R. R. Donnelley & Sons Company
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Welcome to the R.R. Donnelley Third Quarter 2016 Results Conference Call. My name is Corry and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, 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, R.R. Donnelley Senior Vice President, FP&A, and Investor Relations. Brian, you may begin.

[Brian Feeney:]

Thank you, Corry. And thank you everyone for joining R.R. Donnelley’s third quarter 2016 results conference call. Joining me on today’s call are Dan Knotts, President and Chief Executive Officer; and Terry Peterson, Our Chief Financial Officer. On the call this morning, we will be discussing the new R.R. Donnelley’s third quarter financial results and the vision and strategy for the Company going forward. And at the conclusion of today’s prepared remarks, we will take questions. Yesterday afternoon, we filed our third quarter 2016 Form 10-Q with the Securities and Exchange Commission. As a reminder, this filing reflects the consolidated results of R.R. Donnelley before the impact of the spin-offs of LSC Communications and Donnelley Financial Solutions, which we completed on October 1st. With the spin-offs completed on October 1st, our 10-Q for the third quarter was required to be filed on a consolidated basis, which included LSC and Donnelley Financial. Beginning in the fourth quarter, we expect to be able to show results from the new R.R. Donnelley on a continuing operations basis excluding LSC and Donnelley Financial. This would be more representative of the new R.R. Donnelley as a standalone company. We also filed a current repot on From 8-K yesterday that included supplemental information on the 2016 year-to-date results of operations for the Company, reflecting the operations of LSC and Donnelley Financial as discontinued operations as well as select balance sheet information. With this 8-K, we have attempted to provide supplemental financial information within the guidelines of the SEC and GAAP rules. A copy of these released filings can be found in the Investors section of our website at rrdonnelley.com. Our focus on this call will be on the new R.R. Donnelley after giving effect to the recent spin. 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. In addition, our actual results could differ materially from our current expectations. For a complete discussion on the factors that could cause our actual results to differ materially, please refer to our annual report on Form 10-K, our quarterly report 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 R.R. Donnelley’s ongoing operations and is an appropriate way you to evaluate the Company’s performance. They are however provided for informational purposes only. Please refer to 8-K filed yesterday or the fourth quarter 2016 investor presentation available on our website and furnished to the SEC both of which contain description as well reconciliations of a GAAP to non-GAAP measures which we will refer to on this call. I now will turn the call over to Dan.

[Dan Knotts:]

Great. Thanks, Brian, and good morning, everyone. On October 1st, R.R. Donnelley completed its previously announced tax free spin-offs of its publishing and retail centric print services and office products business LSC Communications and its financial communications and data services business Donnelley Financial. I would like to take a moment to recognize all of the employees across R.R. Donnelley who have worked incredibly hard to ensure a timely and seamless execution of the spin-offs of LSC and Donnelley financial. Since the spin-off transactions were announced in august of 2015, our teams have accomplished an incredible undertaking and the onetime completion of these spin-offs as a tribute to dedication, commitment and can-do attitude of the people at R.R. Donnelley. October 1st began a new era for R.R. Donnelley, and I would like to outline the future direction of our Company on our call today. I’ll begin with the brief summary of our third quarter performance and then I’ll take a few minutes to talk about the vision and strategic priorities for the new R.R. Donnelley. Following that Terry will discuss our financial performance in more detail and then we will open up the lines for Q&A. I am pleased with our results for the quarter as our quarterly sales performance trend continue to improve from the beginning of the year, our operating margin from continuing operations improved over the first half of the year, and we successfully completed our $800 million bond tender at the end of the quarter. More specifically on each of these points. Our total net sales from continuing operations of 1.73 billion were slightly favorable and our organic sales were essentially flat compared to the third quarter of 2015. Our sales performance in the quarter is a continuation of a sequential trend improvement that we experienced in each of the first two quarters of 2016. Our flat year-over-year organic sales were driven primarily by higher volumes in our commercial and digital print, logistics, Asia and Canada reporting units offset by softness in our smaller reporting units. Our operating income from continuing operations was $84 million and our non-GAAP adjusted EBITDA was $127.4 million or 7.4% of sales, which represents a 110 basis-point improvement over the first half of 2016 non-GAAP adjusted EBITDA margin of 6.3%. Finally, during the quarter, we successfully redeemed a portion of our outstanding debt, using the proceeds from the debt issuances by LSC and Donnelley Financial. The repurchase of almost $800 million of debt plus the additional redemptions in October and November provide us with a more attractive long-term debt maturity profile. With the spin-offs of LSC and Donnelley Financial now complete, our vision for R.R. Donnelley is to further extend our position as a leading global provider of integrated multichannel marketing and business communications that enhance audience engagement and drive business performance. With our extensive portfolio of multichannel communications solutions, as well as our significant supply chain, business process outsourcing and logistics capabilities, we enable companies around the world to effectively create, manage and execute their marketing and business communication strategies. Given the importance of our go forward vision, I would like to further emphasize a few of the key words that define our distinctive offering and differentiate R.R. Donnelley in the markets we serve, staring with multichannel. We have developed a comprehensive portfolio of multichannel capabilities including creative and design, hosted managed services, data analytics, digital interactive experiences, ePresentment, content management and much more. And we will continue to expand our multichannel services in support of our customers’ evolving communication requirements. Second is integrated. To more effectively communicate in a multichannel world, digital and print communications should work together, and we are seeing increasing customer demand for solutions that integrate their digital and print processes. Our multichannel capabilities from content creation to content management to content distribution are interconnected and are provided to our customers as integrated offerings, improving the overall efficiency of our customers’ communications supply chain. Finally, marketing and business communications. We are focused on every marketing and business communication that our customers utilize to drive meaningful connections with the targeted allowances. Starting with the single digital image or unstructured data for business statements all the way through to a final package that’s delivered to a store or to the consumer’s door as well as every marketing and business communication that’s sent to an inbox or to a mailbox, R.R. Donnelley is capable of managing the entire communications supply chain for our customers. With nearly $7 billion in sales which would have ranked us as number 255 in the 2016 Fortune 500 listing of America’s largest corporations, R.R. Donnelley will continue to operate with significant scale, serving over 52,000 customers through our 377 locations in 28 countries around the world. Given that our mission, which is to enable the future of innovative communications remains firmly intact, everything we do will center around providing innovative multichannel communications solutions to help our customers effectively connect with their audiences. We’re excited about our future as a leading provider of integrated multichannel marketing and business communications solutions, and we are confident in our ability to deliver value for our stakeholders, mainly for the following four reasons. First, our market opportunity; second, our significant customer base; third, our unmatched portfolio of capabilities and operating scale; and fourth, our focus on innovation. And I’d like to further expand on each of these points. Starting with our market opportunity. We operate in a large and growing commercial printing market that was valued at $462 billion in 2014 and is expected to grow to $509 billion by 2019. Served by a fragmented supplier base around the globe, it is a market that continues to evolve with ongoing advancements in technology, changing the ways in which we as consumers want to be communicated with, ways that no longer aligned with traditional marketing, brand execution and consumer engagement models. Today’s consumers expect personalized, high touch and gratifying communication experiences at every turn. Every company and every industry is wanting for consumers’ attention as they speak to create meaningful connections to drive brand loyalty and ultimately capture a greatest share of their spending. As a result of these ongoing changes and the very large market that we serve, R.R. Donnelley is well-positioned to support evolving customer demand for cost efficient solutions for print and digital that increase the overall effectiveness of their marketing and business communications. Second is our significant customer base and longstanding customer relationships. R.R. Donnelley is a recognized industry leader, serving over 52,000 customers, ranging from small companies on Main Street to the largest companies on Wall Street including 97% of the Fortune 100. Whether large or small, many of our customers are challenged to create, synchronize, and deliver their content across a complex maze of channels that will grab the attention and meet the expectations of their targeted audiences. There are three key themes being discussed by our customers that define their challenges. Managing their multichannel digital and physical communications continues to become more complex especially those who have built independent processes; improving the effectiveness of their communications remains a challenge; and they are seeking more cost-effective ways to connect with their customers. Every day, customers at industries including automotive, beauty, grocery, telecommunications, retail, healthcare, financial services, banking, technology and more, all of which have significant knowledge of their markets and their customers, rely on R.R. Donnelley for the vast knowledge and deep expertise we have gained through the years of working side by side with our customers across a broad and diverse set of industries to solve their communication challenges. Third is our extensive portfolio of integrated capabilities and operating scale. We have an industry-leading portfolio of products, services, expertise and operating scale to help organizations efficiently manage the full spectrum of their marketing and business communications strategies. With our core capabilities including creative and design, content management, digital and print production, supply chain management, business process outsourcing, and logistics services, our customers turn to R.R. Donnelley because they recognize that we have the proven ability to provide cost-effective and the integrated solutions. Importantly, however, we also recognize that not all of our customers are ready for fully integrated multichannel solutions. These customers may want to buy single products such as direct mail, statements, commercial print, labels, packaging or logistic services. Regardless of our customers’ preferences or buying strategies, we have the ability to efficiently serve companies of all sizes around the globe with individual products or comprehensive solutions for their marketing and business communications. As our customers’ needs evolve, we will be there with our integrated offerings to provide increasing levels of value-added services in support of their communication strategies. Finally, innovation. It’s at the core of what we do. As communication preferences change with the ongoing advancement of technology, it is critical for our customers to have access to the latest in communication technology. R.R. Donnelley will continue to place a very high priority on developing and integrating innovative products and services to help our customers reduce cost, shorten time to market and create stronger brand integrity. As an integral part of our innovation focus, we will develop and leverage our own proprietary technology as well as utilize strategic relationships with leading technology companies, to provide innovative solutions that effectively deliver impactful communications. Examples of R.R. Donnelley’s commitment to innovation are the new products coming out of our print electronics group. These innovative products range from power to in-store marketing signage that elevates brand messaging with lighted shelf talkers to grab consumers’ attention to a new set of products that we branded under the name CustomSense. Our CustomSense temperature indicators and data logging solutions are designed to provide cost effective, cold chain monitoring for the food and pharmaceutical industries. We are enabling communications and the management of information not only through words and images but with our breakthrough technologies that allows us to create functional electronic signage. The combination of our leading position in a larger and evolving market, our significant customer base that’s challenged by the growing complexities of mono [ph] channel communications and extensive portfolio of integrated multichannel products and services, and our strong commitment to innovation frames our five strategic priorities which are as follows. Driving profitable growth in each of our core businesses; extending the range of our unparalleled capabilities, product and service offerings to fuel organic growth from our global customer base; continuing the expansion of our print and digital technology platforms with innovative content management, data analytics and multichannel capabilities for targeted markets; optimizing our business performance through service, quality and operational excellence; and maintaining a disciplined approach to capital allocation. We are proud of who we are and what we do because every day through the efforts of the dedicated and talented employees at R.R. Donnelley, we are creating, managing and executing communications that are connecting people around the world with the power of words and images for providing complex, effective and impactful communications that inform, that entertain, that educate, that inspire, and that sell. Communications that maximize how a customer’s brand connects with our audience, whatever the channel, the message, the format or the device. From the electronic message to a delivered package, every communication is a critical touch point that reflects on the Company’s brand and reputation. As a leading provider of integrated, multichannel, marketing and business communications solutions, R.R. Donnelley is firmly committed to assisting our customers around the world to create, manage, and execute their communication strategies. Now, I’ll turn the call over to Terry for a review of our financial performance. Terry?

[Terry Peterson:]

Thank you, Dan, and good morning, everyone. The focus of my comments will also be on the performance of the new R.R. Donnelley after giving effect to the recent spin-off transactions. Effective with the spin-offs, we are now reporting our operations in three operating segments plus the corporate segment reflecting certain centralized expenses not allocated to the operating units, which is similar to past reporting practices. Our largest operating segment is now Variable Print, which represented approximately 46% of consolidated net sales in 2015. This segment includes our commercial and digital print, direct mail, labels, statement printing, and forms reporting unit. Next, our International segment represented 31% of consolidated net sales in 2015 and includes our Asia, global turnkey solutions, business process outsourcing, Canada, and Latin America reporting units. Lastly, our Strategic Services segment represented 23% of consolidated net sales in 2015, and includes our logistics, sourcing, and digital and creative solutions reporting units. Net sales from continuing operations for the quarter were $1.73 billion, up over 1% compared to the third quarter of 2015. After adjusting for the impact of acquisitions, dispositions, foreign exchange, and paper, we delivered essentially flat organic growth which was the best organic sales performance since the second quarter of 2015. Organic net sales were impacted by volume increases in our Strategic Services segment, and stable performance in the International segment offset partially by slightly declining volume in the Variable Print segment. We saw organic volume increases in our three largest reporting units including commercial and digital print, logistics and Asia, plus Canada also had a strong quarter. Varying levels of softness in most of our smaller reporting units partially offset growth in the reporting units mentioned earlier. Third quarter income from continuing operation was $84 million or 4.9% of net sales. Third quarter non-GAAP adjusted EBITDA was $127.4 million or 7.4% of net sales, which represents a 110 basis points improvement over the first six months non-GAAP adjusted EBITDA margin of 6.3%. The increase was driven by higher volume, favorable mix, and continued cost control. Net earnings from continuing operations in the third quarter of 2016 were $2.9 million and included restructuring and impairment sizes of $10.8 million and an OPEB curtailment gain of $19.7 million. Next, I’ll discuss the third quarter financial performance for each of our three operating segments, again after giving effect to the spin-off transactions. Net sales in our Variable Print segment of $790.3 million were down 0.4% versus the third quarter of 2015. Although organic sales were down approximately 1%, we continued the sequential sales improvements in our Variable Print segments in each of the three quarters in 2016. Volume increases in commercial and digital print and the small acquisition in the direct mail reporting unit were offset by continued volume decreases in the statement printing, forms and labels, offerings as well as continued price erosion across the segment. The commercial and digital print sales increased as a result of higher in-store marketing materials volume partially offset by lower transactional commercial print volume, price pressures and a decrease in pass-through postage sales. Direct mail volume was up slightly driven by the acquisition of Precision Dialogue in early august which added approximately $8 million of revenue in the quarter. Excluding Precision Dialogue, direct mail was slightly down on an organic basis. Third quarter income from continuing operations in the Variable Print segment was $50.1 million or 6.3% of net sales. Third quarter non-GAAP adjusted EBITDA in the segment was $82.5 million or 10.4% of sales. The non-GAAP adjusted EBITDA margin improved approximately 10 basis points compared to the first six months of the year, primarily due to higher volumes. Net sales in our International segment were $495.7 million, down approximately 4% versus the third quarter of 2015. Foreign exchange rates negatively impacted this segment by $15.7 million which accounted for approximately 75% of the sales decline. In addition, the disposition of two small entities in our business process outsourcing reporting unit contributed to the rest of the decline. On an organic basis, this segment was essentially flat compared to the prior year quarter. The Asia reporting unit grew organically approximately [audio gap] 4%, which represents highest organic growth performance since 2015. This growth was driven by increased packaging and inbox print materials offset partially by lower labels volume and price pressure. Canada experienced its fourth consecutive quarter of the organic growth as statement printing volume increases were only partially offset by lower volume in its other offerings. Organic sales declined in our business process outsourcing, Latin America and global turnkey solutions reporting units and price erosion across the segments only partially offset the volume increases in Asia and Canada. Third quarter income from continuing operations in the International segment was $35.7 million or 7.2% of net sales. The third quarter non-GAAP adjusted EBITDA in the segment was $51.1 million or 10.3% of net sales. The non-GAAP adjusted EBITDA margin improved approximately 130 basis points compared to the first six months of the year, mainly driven by favorable volume and mix. Net sales in our Strategic Services segment of $445 million were up 13.9%, primarily due to a large increase in pass-through sales which we do not consider to be organic. Net sales grew approximately 3% organically versus the third quarter of 2015. The segment also experienced its best organic growth rate since the second quarter of 2015. Organic sales growth in the segment was led by our logistics and sourcing reporting units, which is partially offset by declines in the digital and creative solutions reporting units. Growth in logistics continued to be driven by our freight forwarding and last mile delivery offerings partially offset by the lower fuel surcharges of $4.8 million. While still negative, the third quarter impact of fuel surcharges improved from the first two quarters of the year. The sourcing reporting unit experienced double-digit organic growth, driven by increased volume from a large retail customer. This growth was partially offset by a decline in volume in our digital and creative solutions unit due to a customer loss earlier this year. Third quarter income from continuing operations in the Strategic Services segment was $13.3 million or 3% of sales. The third quarter non-GAAP adjusted EBITDA in this segment was $18.8 million or 4.2% of net sales. The non-GAAP adjusted EBITDA margin improved approximately a 130 basis points compared to the first six months of the year, primarily driven by higher volumes and favorable mix. Now, I’ll spend some time discussing R.R. Donnelley capital structure. As of September 30th, R.R. Donnelley’s consolidated debt balance was approximately $3.9 billion with nothing drawn on our new $800 million credit facility. This balance included $1.5 billion of incremental debt that was raised to finance the spin-offs of LSC and Donnelley Financial, and then transferred to the new companies effective October 1st with R.R. Donnelley retaining no obligations under that debt. An additional $222 million of debt was subsequently redeemed in October and November as part of the capital restructuring that we commenced after the spin-offs, using proceeds from draws on our new credit facility. Adjusting for the spin-off, R.R. Donnelley’s total debt as of September 30, 2016 would have been $2.4 billion. Our initial post-spin leverage is higher than our recent levels and significantly higher than our targeted debt leverage range of 2.25 to 2.75 times. I would like to highlight two factors contributing to this higher initial leverage. First, we are holding 19.25% of the equity in both LSC and Donnelley Financial. In order to maintain the tax free status of the spins, we intend to dispose of these equity positions within the next 12 months and reduce debt with the focus on the earlier maturities. The second factor contributing to our higher initial leverage is the required GAAP methodology by which we present our discontinued operations restatements. This methodology leaves a disproportionate amount of corporate expenses in our historical results through September 30, 2016, some of which will not be part of our cost structure on a go forward basis. Once the equity positions are disposed off and the discontinued operations reporting methodology is gradually eliminated over the next four quarters, we expect leverage to be lower albeit still above our target range. These capital structure transactions have also enhanced our debt maturity profile as we no longer have a note maturing until 2019. As we announced last week, R.R. Donnelley will pay a quarterly dividend of $0.14 per common share on December 1, 2016, to stockholders of record as of the close of business on November 15, 2016. Based on our recent stock performance, the announced dividend represents a yield of slightly more than 3%. While the payment of future dividends will depend on many factors including the Company’s financial conditions, legal requirements and other factors that the Board of Directors deem relevant, we expect to pay a quarterly dividend at a consistent level for the foreseeable future. Accounting for the one for three reverse stock split that became effective on October 1, 2016, this dividend level amounts to a nearly $10 million payment quarterly. And now, operator, let’s open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Charles Strauzer. Charles your line is open.

[Charles Strauzer:]

I just want to kick of the Q&A with -- if we can get a little bit of a sense for expectations going into Q4, in terms of maybe not formal guidance, but maybe give us some help with the goalpost, if you will.

[Terry Peterson:]

As we have talked earlier in our plan to issue forward-looking guidance until [ph] we enter this New Year. So, if you were to pull up our investor presentation that we put on the website last night and filed with the SEC earlier this morning, you can get sense for some small seasonality in our sales going into the fourth quarter. I mean we certainly had a nice quarter in third quarter here. But, if you were to look at the 2015 full year, less the nine months year-to-date, you can see last year we had sales in the fourth quarter of $1.83 billion. So, you get a little bit of a sense for some seasonality, not a lot but a little bit nonetheless, coming in fourth quarter. So that’s probably the best of I can give you on the revenue side, as we think about going into the fourth quarter here. Cost structure wise, we started to see some strengthening of our margin, even on a discontinued operations basis, reporting this quarter. And we were able to start to adjust the cost structure even during the third quarter, as we prepared for standalone company beginning on October 1st but some of that impact started hitting into the third quarter and we’ll certainly continue to see that happening as we go throughout fourth quarter, likely as the volumes tend to pick up a little bit in fourth quarter, we get little bit leverage, a better leverage on some of the fixed costs elements of our cost structure too. So I think those are probably the best pieces of help that I can offer out as we start we think about the fourth quarter.

[Charles Strauzer:]

Is it safe to say that you will see continued improvement in margins in Q4 from Q3; and so the pattern you saw year-over-year in Q3, will that continue in Q4?

[Terry Peterson:]

We haven’t given specific guidance out there, but I think we’ve put some of the -- we’ve have some of the cost reduction initiatives in place as we kind of prepare for our standalone cost structure going forward. So that is starting to happen during the quarter that will have a bigger impact for us as we go. And again, I think as you think about the leverage and the other two companies will become commercial, customers of ours as well. So, I think probably going to need to leave at that for the moment as it relates to margins.

[Charles Strauzer:]

Got it. And is it possible to give us what the Q4 2015 segment revenue was, so we can build that out a little bit easier?

[Terry Peterson:]

We do not have that -- I don’t have that readily available. I apologize for that.

[Charles Strauzer:]

Okay. Thank you.

[Operator:]

Our next question comes from Michael McCafferty. Michael, Your line is open.

[Michael McCafferty:]

Thanks. I guess some follow-up housekeeping questions. The third quarter here, $127 million of EBITDA. What’s the pro forma growth rate on a year-over-year basis?

[Dan Knotts:]

On the EBITDA, you’re little bit hard to hear.

[Michael McCafferty:]

Yes, EBITDA.

[Dan Knotts:]

We have not published the restated 2015 EBITDA or GAAP earnings yet. So, I don’t have that to offer to you yet. We gave several comparisons on EBITDA at the segment level and the consolidated level to what we saw in the first half of the year, and that’s the extent of what we are able to provide at this time.

[Michael McCafferty:]

Are you able to give what your trailing-12 month EBITDA is?

[Dan Knotts:]

You can certainly see that for the first nine months, we are at 6.7%. And if you were to go back to the 8-K that we filed at the end of September for the six months number, it was 6.3% and all of 2015 was about 7.7%. So, it’s improving right now as we’re going through this year. But at this level for the nine months, still a little bit less than what the 2015 period was.

[Michael McCafferty:]

Yes, I am not asking margin, I’m asking what the absolute number was for trailing 12 months pro forma EBITDA. You gave the nine months in the…

[Dan Knotts:]

Yes, again, we have not completed our shared restatement yet for 2015 at the EBITDA level. So, I am not able to provide on a trailing 12.

[Michael McCafferty:]

Is that something that’s going to be forthcoming?

[Dan Knotts:]

It will be forthcoming absolutely, we will get -- actually all of the quarters will eventually be completed from a restatement standpoint, and that will be published in near future here but it is not out yet.

[Michael McCafferty:]

And when that’s done, would that reflect the elevated corporate expense impact that you referred to -- on a true apples-to-apples basis as we’re thinking about forward quarters, what the real organic year-over-year comparison should be?

[Dan Knotts:]

Could you repeat that, you are hardly heard, and I missed the first part of that question.

[Michael McCafferty:]

Is it better now?

[Dan Knotts:]

Oh that’s much better.

[Michael McCafferty:]

Okay. Can you hear me now?

[Dan Knotts:]

Yes, absolutely, much better.

[Michael McCafferty:]

Okay. I apologize for that. So, I’m not sure, I apologize for that. Did you answer if that would reflect the corporate expense impact that you referred to?

[Dan Knotts:]

Yes. That’s consolidated view of the company. Those margins I gave you, that’s consolidated that includes the segments as well as the corporate pieces. So, absolutely.

[Michael McCafferty:]

But I guess my question is, as I am trying to think about what the real -- had you been a standalone entity back in 2015 on a quarterly basis, how much should I haircut the corporate expense to reflect what your real cash expenses on a forward basis are going to look like?

[Dan Knotts:]

Yes, I understand. You are asking about the impact of those heavier allocations because of the discontinued operations as measured?

[Michael McCafferty:]

Correct.

[Dan Knotts:]

Well, if you were to look back in filings that LSC and DFS have done as well as our discontinued operations basis, they prepared their quarterly filings on carve-out basis; it’s a different methodology and have treated those corporate costs differently. For example, shared cost, it’s just a portion of those. If you were to back into what the implied is for R.R. Donnelley and compare that to what we actually published on the discontinued operations basis, using that separate methodology, you would find that our EBITDA would be up between $50 million and $60 million a year on any of the past three years. So that impacted that different methodology. And again, we don’t believe that the discontinued operations methodology or that carve out methodology are going to be a true reflection of our going forward cost structure. We do think that that go forward is going to lie somewhere in between those two methods.

[Michael McCafferty:]

Okay. So, 50 million to 60 million is at least first simply put out restatement on a quarterly basis that’s…?

[Dan Knotts:]

Yes. Again, that’s a difference between those two methodologies and we believe would be somewhere in between there, not at either end.

[Michael McCafferty:]

Okay. One other housekeeping question, in the 8-K that was filed, when you highlight the total debt and then the net debt, and you have a footnote about the subsequent tenders that were done after September 30th. If I look at the balance of the $2.446 billion in debt, that does not count – that does not incorporate the subsequent tenders. Is that correct?

[Dan Knotts:]

The 2.446 is not included the subsequent debt tenders, the 222 that went in October and November.

[Michael McCafferty:]

Okay. And then, I guess just more broadly is I guess I’m not understanding why, if LSC and Donnelley Financial both raised just under 1.5 billion that is apparent at the standalone RRD here, it was only about 1 billion of tender that was done on the short end maturities. Why was there not further tenders done at that time to bring the leverage closer to your target level?

[Dan Knotts:]

Yes. You are talking about the balance between what was raised versus the $1 billion that was targeted for the year tender?

[Michael McCafferty:]

Correct.

[Dan Knotts:]

First of all, the $1.5 billion was the gross debt issued, so there were fees and adjustments that came out of that. So, the net piece that came to us was less than that. And we also were require to establish opening cash balances for the other two entities. So, we did have to use some of those proceeds to establish that initial upfront debt. And then also too, we did have going into the refinancing that happened on the 31st September, we did have some amounts drawn on our credit facility at that time, so some of that cash was also used to bring that credit facility down to a zero balance. So that’s really where the cash went. And again, even as we exited the September quarter on carve out basis which is what you see in the filing, we did still have cash on hand but it’s our cash, not consolidated cash but go forward cash of about $315 million.

[Michael McCafferty:]

Okay. And I guess how should I think about your use of cash on a go forward basis, given and all your bonds are bullets and at least on the short end, they traded pretty good premiums. So, you don’t have any -- with the exception of what you have drawn on a revolver, there is not a lot of pre-payable debt to chip away at? I mean are you going to have to just fight a bullet and pay some higher premiums to take out some debt sooner versus like cash just build since you have a really material maturity for three plus years now?

[Dan Knotts:]

Yes. That is correct. So, will happen with cash, first of all when we liquidate the 19.25% equity stake in both of the other two companies that that money will be exchange for some of the debt that is outstanding. And again, as we mentioned, we will target earlier maturities there. So that really does have to go to debt this outstanding right now. So that will incur some premium to make that and affect that exchange. And as we generate cash from operations, we certainly have investing in the business in that capital and that could be some strategic investments as well. But we will use cash to also pay dividend and we will also look to pay down the credit facility over time too. So, as long as this amount is drawn there, we will have the capacity to continue to bring down that debt without going into the fixed maturity share.

[Michael McCafferty:]

And can you just let me know what was -- what’s the current outstanding on the revolver?

[Dan Knotts:]

We didn’t indicate about the current balances in that; it does fluctuate very regularly with ins and outs on the cash daily. So, I can tell you that with the two maturities, one three maturities that we are called and funded in October and November, that was $220 million of debt with roughly about $10 million premium on top of that, that all go on to the credit facility.

[Operator:]

Our next question comes from William Nestor. [Ph] William, Your line is open.

[Unidentified Analyst:]

Terry, I wondered if you could give us some type of timeline when you expect to be back in your targeted leverage range and even have a ballpark on target current leverage ratio that would be great. I know that you haven’t completed your LTM EBITDA but you can get us some of the ballpark and then obviously with that timeline that would be also very helpful.

[Terry Peterson:]

Yes. I mean it’s going to take a little bit time for us to get to that the targeted range. We certainly will be making investments in the business along the way too, so not all the free cash flow’s going to go towards free [ph] net debt. But certainly as we look at alternatives and investment options, we are absolutely going to be balancing that within each -- will be bringing that debt level down over time. That’s not going to be within the next year, it’s going to be I’d say more, if I could characterize it, more medium term before we would get to those targeted levels.

[Unidentified Analyst:]

So, would three years be a fair timeline?

[Terry Peterson:]

I am not going to quite box it in because there is so many things that can happen in that window of the time. So, I just don’t really want to really go on record as to giving a specific commitment like that. As long as we’re above that level, we will be diligently focused on -- evaluating investment with the period of trending leverage at the same time.

[Unidentified Analyst:]

Okay. And then if you have a number for approximately where are you right now?

[Terry Peterson:]

We are over four [ph] times right now. And just as a follow-on to that we are well below our covenant threshold that we personally measured with the new credit facility agreement, that will be a five times on a different computation basis. So, we are well below that level that will be measured at the end of December coming up here.

[Operator:]

And our next question comes from Richard Lee. [Ph] Richard Your line is open.

[Unidentified Analyst:]

Following up earlier on Charlie’s question, thinking about like guidance, little bit about the combined company, the prior guidance 11.3 billion to 11.5 billion, should that be revised down lower because that would be expecting sequential growth of around 13%, around $400 million to get to the guidance? And similar is the case for EBITDA, year-to-date it’s like $820 million, so that would look like a significant step up in Q4 of around $400 million to get to the prior guidance, no press release also, how should we be thinking of the combined company?

[Terry Peterson:]

Yes, I’d love to help you with that but there will be absolutely no reporting on that basis going forward here. So, we are not able to really speak to really what’s happening with the other two companies at this point.

[Unidentified Analyst:]

Got it, okay. That’s helpful.

[Terry Peterson:]

They’ll be releasing their numbers shortly here.

[Unidentified Analyst:]

I was just using the numbers from the Q-10. And then coming to Bill’s question regarding the pro forma leverage, right now, it looks like almost a five-time levered company. And after we deduct the current market value of the stakes of almost 285 million, it’d be leveled delivered by half a return, so you will still be around 4.5 times leverage level. So, how should we be thinking from there onward going to the targeted range over the next three years?

[Dan Knotts:]

I think as I mentioned, there is really two factors that have affects and cause that added leverage to be higher. Right now, you are right, you have to make an adjustment for the liquidation of those two equity stakes and I believe your math is reasonable as you just articulated it. And then secondly, as this methodology for the discontinued operations kind of cycles through that’s going to affect the EBITDA portion of that leverage calculation, so that will help improvements too I guess and help earlier caller that had ask for how to think about that. So, we can say what that might be to improve…

[Unidentified Analyst:]

And would there be any synergies, so that 50 to 60 million and then some dissynergies of 23 million; so the right ballpark as you just mentioned right in the middle of almost 30 million?

[Dan Knotts:]

Yes, I would say that’s kind of embedded in that, that kind of in between ballpark. And when I said between the two methodologies, we’ll be somewhere in between those two methodologies that kind of takes into consideration the fact that we got some added costs in addition to the higher than go forward allocated cost.

[Unidentified Analyst:]

Okay, and then…

[Terry Peterson:]

On top of that too, while we haven’t given specific guidance for it yet too, this business we do expect it will generate free cash flow too that will also be able to help with debt paydown over time.

[Unidentified Analyst:]

Great. And then thinking about allocation of the free cash that you mentioned. There seem to be an acquisition in August, the Precision Dialogue holding, the former 60 million, would that be coming into R.R. Donnelley as well?

[Dan Knotts:]

Yes, that does stay with this Company and it’s part of our direct mail business supporting in it.

[Unidentified Analyst:]

Okay. And going forward, should we be expecting further acquisitions or debt pay down?

[Dan Knotts:]

We certainly continue to look at options for us to look at opportunities that make sense for us. And this Company has been acquisitive in the past. So, we’ll continue to look but again, it will need to meet some of our requirements in terms of the strategic fit and valuation needs to be right. And like I said earlier too, we will continue to do balance those opportunities with our desire to also lower that leverage ratio.

[Unidentified Analyst:]

Perfect. And then on the net debt offer, as you mentioned, there was a premium paid on some of the tender offers in October, November. So, the net debt should be going sequentially a little higher from 2.131 [ph] mentioned in the 8-K to 2.14.1; [ph] is that the right number we should be thinking about?

[Dan Knotts:]

Yes. The numbers we were really talking about was growth before you get back to the cash and cash equivalents. The 2.4 numbers that I referenced at the debt would have been at September 30th just for the new R.R. Donnelley going forward. I think of that as coming down by the 222 and then going up for the draw on the credit facility.

[Unidentified Analyst:]

Okay, got it. So, sort of remaining unchanged?

[Dan Knotts:]

Yes, that’s way to that.

[Operator:]

At this point, we have no further questions. I’ll turn it back over to Dan for closing remarks.

[Dan Knotts:]

Okay, great. Thank you. Before we wrap-up, I’d like to close our comments by talking about R.R. Donnelley’s dedicated team of employees. We have a diverse talented and passionate workforce of 42,000 employees around the world who continue to work as one team to provide the integrated multichannel communications, supply chain, business process outsourcing, and logistics solutions that help our customers drive their measurable results through the effective execution of their communication strategies. As the new R.R. Donnelley, we are excited about our future; we are inspired every day to serve our customers, protect the safety of our employees, and operate with the highest standards of ethics, integrity and sustainability. Thank you all for joining us on the call today. And here is Brian again for some final housekeeping points.

[Brian Feeney:]

Thanks Dan. I would like to mention that R.R. Donnelley management will be participating at two upcoming events where you can hear more about our Company. On November 28th, we will be in Boca Raton, Florida at the Bank of America 2016 Leveraged Finance Conference and on January 11th, we will be in New York at the CJS Securities 17thh Annual New Ideas for the New Year Investor Conference. As a reminder, a replay of R.R. Donnelley’s third quarter 2016 results will be posted on our website at rrd.com. Thank you for joining us. And that concludes the R.R. Donnelley third quarter 2016 earnings call.