receive a lump-sum pension payment or annuity with payments beginning in the second quarter of 2016. To the extent eligible individuals elect the option to receive a lump- sum pension payment or annuity, our pension obligations will be reduced. We expect to record a significant non-cash settlement charge in the second quarter of 2016 in connection with the settlement payments. While the amount of this charge will depend on how many individuals elect the option to receive a lump-sum pension payment or annuity, as well as the discount rate and asset values on the settlement date, we currently expect the non-cash charge to be in the range of $90 million to $100 million. Lastly, as highlighted in this morning's press release, we're reiterating the full-year 2016 guidance that we previously provided. Our guidance represents full-year operations for the current R.R. Donnelley as one Company and excludes one-time costs related to the spinoff transactions. At the time of the spinoffs, we will classify the two Companies that are distributed as discontinued operations. While there's no change to our guidance, I'll recap our expectations. We expect revenue in the range of $11.3 billion to $11.5 billion. At the midpoint this implies organic revenue growth of 1.1%. We expect our non-GAAP adjusted EBIDTA margin to be in the range of 10.4% to 10.6%. Depreciation and amortization is expected to be in the range of $430 million to $440 million. We expect interest expense in the range of $260 million to $270 million. Our full-year non-GAAP tax rate is expected to be in the range of 34% to 35%. We project the full-year fully diluted weighted average share count to be approximately 211 million shares. Regarding CapEx and free cash flow we expect capital expenditures in the range of $200 million to $225 million and free cash flow in the range of $400 million to $500 million. And with that, I'll turn it back to Tom.

[Tom Quinlan:]

Thank you, Dan. While there's still much work to be done on the establishment of three independent organizations, our day-to-day focus remains constant. Without exception, we will continue to provide our customers with outstanding service and remain committed to the highest standards of ethics, integrity and sustainability. We're extremely grateful to our employees for the exceptional standard of customer care they provide, their commitment to operational excellent and their ongoing focus on working safely. Without their support, our ongoing industry leadership and our ability to drive valuable change would not be possible. And with that, operator, let's open it up for questions.

[Operator:]

[Operator Instructions]. And from CJS Securities we have Charles Strauzer online. Please go ahead.

[Charles Strauzer:]

Dan, this is for you, but I know you mentioned that financial was down 10% year-over-year. If you back that out, what would have organic growth or lack of growth, I should say, look like overall for the Company?

[Dan Leib:]

Sure. Excluding financial, we would be at 2.4% negative which would be improved performance from the fourth quarter which again, excluding financial, would be 3%. And that would be a trend better than the third quarter of 2015 as well and so, as many of you are aware, there were no IPOs in the month of January. There were 11 in the first quarter that priced which is really the slowest beginning to the year of 2009 represents being down roughly 73% from the first quarter of 2015. Really the story in the financial business was just a lack of transactional work in the marketplace. We saw relatively flat performance in our investment management business and our data room business continued to grow nicely.

[Tom Quinlan:]

Charlie, just to keep going on that. If you think about that type of margin work that we had that wasn't there, the fact that we're able to keep the EBITDA margin at 9.4%, we're pretty excited over that and we had some what I'll call, a couple of legal bad guys in the first quarter that were cleaning up as we're going through the spin. So we're really happy with the performance during the quarter.

[Charles Strauzer:]

And I think keeping the margins flat was a pretty good testament to your ability to take the cost out of the business to offset lower revenue there. Just looking at Q2 a little bit too, in terms of trends in the various segments. What are you seeing so far in Q2 and how should we think about modeling out Q2 revenues and margins?

[Dan Leib:]

Again, if you look and see at the earnings that are coming out right now by a lot of companies, I think obviously no one is happy with what the Aussies did today, but you look at the top, there's topline growth by a number of companies and all across the vertical and we're seeing that better than where it was. Obviously with our guidance that we're giving, we would need to have topline performing better than it did in the first quarter. And as we're going through the second quarter here, we're seeing that combined with the fact that we have - again, I go back doing this for a number of years. You've got a presidential election. You've got the Olympics and you've got the European soccer championships which have always been good in the back half of the year for our industry. And no matter what type of communication now because of the way we've taken the Company from a communication standpoint, whether it's physical or electronic distribution of the content, we're going to be playing in it. So we feel good with all the craziness going on. And you haven't heard me say that in a long time, but I think the platform is ready to take advantage of the growth that we're seeing here in the states.

[Charles Strauzer:]

And lastly, when you look at the spins as you start approaching October, when do you think we should start seeing some individual slide decks or more granularity as to how out build out those models going forward?

[Tom Quinlan:]

As Dan talked about, we filed the Forms 10 with the SEC. We've got to get those back, go through those. Sometime I think towards end of second quarter, beginning of third quarter. Somewhere around there. Again, I think the thing that - as we start to get closer to it, the thing you should think about all three of these businesses is from a technology standpoint, I don't have a clue which technology is going to be the next one to disrupt the market and our customers. But I do know, if you look at the three Companies that we've created, we have the technology capabilities to extend the distance between ourselves and our competitors to serve our customers' needs because of the technology we have developed, whether it be what we talked about today with MultiTrans or the Black Chain announcement we made earlier last month or our arc reporting for Financial Services group that's using the investment management industry, we've laid the foundation to compete against new competitors and enable our customers to leapfrog their competitors. So we've institutionalized technology innovations here with creating the three Companies you're going to start to see roll out more and more as we go through the year. We're going to be able give each of those Companies the human capital it needs as well as the financial capital that it's going to require to accelerate the growth. So, again, we feel good about that.

[Operator:]

From Macquarie we have Jamie Clement online. Please go ahead.

[Jamie Clement:]

So, Tom, I do have a question about financial print and I will get to that in a second, a follow-up to Charlie's question, but the first thing I wanted to ask about was publishing and retail. Topline ex pass-through paper that is actually one of the better quarters I think you guys have reported in recent history. I know you guys referred to the Pearson transaction or arrangement a couple months back. It sounds like that was what you referred to in your prepared remarks here. Was the books business a real good performer this quarter?

[Tom Quinlan:]

Yes, the book has been - look, it's an area, as you've seen with the Courier transaction and bringing them together with the Donnelley platform, we're emphasizing the book platform as you think about long-run print. It is paying dividends for us. And, again, I think when you think about long-run print, the areas that we're participating in aren't doing as bad as maybe some other areas of long-run print are doing. So as you think about that too, we think we're going to be able to bring additional services and capabilities to the publishing community as we go throughout the year. It's been an industry that's outsourced, started out insourcing everything and then slowly but surely has outsourced, whether it's printing, distribution, warehousing. What other functions there can we go ahead and take advantage of and given our skill set and what we've done here, we feel pretty good that we can continue to help publishers take cost out of their business and make them more efficient. We feel pretty good as far as how the first quarter went there.

[Dan Leib:]

Just to add to that, Jamie, it is the best performance in a segment level in a couple years, as you noted. And within [indiscernible] retail was better than trend as was directory, so really all three of the reporting units contained in this segment had better than trend performance.

[Jamie Clement:]

And Tom or maybe Dan Leib, since you're going to be running that business going forward, on financial print, back when Bound was public on its own and when financial print was a larger piece of R.R. Donnelley, many, many, many years ago, when we saw quarters like this, the deleveraging on the P&L at the EBITDA line was sometimes, I mean, it got severe sometimes. And I think that, given the lack of capital markets activity in the first quarter, can you talk a little about what the cost structure of transactional financial communications looks like these days versus the way some of us might have remembered it 10 years ago when Bound was a public Company? How are you able to get costs out so quickly and really avoid a really nasty EBIDTA line in a quarter like that?

[Dan Leib:]

Sure. Yes. That's a great, great question. A lot of activity and efforts really going back to the early 2000s from the team that made - variabilized as the cost structure much more. As Tom said, that is a higher margin offering done a lot via using external resources via the way we've set up the infrastructure to take costs out. And then with the addition of some of the tools that we have, it's become much more of a service business and moving to the software side. So you look at tools like our venue data room product which I mentioned had a nice performance. That obviously impacted by the M&A environment, but even in the environment we were in had nice performance and then we broadened the business out via Language Solutions. We also have a little bit of a different mix than what Bound had in terms of our mutual fund or funds business which is a much more stable producer. So we have some sets in the business and we've taken a lot of activity on the cost side to variabilize that cost structure.

[Operator:]

From Shenkman Capital Management we have Michael McCafferty online. Please go ahead.

[Michael McCafferty:]

I wanted to clarify. As far as getting a pro forma view of the three segments, is that something you're not able to provide that yet? And when will you be able to provide that, even just on a quarterly basis, so we can get a sense for the health of the three segments at their--?

[Tom Quinlan:]

I'm sorry, Mike, are you asking on a capital structure or--?

[Michael McCafferty:]

No, I'm talking operational. Just revenue and EBIDTA, because obviously some parts of Strategic Services are going into FinancialCo and parts of--

[Dan Leib:]

Right. So the Form 10s which are out there now obviously provide visibility into each of the spun entities. And then as we get further in the process, we will be providing more information on capitalization, et cetera.

[Tom Quinlan:]

There's very little movement between what we're going through today - there's some, but not what I would call dramatic that you couldn't take a look at what we've got going on today to take a look at that as we report.

[Michael McCafferty:]

I guess maybe then just to follow-on, if I look at Strategic Services, you're indicating a big part of the reason this was down so much in the first quarter was due to financial. Obviously that's going to be going away from RRD to FinancialCo. Obviously Strategic Services as it's going to stay in RRD, trying to understand the health of that versus just what's happening in the financial landscape. And I guess a similar question in terms of Variable Print. Obviously that's been pretty weak over the last four quarters. I'm trying to understand which parts are going to stay with RRD and how they're doing versus the parts that are going to go over to LSC Co.

[Dan Leib:]

Right. I think the Form 10 is probably the best because it is in the new format, et cetera. As it relates specifically to the quarter, so we mentioned on the call that logistics posted revenue that was down 2.3% organically; however, had a couple impacts in there, one being fuel surcharge and one being postage pass-through that impacted growth negatively by 800 basis points or so. On an adjusted basis, it's performing a little bit lighter than we've done in past years where it was growing at 10%, but still has mid-single-digit to high-single-digit type of growth. And then as it relates to the Variable Print Segment, the one offering that is moving out is office products and that was down roughly 6% organically in the quarter. And, again, if you go back to 2015, 2014, 2013, are all represented in the Form 10s as will exist post-spin.

[Tom Quinlan:]

And, Mike, I think commercial and digital print you're going to see us have better results there as we continue throughout the year for the reasons that I stated earlier. And I think the new Management team that's in there is doing a heck of a good job and we're going to see some good things out of them as we go through the second and third quarter.

[Michael McCafferty:]

And just on logistics, is it just volume was lighter in the first quarter and is this one of the areas where you saw an improvement over the course of the quarter as well?

[Dan Leib:]

Yes. So the couple of things that I called out in terms of fuel surcharge, we've seen for a number of quarters. We start to lap that as you look at fuel pricing, as we get to the latter part of the year. The post-it side was somewhat new to the quarter. We did mention a couple of areas that we saw good performance in, so I would characterize it as largely attributable to those two things I mentioned. And as you look through those two things, you get to growth that is roughly in line, a little bit lighter than we saw previously, but nothing that we would call a change in trend to the logistics business.

[Michael McCafferty:]

And then on the front part of the question though, is this an area where you saw pickup over the course of the quarter and into the second quarter?

[Dan Leib:]

Yes. We generally saw across the platform that dynamic, as we mentioned. And I'd have to look - I don't have the detail in front of me to make that comment specific to the logistics business. I don't know if, Dan, you do?

[Dan Knotts:]

No. The only other thing I would say is I think it's fair to say that as the print volumes - because a lot of the print volumes that we're producing, as the print volumes are showing that trend forward and as we're distributing those print volumes that would flow through to the logistics platform as well.

[Michael McCafferty:]

And I don't have a full cash flow statement, but was there a particular reason - I'm speculating working capital was a bit heavier than normal for first quarter, just given the free cash flow burn?

[Dan Leib:]

Yes. Correct. There were about $15 million of spin-related cash that went through the cash flow statement in the first quarter. Even adjusting for that, working capital was a higher use in the first quarter.

[Michael McCafferty:]

Okay. And then is it still your intention that - obviously the high-yield markets are still pretty volatile, especially as it relates to your credit. Are you still of the opinion if rates are not where you want them to be in the fall that you'll sit tight and just run three businesses versus coming to market?

[Tom Quinlan:]

Yes. I think, as we said previously on the last call, we're going to separate these businesses out so they are going to be segmented reporting to your earlier questions where you stayed on top of was that will take place, come the fourth quarter, whether the markets are there or not there. And if they're not there, we will wait till they get there and we'll go from there.

[Operator:]

We have a follow-up from Jamie Clement. Please go ahead.

[Jamie Clement:]

Just a quick follow-up on the logistics business comments. To the extent that your logistics business is in some cases operating as a legit 3PL the way other public company 3PLs are operating, if trucking capacity is loose and rates are down, that's revenue that you can't pass along. In other words, your revenue, just like fuel, is going to be negatively impacted by that. Am I thinking about that right too? You may not be collecting much of a margin on that pass-through but that's still a factor to consider here, right?

[Dan Leib:]

No, it's cost. It comes down to just from the cost standpoint of what we're dealing with.

[Jamie Clement:]

Right. No, but what I'm saying is if the cost to outsource some freight to a third-party trucking company, if their rates are down, you're likely charging your customers less to move that freight because, you know what I'm saying? That's going to impact your topline, right?

[Dan Leib:]

It will.

[Jamie Clement:]

And it may not impact your profitability, but that's a pass-through almost like paper on the print side or even fuel, right? Am I totally off-base on that?

[Dan Leib:]

No. You're correct. The way to think about it is exactly as you stated which is it's an asset-light business. Very good returns on capital. The margin dynamic is reflective of being an asset-light business and so, to your point, revenue drops, but without much impact--

[Jamie Clement:]

The margin, exactly. The EBIDTA is the same but the optics of the topline may look a little worse, right?

[Dan Leib:]

Correct.

[Tom Quinlan:]

Thank you, everybody, for joining us. We hope everybody has a great spring. We'll see you in 90 days and, again thank you for your support.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.