R. R. Donnelley & Sons Company
Q4 2008 Earnings Call Transcript

Published: 25 Feb 2009

[Operator:]

Good morning. My name is Jacob and I’ll be your conference operator today. At this time I would like to welcome everyone to quarter four, year end financial results. All lines have been placed on mute to prevent any back ground noise. After the speaker’s remarks there will be question-and-answer period. (Operator Instructions) Thank you Mr. Leib, please go ahead with your teleconference.

[Dan Leib:]

Thank you, Jacob. Good morning and thank you for joining us for R.R. Donnelley’s fourth quarter and full year 2008 earnings conference call. Earlier this morning we released our earnings report, a copy of which can be found in the Investor’s section of our website at www.rrdonnelley.com. During this call, we’ll 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 provide you with useful supplementary information concerning the company’s ongoing operations and are 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’ve also posted to our website in the investor presentation section a description, as well as reconciliations of non-GAAP measures to which we will refer on this call. We are joined this morning by Tom Quinlan, Miles McHugh and Drew Coxhead. I will now turn the call over to Tom.

[Tom Quinlan:]

Thank you, Dan. Good morning everyone. I’d like to begin by addressing how we are seeing general economic conditions impact R.R. Donnelley as well as our customers, competitors and suppliers. Next I will describe the course that we are taking as we navigate these historical times. Miles will then take you through a detailed discussion of our performance and expectations and I will make a final comment before we open it up for questions. While our full year performance slightly exceeded the revised guidance that we issued in early January, we are disappointed that the momentum that we had establish through the first three quarters of 2008 was overcome by the significant softening that we experience in Q4. We are seeing the global economic turmoil impact the entire supply chain as customers, competitors and suppliers adjust to softening demand and increased business uncertainty. For many customers, the current economic conditions are driving two courses of action; an intense pursuit of cost control and a renewed focus on total cost of ownership, within their supply chain. From a cost controlled perspective, our customers are aggressively pursuing cost out actions and are taking a very cautious approach in regards to spending, which for us means that they are fine tuning the quantities that they order and are in some cases delaying or even canceling print programs. From a total cost of ownership perspective, our customers are taking a more open approach to evaluating their supply chain model, which for us is great news, because it means that they’re looking to take advantage of the kind of efficiencies that R.R. Donnelley has built to deliver within their business model. As we have demonstrated time and again, we have a difference to sell; our scale, our diverse integrated products and services, our geographic reach and our line of proprietary value-added capabilities make R.R. Donnelley so much more than just a commodity provider. For example, we use our best in class logistics and distribution capabilities to help customers mitigate postal cost, reduced cycle times, meet precise in-home dates and take advantage of the full potential of a distributed variable print model enabled by digital printing. In 2008, revenues from our logistic services were up nearly 7%. Let me be clear, no company in this industry is better positioned to provide print and print-related products and services and help customers take out costs better than R.R. Donnelley. We can create and manage content for electronic or hard copy output, print via digital, sheet-fed, offset or rotogravure processes or for variable trim binding kit assemble, co-palletized, co-mail, co-bind and drop ship the product, provide venue virtual data rooms and XPRL services or for data pipes and pearls through out customer point technology, leverage enterprise communications management and much, much more. By the way, we offer a significant number of these services in each of Canada, Latin America, Europe and Asia, as well the United States and also R.R. Donnelley has established relationships to license its variable data portfolios to such world class imaging companies as Kodak and Canon. For competitors, the difficult environment is tightening financing options and highlighting the challenges confronting those organizations, whose offerings are narrow and whose range of expansion options is limited. We expect that the industry will emerge from the economic slowdown with a correction in available capacity. Suppliers are confronting similar issues, from press manufacturers to people who make the shrinkwarp. We believe that our scale and strong liquidity make relationships with R.R. Donnelley particularly attractive to suppliers; and we’ve been working in co-operation with our suppliers to help match our cost to our revenues. I’d like to move on to outlining the course that we are taking to deal with this uncertain environment. By now, I think that everyone has run out of synonyms for the word unprecedented. Although, no one has managed through the economic conditions like these, we are not just sitting back and reacting to what the general economic turmoil throws at us. We believe that the best strategy is to continue to focus on two of our primary complementary objectives. These are the same objectives we have focused on in the past and intend to focus on in the future, no mater what the economic climate. Our first objective is to continue to operate the business, to maximize cash flow and deploy it prudently in order to maintain a very strong liquidity position. Our second objective is to continue to achieve operational excellence in serving our customers. We believe that this dual focus will continue to provide R.R. Donnelley the flexibility to take advantage of the best opportunities now and to emerge even better positioned for growth. Our commitment to the business discipline associated with maximizing cash is also not new. However, when we recognize that the credit markets were tightening in August 2007 we sharpened our focus even further. Miles will provide more detail, but we feel confident about the steps that we have taken to maintain strong liquidity. I would like to draw your attention to four points in particular. One, we continue to generate strong cash flow. Cash from operations for the year was more than $1 billion and during the fourth quarter was $326 million, up sequentially from $319 million in Q3 of 2008. Two, during 2008 we paid down $200 million in short term debt. Our January issuance of $400 million of senior unsecured notes increases our flexibility not only this year, but through 2010, which we believe is particularly important in the face of the uncertain duration of this downturn. We believe that the transactions also reflected R.R. Donnelley’s continued access to the capital markets and helped to strengthen our already favorable maturity schedule. Three, we continue to control capital expenses by focusing only on opportunities to increase revenue, reduce cost and improve safety conditions. We reduced CapEx by nearly $160 million in 2008 versus 2007 and expect a further reduction of $75 million in 2009. These reductions are possible for two reasons. First we have engineered uniformity into our platform, which allows us to rough work between facilities in order to maximize our capacity utilization. Second, we continue to calibrate CapEx and response to demand trends. In addition, we have taken an advantage of attractive valuations in making the targeted asset acquisitions that we announced in Canada and Chile in lieu of incremental CapEx. With regard to acquisitions, our pipeline is full of organizations that are looking to monetize themselves. There are a lot of choices out there. We’ve demonstrated in the past that we have what it takes to be the leader in consolidating this very, very fragmented industry; however, with our focus on debt repayment and the challenging environment, few if any of the opportunities sufficiently satisfy our criteria. I firmly believe that many in this pipeline will not survive absent a transaction. It may turn out that the economy and the credit crunch will wind up having the biggest impact when it comes to taking out capacity. That’s in our industry and in virtually every other industry as well, because we have been prudent in deploying capital and have shown that we can deliver for customers, we feel that this environment will ultimately create compelling organic opportunities for R.R. Donnelley. Four, we continue to match expenses with revenues and to keep up platform synchronized with customer needs. In concert with our focus on maintaining strong liquidity, we continue to work to achieve operational excellence for our customers. We believe that the breadth of our product, service and geographic offering, our scale and our technology create significant competitive advantages. Customers are looking for stable suppliers who can help them leverage their own scale, offer innovation, deliver continuity of service and streamline processes. R.R. Donnelley does all of that and more. We are expanding important relationships and positioning the company for continued industry leadership. Miles.

[Miles McHugh:]

Thanks Tom. I’ll provide a detailed review of our fourth quarter and full year results. Our fourth quarter performance slightly exceeded the high end of our expected results that we announced in January, with non-GAAP earnings per diluted share of $0.63 in the fourth quarter and $2.93 for the full year. Earnings were negatively impacted by a higher tax rate in 2008 relative to 2007, but positively impact by our share repurchases and then the impact of these two items was a drag on EPS of $0.001 in the quarter, but accretive to EPS by $0.001 for the year. As Tom mentioned we generated in excess of $1 billion in cash from operations in 2008. We also generated $693 million in cash flow from operation less CapEx, just about the same amount as we generated in 2007. Before I discuss the quarter in detail, it’s important to understand the $1.1 billion charge for restructuring and impairment impacting our fourth quarter GAAP operating results. This non-cash charge is largely comprised of the impairment of goodwill and intangible assets resulting from our annual impairment testing under statement of financial accounting standards number 142. Now let’s move on to our non-GAAP results for the quarter. Consolidated net sales in the fourth quarter were $2.8 billion, down 9.5% from fourth quarter 2007 results. On a pro forma basis, adjusting for the impact of acquired companies; net sales declined 11.7% from the fourth quarter of 2007. Unfavorable foreign exchange rates contributed 275 basis points to this quarter-over-quarter decline. Changes in paper prices did not significantly impact our revenue. Our gross margin was 24.0% in the fourth quarter of this year, compared to 25.1% in the fourth quarter of 2007. This decrease of approximately 103 basis points was due to volume and mix declines, continued price pressures, lower demand for print related bio products and an increase in the LIFO inventory provision, which were only partially offset by the benefits of our continuing productivity and cost management efforts and a significant reduction in variable compensation expense. Our SG&A as a percentage of revenue decreased 79 basis point to 9.7% in the fourth quarter from 10.5% in the fourth quarter of the prior year, primarily due to the benefit of productivity initiatives and reduced variable compensation expense, offset in part by an increase in the bad debt provision. Depreciation and amortization expense in the fourth quarter was $154 million, approximately the same as a year ago. The GAAP operating loss including restructuring and impairment charges was $892.9 million in the fourth quarter of 2008, compared to an operating loss of $183.4 million in the fourth quarter of the prior year. Excluding restructuring and impairment charges, non-GAAP operating margins decreased 74 basis points from the fourth quarter of 2007 to 8.8%. The impact of declining volume and price pressure and higher bad debt expenses offset the benefits of our productivity initiatives and the variable compensation reduction. The acquisitions of Pro Line and Cardinal Brands, both of which had historically lower margins that our base business reduced operating margins by 24 basis points. Changes in foreign exchanges rates increased operating margins by 19 basis points in the quarter. Net interest expense was $55.4 million in the quarter; $4.0 million lower than the comparable quarter of the prior year, primarily due to our reduced debt levels as we focused on paying down debt as well as lower interest rates on short-term borrowings in the U.S. In the fourth quarter of 2008 our GAAP net loss from continuing operations included an income tax benefit of $273.4 million. The majority of the benefit, $228.8 million resulted from the decline in value and reorganization of certain energies within our international segment. Additionally, we were able to recognize a tax benefit related to a portion of our restructuring and intangible asset impairment charges. The non-cash charges related to impairment of goodwill in both 2008 and 2007 were not deductible for tax purposes. On a non-GAAP net basis, the tax rate increased to 30.8% in the fourth quarter of 2008, from 26.7% in last years fourth quarter, due to lower benefits from the release of tax valuation allowances and a lower benefit from the expiration of state tax statute of limitations in 2008. As I mentioned, our non-GAAP earnings per share from continuing operations in the fourth quarter of 2008 decreased $0.63 per diluted share compared to $0.80 in the fourth quarter of 2007. Now lets to fourth quarter operating results by segment. Sales of our U.S. print and related services segment declined 4.9% to $2.2 billion for the quarter, while pro forma sales decreased 8.1%. Declining volume versus fourth quarter of 2007 was seen most prevalently in our full color book, directory, catalog and magazine product offerings, all of which saw lower demand from existing customers. Additionally both our forms and labels and directory operations experienced heavy price pressure from existing customers, particularly when renewing contracts. Non-GAAP operating margins decreased by 107 basis points to 11.7% in the fourth quarter of 2008. Our continued focus on productivity and cost management initiatives, combined with the variable compensation expenses reduction, partially offset declining volume, price pressure and lower demand for print related byproduct. Our international segments reported sales dropped 22.1% to $637.8 million due to volume declines and unfavorable foreign exchange rates across most product lines and overall price pressures partially offset by volume increases in Latin America and Asia. Foreign Exchange rates negatively impacted almost all of our international business, accounting for over 45% of the sales decline. In Latin America, we primarily saw a volume increase in our forms and labels, commercial print and book offerings. The most significant volume drops in the quarter were seen in global turnkey solutions due to decreases in demand from our technology clients and in there financial print business, which have seen a dramatic drop in volume as a result of the lack of M&A activity in the foreign markets which we serve. Non-GAAP operating margins declined 24 basis points to 7.0% in the fourth quarter of 2008, as continued volume drops and price pressures, as well as higher bad debt provision were only partially offset by productivity initiatives and the variable compensation expense reduction. Foreign exchange rates improved non-GAAP operating margins by 52 basis points. Finally, excluding restructuring and impairment charges, our unallocated corporate expenses decreased $3.4 million from last year’s fourth quarter due to productivity and cost control efforts and the variable compensation expense reduction, which were partially offset by increases in both the bad debt and LIFO inventory provisions. During the fourth quarter of 2008, we spent $84.3 million on capital expenditures; bring our full year CapEx to $322.9 million. This represents a nearly $160 million reduction in spending from 2007’s $482 million, as we leverage the capacity that our acquisitions provided, continue to realize the benefits associated with optimizing our platform and more tightly controlled new capital spending in these challenging economic times. As mentioned, we generated over $1 billion in cash from operations this year, representing a $160 million decline from 2007, primarily the result of higher working capital usage. As we mentioned last quarter, the reduction in incentive compensation expense that benefited earnings both in the quarter and for the year did not impact our 2008 cash flow, but will result in higher net cash flows in the first quarter of 2009, compared to the first quarter of 2008. Our balance sheet and liquidity continue to be very strong. We decreased our debt by $200 million to $4.1 billion at the end of 2008 and we maintained investment grade credit metrics. As of December 31, 2008, we had approximately $1.5 billion available under our $2 billion committed revolver, which is a backstop to the CP program and can be used for general corporate purposes. On January 14, 2009, we issued $400 million of 10 year senior unsecured notes at an 11.25% interest in a debt neutral transaction. In the short term, we used the proceeds to pay down our borrowings under our committed revolving credit facility and to scale back our borrowed amounts in the CP market. Presently our debt is nearly all fixed at an average cost of 6.0%. We expect to fund our April 1, bond maturity of $400 million with the revolver, cash on hand and the CP market. Our issuance last month positions us well as we plan for upcoming maturities in 2010 and 2012. We have no term debt coming due in 2011. In 2008 we contributed $36 million to our pension plans throughout the world and recognized $17 million in pension income. In 2009 we are required to contribute $22 million for our pension plans and expect to recognize $6 million in pension income. Given the recent market performance of our pension investments, we expect to have higher required cash contributions in 2010 and incremental approximately $130 million or so and have a reduction in pension income by approximately $15 million. However for 2010 and beyond, investment performance and discount rates will determine the future required cash contributions, although we do expect there to be required cash payments and we will move to a net pension expense position overtime. Much will depend on the timing of contributions and market conditions. We will continue to evaluate the most opportune time to fund our pension obligations. As we all know, the recent confluence of economic, credit and currency difficulties world wide, has made forecasting future customer demand and our business trends more uncertain than ever before. We mentioned in January that we would not provide 2009 earnings guidance on this call due to the expected lack of visibility. To enable you though to understand some of our business dynamics, I’d like to share with you some of what we are expecting and how we analyze our cost structure. In 2009 we expect the following; depreciation and amortization expense of approximately $600 billion. This is a decrease of approximately $40 million from 2008, resulting from the Q4 impairment of intangibles that I mentioned, as well as reduced capital expenditures. Our fixed rate debt has an average interest rate of 6.0%. Our invested cash earns a low rate of return and our variable debt is expected to be at an average interest rate of 2% to 3%; our non-GAAP tax rate of approximately 36.0%, an increase of approximately 340 basis points from 2008s non-GAAP tax rate. This estimated tax rate could be significantly impacted by business trends affecting different countries in which we do business or of a change in tax loss, a fully diluted share base of approximately 207 million shares for the full year. Corporate expense is expected in a range of $160 million to a $170 million, a reduction from 2008 of $10 million to $20 million. However, these expenses can be subject to significant volatility from LIFO inventory provisions, bad debt expense and healthcare cost trends. We expect that revenue comparisons will be much more challenging during the first half, as the full force of the current economic crisis did not impact customer demand until late in 2008. Over the past few years, we’ve been focused on turning fixed cost into variable cost and it’s in periods of volume volatility that we see the benefits of those actions. We have taken difficult steps, eliminating our 2008 variable compensation to spending 2009, 401K match, freezing salaries for non-hourly employees and continuing to manage aggressively our cost structure. Top line visibility remains very challenging in this environment. Our 2008 pro forma sales decreased by 3.7% for the year, with the decline accelerating to 11.7% in the fourth quarter of 2008. The pace of decline continued in January. We expect the first quarter to be very challenging. We have modeled multiple revenues scenarios for the year. There will be many factors that determine bottom line impact from a given revenue change. Factors such as changes in pricing, duration and severity of a revenue change, product mix, foreign exchange, change in commodity prices and the resulting byproduct impact, bad debt provisions, benefit plan expenses and variable compensation to name just a few. For volume increases or decreases, we do have a fair amount of variable cost in our structure, with our largest cost being direct materials and freight at approximately 30% to 40% of revenue. These costs were nearly 100% variable. Approximately 30% to 35% of cost as a percentage of revenue is comprised of items that are highly, but not total variable, such as direct labor, employee benefits, SG&A compensation and travel and entertainment. The remaining 10% to 15% of our costs, again stated as a percentage of revenue, is more than 50% variable and includes energy, maintenance and repairs and rent. While we expect 2009 to be a challenging year for earnings, we do expect relatively strong cash flow performance. We spoke earlier on the tax benefit from the decline in value and reorganization of certain entities within the international segment, all of which was recognized on our income statement in 2008. Well approximately $64 million of cash benefit was received in 2008. We expect another $165 million cash benefit to be received in 2009. In addition our one R.R. Donnelley platform allows us to maximize our utilization on a given volume of work and economize on CapEx. We expect 2009 capital expenditure to be approximately $250 million, a more than $70 million decrease from 2008 and about $230 million lower than 2007 and we have many opportunities to improve on our 2008 working capital performance. We have targeted improvements in this area, assigned accountabilities and linked incentive compensation to improvement. In total, we expect to deliver higher cash from operations less CapEx in 2009 than we generated in 2008. We expect to continue to focus on liquidity and debt reduction in this environment. As we plan, we have assumed the continuation of the dividend at its current $1.04 per year level. Of course in these challenging times, the dividend level is discussed frequently with our Board of Directors. With that I will turn you to Tom.

[Tom Quinlan:]

Thank you, Miles. During the balance of 2009 we will continue to pursue the two complementary elements of strategy; strong liquidity and operational excellence. Given economic uncertainty isn’t hampering the ability to see what is coming over the horizon; however our planning and action model is built around anticipating the possibilities and being prepared to react immediately to trends. So, weather demand stabilizes or continues to decline we are prepared to move quickly to match cost to revenues. We have modeled the revenue scenarios as Miles indicated and identify the steps on the cost side for each. I would emphasis that while the challenges presented by the economic turmoil in cash can cause undeniable difficulties, it also creates opportunities for the best optioned organizations. In every vertical we serve, across every location around the world, customers are looking for creative ways to lower their total cost of ownership. They are moving beyond mere price competition, they are asking questions about how they can consolidate and leverage their entire spend, integrate and streamline their processes, make printing and related services work harder and smarter and about how they can manage their supply chain better. We have build R.R. Donnelley to be the answer to each and everyone of those questions. Before we take questions I would like to reiterate our thanks to employees, both current and former. We have been talking necessary but very difficult actions. We are mindful that the employees who are impacted by the softening demand are not numbers, they are individuals who have performed for R.R. Donnelley to the best of their ability and we thank them for that. Even in the face of this uncertain environment, our employees continue to remain focused on working safely, improving efficiency and taking care of customers. Now operator, let’s open it up for questions.

[Operator:]

Thank you, sir. (Operator Instructions) Our first question comes from Charlie Strauzer.

[Tom Quinlan:]

Good morning, Charlie.

[Charlie Strauzer:]

How are you? Miles, just a couple of quick housekeeping questions right in front there; the total amount of variables that you have currently, what was that number?

[Miles McHugh:]

Right now currently or at the end of the year?

[Charlie Strauzer:]

At the end of year, I’m sorry.

[Miles McHugh:]

At the end of the year, we had about $500 million.

[Charlie Strauzer:]

And then you’ve talked about the pension of you said $130 million of the expected contribution in 2010, is that correct?

[Miles McHugh:]

No, the $130 million is incremental to the $20 million, $25 million we had this year.

[Charlie Strauzer:]

So, it will be $150 total contributions.

[Miles McHugh:]

That’s about right.

[Charlie Strauzer:]

So I assume then that you’re no longer in an over funded situation in the pension, is that correct?

[Miles McHugh:]

That’s correct.

[Charlie Strauzer:]

Then if you could talk a little bit to, maybe it’s more for Tom, but also you touched briefly on the dividend. Obviously the board I’m sure is probably examining this pretty closely given a lot of the competitors in the industry, as well as other large Fortune 500 companies here, seeking hard work and hard stance on the dividend given the recession. Where was basically the stance right now? I mean it sounds like they want to maintain it, but they’re keeping a pretty close eye on it. What’s causing you to keep the dividend where it is right now?

[Miles McHugh:]

Charlie, I think again, as everyone else in the world is doing, everyone is taking a hard look at it. I think when you see our K filed later today, we again continue to speak to the fact that our goal is to maintain the current level of our dividend that we have. Now given the various models that we’ve opened, that we reviewed and gone through, as we finish the first quarter here, obviously the Board in December, again in January accrues the dividend of $0.26 a quarter and again we’re going to look at it in each and every quarter, but our goal is to go ahead and maintain it that way. Again I think some of the things coming out of what we’re saying here today; we didn’t do a great job last year with working capital. So, we’ve got some opportunities there to improve, which obviously again going back to liquidity, that should helps us and benefit us and when you think about working capital in our industry, people who don’t have the assets are relying heavily on working capital, working smoothly for them. If you got to go ahead and if you’re not getting paid from your customer, but if you got to go ahead and pay that particular print to the job and you can’t do that on time, that is going cause a lot of anxt [ph] in that particular part of the market place. I mean there’s inefficiencies in the model there to begin with and then later on top of that, the additional cost that has to be incur because of throwing in a middle person. That’s going to end up opening up some opportunities, for people like thus who have assets to go ahead and serve customers.

[Charlie Strauzer:]

And that seg moves nicely into my next question. I was basically talking about a little bit more about, the competitiveness people here are it’s really every week another printer on either filling for bankruptcy, being seized by the banks, it sounds like a lot of even kind of mid sized printers are struggling a little bit right now. Also talk to if you can a little bit about your supplier. I mean the paper companies for the last few years have been trying to raise price by talking capacity out. We’ve heard anecdotally that paper pricing is not only stabilized, but it should be starting to come in; are you seeing that aswell?

[Tom Quinlan:]

I would tell you, Charles this is bad time. Again, what I’m going to say to you here is going to be perceived as rocket science. I mean this is a bad time for a vendor to have one product and if you only do magazine, if you only do catalogs, this is not going to be a good environment for you and there’s going to be very little that you can do about it to impact your viability. Financial print for example; I mean obviously if you just had financial print, you go back a couple of years the way Donnelley was built, it would be real tough times here. I would tell you, our financial print team in 2008 won the majority of the IPOS that were out there, got the most valuable IPOS that were out there. So we’re delivering there and now they are taking that and looking to see what other services and products that we can provide to certain people that we haven’t done before. When you go ahead and think about somebody again who doesn’t have the distribution model that we have, I mean that is key. Postal is going up, the United States postal system; obviously as we’ve seen in the paper and read has some difficulties that they are facing. We’ve got scale, we’ve got the breadth of products that allows us to go ahead and take our customers, content and mitigate that postal cost because of our scale that we can distribute it for them. From a technology standpoint, we’re not fighting technology and you’re going to here more about that at the end of March, beginning of April, somewhere around that timeframe, but again we want to be the ones that link print to technology. Donnelley for decades has always been the industry leader here; we’re not going to on our watch have that change. When we think about what we can do with personalized URLs, how that can work hand-in-glove with magazine providers, with direct mail providers; it already works for catalogers, we’ve already proven that, we got the ability to do that. So it’s tough. Where you kind of just shake your head and say what we’re offering, why do you push back on it? We’re going to customers, we’re telling them “look, we can save you money, we can make you more efficient” and that’s the tough thing to argue with. You don’t have to go to somebody else to get X, Y and Z, we can do that for you. So again, even in the midst of the stress that’s occurring out there, there are opportunities and we’ve got to go ahead and make ourselves take advantage of those opportunities.

[Charlie Strauzer:]

Excellent, and then my last question is basically, if you look at some of your customers who have been kind of reticent to fully outsource a lot of their internal prints, especially some of the financial companies, are you starting to see some of that, kind of holy grail becoming more of a easier conversation with those kinds of CEOs and CFOs?

[Tom Quinlan:]

I wouldn’t say they’d become easier conversations, I would say that there is no one that we are speaking to. No matter what vertical you want to talk about, that is not talking to us in a consultative matter “Hey, how can you help us out here? How can you make ROI better? How can you take cost out of our platform?” and we’re having those conversations. So, I mean those are good, we’ve got to go ahead and deliver on them, but again I think everyone, throughout the entire world is looking to see how they can make themselves better.

[Charlie Strauzer:]

Thank you very much, Tom.

[Tom Quinlan:]

Thanks Charlie.

[Operator:]

Thank you. Our next question comes from Edward Atorino. He is with Benchmark.

[Tom Quinlan:]

Good morning, Ed.

[Edward Atorino:]

Is there any information you can give us, let say looking at the print category magazine, catalogues, books, etc, on sort of business trends, backlog, order rates, sort of where things have gotten worse? Where they might not have gotten worse and how you look at these areas? Where would you think things might respond one way or the other to economic conditions? That’s sort of a convoluted question, but I think you get the point?

[Tom Quinlan:]

I do Ed. I think to make it easier for everybody; I think we’ll be filing our K later on this afternoon, probably towards the end of the day. So, the detailed information that you’re looking for there; that will be in the K and everybody will have access to that then. What I would tell you is, if you think about us, think about our business model, the way we look at it is we’ve got 40%, 50% of our top line comes out of what we’ll call branding. The other 40%, 50% comes out of what we’ll call a business model and then we have compliance. Compliance obviously, although it is impacted in certain ways, it isn’t impacted as much as you look at the economic environment that we’re in. If you look at branding, obviously some company’s, Wall-Mart for example is going to add and investing more in branding at this particular time where other company’s are completely pulling back or really, really cutting down on what they’re doing. When you think about the business model, there is some things out there that have to print in order for them to get paid. How much advertisers are going to paid for their adverting in those particular products? How frequent those events take places, those are all at basically at the mercy of what our customers are thinking about as they look at their company. So, again I think if you break it down to some of those three buckets for us, that’s where we play, that’s where we’ve always played and again we try to go ahead and bring what we can as far as value added to those customers, whether it is on the front end with digital asset management, whether it is from an operational standpoint or on the back end from a distribution standpoint. Distribution in the United States is going to be more and more critical in many ways. So I think again, we’re positioned very well there to assist customers to get their product out.

[Edward Atorino:]

Other media are saying there’s really no more backlog any more, sort of just in time business. I would imagine with magazines, catalogs, they’ve got be online, they can’t just show up tomorrow and say “ship a million magazines,” is there any indication you can give us of sort of where the “backlog” is versus full quarter. Is it worse or better?

[Tom Quinlan:]

I’ll give it to you in clear needs as opposed to any -- maybe that will help us. I would tell you that look what we see from our customers who have been successful is they have both. They have a hard printed portable copy that people can experience and then they also have a good internet/website, so that they are reaching out to you through us on whatever precise in-home date they want. They know when you receive that particular catalog or magazine and then they know if you’re going to go through the internet to take a look to see what you may want. We’ve got technology that can go ahead and really focus in on you receiving what you’re receiving and then we can point you to whatever our customers wants us to point you to, through a Pearl. We’ve also got the ability to go ahead and have it such that, there are 182 million website that are out there, how does anybody really know? How can you keep track that your particular website is being reached or your particular website is having people take a look at it. We again have the ability to help our customers experience that, help them track that with some of the technology that we have and we again think that hard copy as well as electronic is still going to be with us for a long time.

[Edward Atorino:]

I presume you get paid for all that stuff.

[Tom Quinlan:]

We do and that’s one of the issues when you bring up a good point. The monetization of the web has not been what people though it would be. So therefore, how do you fight back? You fight that through a hard copy, through a printed product.

[Edward Atorino:]

Okay, thanks.

[Tom Quinlan:]

Okay.

[Operator:]

Thank you. Our next question in queue comes from Craig Huber with Barclays Capital.

[Tom Quinlan:]

Good morning, Craig.

[Craig Huber:]

Hi, good morning. Thanks for taking the questions. First, about the pension; what is funded status at the end of the year please?

[Miles McHugh:]

We were about $480 million under funded at the end of 2008.

[Craig Huber:]

Can you just repeat again if you would, what cash contributions you expect after June ’09? What’s your preliminary thought on 2010 there? I know it can change.

[Miles McHugh:]

Okay, in 2009 we expect roughly $0.2 million and $6 million in pension income, in 2009 and then for 2010, we expect an incremental $130 million or so of required cash funding.

[Craig Huber:]

Expense for that year, just repeat it.

[Miles McHugh:]

Reduction of approximately $15 million from ’09.

[Tom Quinlan:]

And that’s not baked in or I wouldn’t say that’s finalized yet.

[Miles McHugh:]

Right, that as I mentioned it depends on market conditions, what our funding decisions are between now and then, discounted rates, all types of assumptions that are going to change between now and then.

[Craig Huber:]

Okay then also if you could switch over to SG&A, if we could please; in the third quarter I recall you guys said in the third quarter, variable compensation expense in your SG&A volume helped you guys year-over-year by $79.3 million before we get some reversals or some accruals in there. What was the variation year-over-year in the fourth quarter versus the year ago period?

[Miles McHugh:]

I don’t have that; I don’t have the 2007 expense right here. Maybe if we can go on, we’ll try to see it if we can pull it up while we’re talking and take a couple of other questions and maybe get back to it.

[Craig Huber:]

Okay, appreciate that. Then also I’d like to ask a pricing question, to typically ask. Well historically I think you guys have said you think pricing generally is down roughly in the range of 1% to 3% per year. What would you think the range is sort of right now, has it changed much?

[Tom Quinlan:]

I’ll tell you Craig; this is more of a volume hit for the industry we believe than for on pricing side. I think obviously if you look at different products it depend; the transactional product is brutal and I don’t think that’s a surprise to anybody, because of again the over capacity in the industry. Again if you just look to see what’s the United States postal service on the mail side, I mean they’re down 4.5% in volume. I think was 9 billion pieces less in 2008 and I think most of that decline occurred towards the end of the year. So again, depending on the different products you would have a different answer for that. Probably if you looked at our overall platform that we have, the 1% to 3% probably is not a bad number, but within that there is a tremendous amount of volatility.

[Craig Huber:]

What you say when you say brutal pricing per transactional, what sort of range?

[Tom Quinlan:]

When you think about you commercial work, there are still many, many, many commercial printers out there with assets that are buying for business, so that particular product line is getting beat up pretty good from a price standpoint.

[Craig Huber:]

But meaningfully worse will stand on one to three you’re saying.

[Tom Quinlan:]

Yes, I would say meaningful worse, then down one to three. That’s not a product as you know from the years you’re covering this; is not a product to where in most cases people making investments, supplier make investments for the particular customer. If you make investment, if you buy CapEx for a particular customer, then usually you have a contractual agreement there and you have pricing that is outline within that agreement based on volumes, based on CPI, whatever it maybe, but when you get to something like a commercial product, that is not something were you don’t have a dedicated press, you don’t have dedicated bindery for that particular product line

[Craig Huber:]

Then also if we could just take the mindset for a second back to November 5, when you guys last supported the third quarter in that case and you guys reiterated your full year guidance, the low end of that relative tight range for the full year, reiterated your guidance basically on November 5; obviously much of your work is pretty locked in at that stage I would think for the rest year. What changed so much between then and over the next two months? For the first week in January you lowered your number, your guidance, your EPS number your significantly; was it really just those last four weeks of December that things really fell off a cliff.

[Tom Quinlan:]

No, I would say and it’s a good point. I mean October was a month where we were down slightly from a top line standpoint and the multi trends looked pretty good; got together with you guys in November 5. Towards the end of November and all of December, basically the fossit was turned off and we probably laagered as you know part of the economy to see what’s going on with the picture. I mean (Inaudible) go down and they go down in September and it probably hit us. In our industry I would tell you, it will trend in November to all of December and obviously into January here. Understand our contractual basis. It doesn’t mean that I know how many pages I’m going to print. Advertisers started pulling back. At a total comment, pages had to be pulled back because of that. So, it’s a complete circular reference here when you go back to see what the tie-in is between the economic conditions, what our work load was and what November and December look like.

[Craig Huber:]

Because you’re saying perhaps it’s really the latter, the very late part of November that things really fell apart for you (Multiple Speakers)?

[Dan Leib:]

I’m not going to say November 12 to 13, but after November 5 is where we started to see fall-off and then that fall-off just became a significant steeper slope as we got into December.

[Craig Huber:]

I think you’re inferring that’s continuing here in the first quarter, right?

[Dan Leib:]

Yes, as Miles indicated in January’s numbers and again we’re confident. We had a real good, call it 10 months of 2008, obviously from what we’re seeing and just as you think about what’s going on now, it’s not unlikely to say that what we experienced in the fourth quarter here doesn’t continue, as you look at 2009.

[Craig Huber:]

Okay, thanks guys.

[Miles McHugh:]

I’ll get back to you on the earlier question you had on incentive compensation and the fourth quarter of ’08 versus the fourth quarter of ’07. We had about $44 million less incentive compensation expense in Q4 of ’08 versus ’07 and versus SG&A, it’s probably give or take a little bit, 50% of that goes to our SG&A.

[Craig Huber:]

I see, I’m looking at my notes here from last time; I believe you said last time you had $120 million of these variable comp expenses for full year ’07? Do you have that in front of you, what it was for ’08?

[Miles McHugh:]

It would have probably been more like in the $135 million range for ’07.

[Craig Huber:]

What was it for ’08, then?

[Miles McHugh:]

Zero.

[Tom Quinlan:]

We do not have any variable comp for us in 2008.

[Craig Huber:]

So, it’s probably down to zero; 135 to zero. Thank you very much. That wraps it up, thanks.

[Tom Quinlan:]

Okay, thank you Craig.

[Operator:]

Thank you. Our next question comes from Joe Galzerano with Babson Capital.

[Joe Galzerano:]

Yes, good morning. I have two questions for you. The first, just to follow up on the last bit of conversation; can you just give us some kind of idea of how the revenue trends through the quarter, meaning so it is until November, December basis it’ll be a third, a third, a third?

[Tom Quinlan:]

I would tell you no it wouldn’t be. We would probably have a little bit more in October and then November; December obviously is a small month given that the holidays are starting. By that timing you got to have a lot of things out there in the distribution for the holidays.

[Joe Galzerano:]

Okay and then my another question is, I think you were going there early on working capital. If I’m reading it correctly, it looks like the working capital was a use of over $500 million for the year and in particular $250 million for the fourth quarter. So I’m just trying to figure, am I reading that right and then what would that be?

[Tom Quinlan:]

Well that’s more than just what we normally consider working capital and receivable, payables and inventory. That includes that change in incentive compensation expenses, as well as changes in income tax accruals and receivable. So there’s a number of other liabilities that go through there that can change that a lot and so the variable compensation expenses change would have had a big impact on that.

[Miles McHugh:]

As I mentioned earlier, I mean inventory is going to be a huge focus for us in 2009. Obviously receivables, we’ve got to continue to monitor those given the economic conditions. Also on our payables side we’ve got to make sure that again we’ve got good relationships with our vendors, everyone’s got to work together in this, but we will look to pay quicker if we get some discounts, because obviously that’s a great use of cash; if not, then we’ve got to look at how our payment cycles takes places.

[Tom Quinlan:]

Right and then the number that you’re looking at for receivables at the end of 2008, the number I mentioned we’re expecting, $165 million in income tax benefits to be received in cash here in 2009. So that $165 million receivable is in there too. So you got to breakout those before you start to look at what we usually talk about as traditional working capital.

[Joe Galzerano:]

Okay, thank you.

[Tom Quinlan:]

Thank you.

[Operator:]

Our next question comes from Abraham (Inaudible)

[Tom Quinlan:]

Good morning Abraham.

[Operator:]

Sir your line is open.

[Tom Quinlan:]

Lets got to the next question operator.

[Operator:]

Our next question comes from Jake Kemeny – Morgan Stanley

[Jake Kemeny:]

Hi, thanks for taking the question. If you guys could just help reconcile your commentary about the near term revenue outlook with your full year guidance for improved cash flow that’ll be really helpful.

[Tom Quinlan:]

Yes I think again, there are some benefits that we’re going to get from working capital that we didn’t have in ’08. We’ve also got, what I’ll say from a cost takeout standpoint and an incentive compensation standpoint that are going to be different for us; the tax standpoint that Miles talked about. So again given the levels of top line that we are modeling, combined with what I’ve talked to you about on working capital, CapEx, tax, incentive compensation, is why we’re coming up with saying why we think we’re going to have the 2009 number that we’re talking about.

[Jake Kemeny:]

Okay and then on the casual statement, there is a line item, accrued liabilities and others that this year was the use of like $359 million. Some of that is like the taxes you were talking about in some of the comments. What’s in that number and why won’t a big number like that appear again in 2009?

[Tom Quinlan:]

Right, that goes back to the earlier question. The income tax receivable of $165 million is in there, so that drives that up, as well as the year-over-year change in incentive comp, which is more than $100 million too. So, those are the two biggest drivers in the year-over-year swings there.

[Jake Kemeny:]

Okay and then, do you think there’ll be any cash restructuring charges in 2009?

[Tom Quinlan:]

Yes. Every year we have some and I think this coming year we can expect some more. I think we had about $70 million in 2008 and we don’t have guidance for ’09 on that, but I could say it’s reasonable to assume it’ll be higher than that.

[Jake Kemeny:]

Okay and then what’s your commitment right now to continuing the share repurchases? I know you mentioned talking about reducing debt, but are you still committed to buying back stock?

[Tom Quinlan:]

Do we have the authorization that’s out there and again, I think one of the things that we’ve tried to keep this simple and tried to stay with the course. Our philosophy in this is to try to go ahead and continue to have operational excellence, but it will also prudently deploy capital and again we’ll continued to look to see how we’re going to use our capital. The good thing with the bond deal I understand is that as we think about it, we’ve taken out -- for what we see right now as we sit here today, we’ve taken completely out of the picture of financial risk for us going back into the capital markets for this company, borrowing an event for 2009, 2010, 2011. There’s not too many companies; I don’t care what industry you’re in, that can say that and again take it a step further, if you want to come back to our industry, look at the rate that we’ve borrowed at 11.25%; obviously we’d like the coupon to be lower, but it’s not, but again that’s probably the floor for where our industry, given that we’re investment grade credit metrics, given the ratings that we do have, anybody else in our sector that’s going to go out and try to borrow money, is probably going to be north of that. So again, ten year money that we borrow, we feel as if we positioned ourselves pretty well to give us the wing, to have the flexibility to operate the way we want to operate.

[Jake Kemeny:]

Okay and then just one last quick one from me. The bad debt expense, are you can seeing a material pick up in that year-over-year and how are you kind of looking at that into 2009?

[Tom Quinlan:]

We did see an increase in 2008 and while we’re doing a lot of extra review and monitoring and management with our customers, I think the economic reality going into ’09 is that we’ll probably expect somewhat higher bad debt expense.

[Jake Kemeny:]

Thanks a lot, Tom

[Thomas Quinlan:]

Operator we’ve got time for two more.

[Operator:]

Thank you, sir. Our next question is the follow-up from Charles Strauzer with CJS Securities. Please go ahead, sir.

[Charles Strauzer:]

Hey thanks again for taking me, but Tom if you could talk a little bit about two things; one is, you touched upon taking cost out. I know you’ve been kind of reticent recently of kind of quantifying that, but can you gives us a little bit more granularity into how much more aggressive you want to be in terms of taking capacity out of your own platform versus maybe just headcount and also if you could talk a little bit about the stimulus packages and what you might see in terms of benefits there?

[Tom Quinlan:]

Sure and I’m not sure where the orchestra is coming from, but look we’ve suspended the 401k Charlie. We have no salaried employees getting any merit increases. We’ve changed the benefit plan design to better control our costs and behaviors that are out there. We continue to monitor aggressively like we’ve always had discretionary spending and we’ve reduce work hours at certain facilities. So it’s obviously something that I’ve been fortunate to be around people to learn that 15 to 20 years ago and we continue to execute on that, but we’ve been doing that no matter what the environment is. When the environment is going well we were doing it and now that the environment is not going well we’re still doing it. From the stand point of Charlie on your second question on capacity, look, there is going to be a market. There’s $174 billion of print according to the government at the end of 2007. $40 billion of it news papers; so there’s $134 billon that’s out there. Let’s assume that that loss 10% and lets for argument sake say its $120 billion. We’ve got maybe $8 plus billion of that pilot that’s out there; that’s still going to be out there. That’s a significant amount of dollars that we can go ahead and have and receive on our platform, plus with all the things that we can do from a scale standpoint, again with technology with distribution, so we want to be careful as far as how we look a capacity in our industry, for us. Where we have to unfortunately, we will make those decisions and we’ve done those decisions and we’ve taken cost out. That equipment will not appear anywhere else in the world. It will be in the Atlantic or Pacific Ocean. It will not come back and fight against us at another particular time. I think our competitors have set tent to try to monetize that, but that’s how we think about capacity and how we’re looking at continuing to monitor the cost structure of the company.

[Charles Strauzer:]

And then just touch upon the stimulus package; are you seeing any potential benefits from the stimulus packages in terms of additional work maybe coming from the government or other areas that might benefit you?

[Tom Quinlan:]

What I would tell you is from this stimulus package, I mean there’s a heck of a lot in there, because down on the hill I would have liked to see some things done on postal that were not incorporated because I do think Postmaster General Potter is trying to tell everybody that he’s got some problems and get some people to listen. I would tell you on the education side, there is some great numbers that are being thrown around on education. How that ends up getting partial debt, whether it is for infrastructure or will be actually for states to go ahead and adopt. I mean you got 45 states right now in the United States who are in a deficit position; about $350 billion in those 45 states. So, as they look to earmark their money for what they are going to do; on the education side, its great to hear all of us talk about what we want to do for education and we want to have the most college graduates in a couple of years and this is all fantastic. How that gets fed out will be interesting. I know our publishes or book publishers are anxiously awaiting to see what the various local institutions, colleges, high school, elementary schools will do. I mean there’s about 16,000 P&Ls, profit and loss if you want to look at it that way, educational systems out there in United States. I mean could you just imagine trying to run a company when you’re at 16,000 P&Ls, that’s what our educational system in the United States has; that’s got a change. So, I mean we look at this stimulus package. I mean anytime you put $2 trillion into an economy, you would think that at some point in time that’s going to payoff. So, is it towards year end, is it early next year, I’m not smart enough to tell you that, but I do know that if you’re putting this much money into something, there should be some stabilization going on or there should be some upside there and if you take into account, another $2 trillion from the countries across the globe, there’s a lot of money that’s been thrown at this issue and I think everyone is keeping their fingers crossed if it ends up turning this thing back.

[Charles Strauzer:]

Okay great. Thanks a lot Tom.

[Tom Quinlan:]

Thank you. Operator, thank you very much. We appreciate everybody’s time and have a good day.

[Operator:]

Thank you, sir. This concludes the call everyone. You may now disconnect from the phone lines.