R. R. Donnelley & Sons Company
Q4 2009 Earnings Call Transcript

Published: 24 Feb 2010

[Operator:]

Good morning. My name is Trinity and I'll be your conference operator today. At this time, I would like to welcome everyone to R.R. Donnelley fourth quarter results call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Gardella, you may begin your conference.

[Dave Gardella:]

Thank you, Trinity. Good morning, and thank you for joining us for R.R. Donnelley's fourth quarter 2009 results conference call. Yesterday, we released our earnings report. A copy of which can be found in the Investors section of our Web site at 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 details 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 an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our Web site in the Investors section the 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'll now turn the call over to Tom.

[Tom Quinlan:]

Thank you, Dave. Good morning, everyone. Obviously, this is a very exciting day for all of us at R.R. Donnelley and Bowne & Company. We look forward to sharing with you why we are so excited during this call. We've got a lot of ground to cover this morning. So I will underscore some performance metrics for Q4 and full year 2009, talk specifically about some of the actions that we took during the year to prepare R.R. Donnelley for future growth, and then turn it over to Miles. After he takes you through the financial highlights, I will return with some comments about our definitive agreement to acquire Bowne, and then open it up for questions. It is no exaggeration to say that as 2009 began, the world was in the midst of the worst financial crisis in 80 years. There were concerns about the solvency of large companies and a number of industries about overall liquidity, and about whether or not we were seeing a persistent structural change in consumer's buying habits. The goal for many organizations could be summed up in a single word, "Survive". Thanks to our employees' hard work, R.R. Donnelley did much more than that. For Q4, we again posted sequential revenue growth as our sales increased 4.9% over the third quarter. Our ongoing attention to financial discipline and tight costs control helped us to post non-GAAP earnings per diluted share from continuing operations of $0.46 for the quarter and $1.60 for the full year. A year ago, we told you that even in the midst of the worst economic environment in the lifetime, we would, at a minimum, maintain our financial strength and flexibility. We delivered, generating $1.4 billion of operating cash flow, up $400 million from 2008. We reduced our debt by $800 million, and improved our favorable debt maturity schedule. We continue to pursue a balanced use of capital. And our Board maintains our dividend at $1.04 per share. For investors, these actions, in combination with the results of our continued pursuit of operational excellence, resulted in a total shareholder return of 78% from the year-end 2008. The economic crisis confronted R.R. Donnelley with a challenge of determining the right balance between making drastic reductions in our workforce and platform and staying the course in order to be ready to take full advantage when economic conditions improve. We struck that balance during 2009. During 2010, we intend to capitalize on significant actions that we took to prepare R.R. Donnelley for future growth. Let me share four examples with you. First, we made acquisitions, opened new facilities, or invested in new businesses in Latin America, North America, Europe, and Asia. For example, in January of 2009, we announced the acquisition of another printer's assets to expand our existing platform in Latin America. The work we did to quickly make this operation an integral part of our platform helped us achieve a double-digit EBIT increase in Chile. This is indicative of the discipline we apply to integrating acquisitions, a subject which I will return to shortly. Second, we invested in online content creation community called Helium. We already create a lot of content for our customers through design, copywriting, translation services, photography, and more. But when we got involved early in the life cycle of communication programs, we are able to create efficiencies for our customers, and in turn, create service revenue for us. The investment in Helium is another great example of how we incubate concepts and expand our product and service offering to deliver value to our current and future customers. A third example of solidifying our foundation for organic growth is what we did to continue building out our leading digital platform and to make advances with our supporting digital technologies. We're using our proprietary ProteusJet variable colored digital print capabilities to produce TransPromo statements, direct response marketing programs, and short-run consumer and education books. We're also blending digital content with traditional media. This provides marketers with the ability to use digitally printed covers on catalogs to direct the recipients to special sales items that are individually matched to their previous shopping habits. Many of the orders that we receive for content that were produced digitally come through our exclusive CustomPoint portal, which we enhanced with new capabilities during 2009. In the past two years, the number of clients choosing CustomPoint has increased by 40%, and the number of orders placed through the system has risen by 42%. We have more than 1 million registered business users on this system today. Simply put, R.R. Donnelley is at the forefront of opening up new opportunities for our customers, with leading edge digital technology. Fourth, we established important strategic alliances that will enable us to continue to offer customers leading proprietary technologies. As we've talked about before, our independent R&D has resulted in significant leaps forward for digital printing. Now, in collaboration with Muller Martini, we are integrating their SigmaLine with our ProteusJet digital presses to create a unique inline digital book production capability. In addition, we announced a joint technology development initiative with HP. These initiatives as well as many others that we have undertaken will position R.R. Donnelley as a leading collaborative provider of integrated communications solutions. If you hear R.R. Donnelley and you think only printer, we invite you to think again. With that, I will turn it over to Miles.

[Miles McHugh:]

Thank you, Tom. We were extremely pleased with the performance of our employees as they persevered through the economic storm, staying focused on earning new customers and taking care of our existing customers. By serving our customers well and executing our business plans, we drove record free cash flow or operating cash flow less CapEx that benefited all of our stakeholders. Our fourth quarter non-GAAP earnings per diluted share were $0.46. And on a full year basis, we delivered non-GAAP earnings per diluted share of $1.60. As expected, we continue to see sequential revenue growth in the fourth quarter, with revenue of approximately $2.6 billion, an increase of 4.9% over the third quarter. Compared to the fourth quarter of 2008, revenue declined 7.6%. Lower paper prices accounted for approximately 133 basis points of the decline, while foreign exchange rates positively impacted revenue by 164 basis points. Excluding these items, our year-over-year revenue decline in the quarter was approximately 7.9%, primarily due to lower volumes as well as continued price pressure. Our comparable second quarter decline was 15.6%, and our third quarter decline was 11.3%. So we are encouraged with the direction that our revenue trends are taking. The improvement is due in part to the continued stabilization in demand as well as easier comparisons to the prior year as we had started to feel the impact of the recession at the end of the third quarter of 2008. GAAP income from continuing operations was $28.5 million in the quarter, compared to a loss from continuing operations of $892.9 million in the fourth quarter of 2008. Included in these amounts are $17.5 million of restructuring and $131.1 million of non-cash impairment charges in the fourth quarter of 2009, compared to $10.7 million of restructuring and $1.1 billion of non-cash impairment charges in the fourth quarter of 2008. A full reconciliation of our GAAP to non-GAAP earnings is included in our earnings release. We generated $319.5 million in non-GAAP EBITDA or 12.4% of sales. The increase in incentive compensation expense negatively impacted our EBITDA margin by 237 basis points. The decrease from fourth quarter of 2008 equates to a decremental margin of approximately 37% on our reported sales results, and only 9% excluding the impact of the increase in incentive compensation expense. As we have discussed in our previous calls, there are many factors that's determined in margin impact of a given revenue change, factors such as changes in pricing, duration and severity of revenue change, product mix, foreign exchange, changes in commodity prices and the resulting byproduct impact, bad debt and LIFO provisions, benefit plan expenses, and incentive compensation expense to name just a few. On a normalized basis, we would expect an incremental or decremental EBITDA margin in the range of the high 20s to mid 30s. Our non-GAAP effective tax rate in the fourth quarter of 2009 was 21.1%. That was the lower than the non-GAAP effective tax rate of 30.8% in the same period last year, due to a change in the mix of earnings across tax jurisdictions. Now, we'll discuss our operating results by segment. Sales in our US print and related services segment declined 10.9% to $1.9 billion in the quarter. The trend in paper prices continues as lower paper prices contributed approximately 173 basis points of the decline. Additionally, we are still experiencing lower volume in most product offerings as well as continued price pressure. We are pleased to see growth, however, in our financial print offering and stabilized revenue from our logistics services. Our international segments reported sales were $659.5 million, and grew 3.4% from the fourth quarter of 2008. Excluding FX, however, sales declined 3.8% from the fourth quarter of 2008, primarily due to lower volume and pricing in Europe as well as lower volume in our business process outsourcing unit. On a positive note, we saw improvement in our global turnkey and Asian financial print offerings, both of which experienced revenue growth, compared to the fourth quarter of 2008, primarily driven by improved volume. Our non-GAAP unallocated corporate expenses decreased by $14.4 million from the fourth quarter of 2008 to $36.8 million in the fourth quarter of 2009. Driving this improvement were favorable LIFO inventory and bad debt provisions, our cost take out efforts, and the suspension of the company 401-K match in 2009. Partially offsetting these reductions was higher incentive compensation expense. Capital spending was $62.1 million in the quarter, $22.2 million less than the fourth quarter of 2008. We effectively managed our CapEx all year long, spending only $195 million. And we'll continue with the same prudent approach in 2010. We generated over $1.4 billion in operating cash flow, and over $1.2 billion in free cash flow or operating cash flow less CapEx. Based on this performance, our full year results reflect a more normal of incentive compensation expense, which negatively impacted our non-GAAP operating margins by 98 basis points as we had no incentive compensation expense in 2008. Our net available liquidity as of December 31st, 2009 was $1.9 billion, over $100 million more than we had at the end of 2008. The financing actions that we took in 2009, including the first quarter issuance of $400 million of tenure notes, our third quarter tender for $640 million of near term notes, and the issuance of $350 million of seven-year notes greatly improved our near term flexibility and our already favorable debt maturity profile. During the year, we reduced our total debt by over $800 million and reduced our net debt by nearly $1 billion. Our remaining debt is 99% fixed at an average interest rate of 6.7%. We are still targeting a debt-to-EBITDA ratio of 2.0 times to 2.5 times on a sustainable basis, recognizing that there are certain circumstances we may be at or above the high end of that ratio. In 2009, we contributed $22 million to our pension plans. We recognized $5 million of pension income. In 2010, we again expect to contribute about $20 million to the plans, but our 2010 expense is expected to be $32 million, a year-over-year increase of $37 million in expense that is substantially driven by the lower discount rates on our plan liabilities under GAAP at December 31st, 2009. We expect our required contributions in 2011 and beyond to increase. And we may decide in 2010 to make additional non-required contributions to the plans. We'll continue to evaluate the most opportune time to fund our pension and obligations. In terms of what we're projecting for 2010, let me share with you some of the key expectations and guidance, all of which exclude the impact of the Bowne acquisition. We expect year-over-year revenue growth in the low single digits. Our non-GAAP operating margin is expected to be approximately 6.5% to 7%. The decrease from 2009 is primarily driven by non-cash increases and pension and post-retirement benefits expense and our LIFO inventory provision. We expect depreciation and amortization expense of $560 million. Interest expense is projected to be approximately $220 million. Our non-GAAP tax rate will be in the range of 31% to 33%, although this estimate could be significantly impacted by business trends affecting different countries in which we do business or by changing the tax law. We expect a fully diluted share base of approximately 210 million shares. Our CapEx will be approximately $200 million. Our projected corporate expenses will be in the range of $220 million to $240 million. And finally, we expect our free cash flow or cash flow less – operating cash flow less CapEx to be in the range of $600 million $650 million for the year, and to be more heavily weighted towards the back half of the year. Negatively impacting our year-over-year comparison are the cash tax benefits that we realized in the first quarter of 2009 related to the decline in value and reorganization of certain entities within our international segment, the 2009 increase in cash for lower working capital, and the fact that no bonus payments were made in 2009 related to the 2008 plan year. In aggregate, these items drive approximately $685 million of the expected year-over-year change in free cash flow. Before I turn the call back to Tom, I'd like to announce some organizational changes that we're making in our corporate (inaudible) function. Janet Halpin, has most recently served as our head of internal audit, will be assuming the responsibility for treasury, filling the role made vacant when Dan Leib moved to his current role as Group CFO last summer. With this change, I'm also pleased to announce that Mike King [ph], who recently – or currently heads our corporate planning function replaced Janet as the new head of internal audit. Both Janet and Mike have been key members of the team over the last few years, and I'm pleased to have them in their new roles. And with that, I'll return you to Tom.

[Tom Quinlan:]

Thank you, Miles, and congratulations to both Janet and Mike as well. As most of you know, there's a lot going on in our industry right now. When the dust settles, we believe that we will still have the only true end-to-end capability to prepare, produce, deliver, and process communications for our customers across so many product and service lines. Our extensive and unmatched product and service offering positions at R.R. Donnelley to expand by providing both additional product and services to the long run industry's traditional publishing and retailing clients, and complete communication solutions to clients within the significant number of industries that we serve. I mentioned earlier our success in integrating prior acquisitions. In our industry, there is no management team that has more experience at quickly realizing value from acquisitions. And we believe that our acquisition of Bowne represents another superb opportunity to do just that. We have constantly said that we evaluate acquisition candidates based on their ability to bring us new and enhanced customer relationships, extend our product and service offering in areas in which our customers have demonstrated firm demand, and/or our ability to impact their cost structure. The acquisition of Bowne satisfies these strategic imperatives, and will be accretive to non-GAAP earnings within the first 12 months following the acquisition date. Combining Bowne's respective resources with R.R. Donnelley's will help us to bring an even broader mix of products and services to both organizations' customers. It will also accelerate the creative use of technology across our platform. When the combination is completed and we bring the organizations together, we will draw on our industry – on our history of selecting best-of-the-best solutions to enable customers to benefit from the combined resources and expertise of both organizations. This reference to best-of-the-best is not just acquisition speak. For example, I talked earlier about the success being driven by our proprietary CustomPoint system. CustomPoint combines the elements that we drew from the great ideas of people who came to R.R. Donnelley from pre-acquisitions as well as from previous R.R. Donnelley capabilities and new creative development. We believe that the acquisition of Bowne will deliver exceptional value. And now, operator, let's open it up for questions.

[Tom Quinlan:]

Operator?

[Operator:]

Yes, sir. (Operator instructions) Your first question comes from Charlie Strauzer from CJS Securities.

[Charlie Strauzer:]

Good morning.

[Tom Quinlan:]

Hi, Charlie. How are you?

[Charlie Strauzer:]

Good. How are you? A couple of questions, I'll start off about the quarter, if you could – actually more about – actually more on the guidance, if you could, the 32 million, Miles, that you talked about the pension expense, and then the 6.5% of guidance you gave for operating margins, can you quantify, in terms of the margin hit, what the LIFO adjustment and the pension expense is to the operating margin runs in terms of percentage-wise?

[Miles McHugh:]

Yes, we'll get that – we'll calculate that here, and then we'll get a chance in a second.

[Charlie Strauzer:]

Got it. And then–?

[Tom Quinlan:]

This is significant. Charlie, just to stay for a second, it's a significant hit to us for 2010. And obviously, we – we're going to do all we can to overcome it in 2010. The good part there that we feel with part of the pension is, obviously interest rates being as low as they are, I don't think any of us believe that they will stay down at that level. So at some point in the near future, that will obviously come back and be what I'll call a good guide to us. And then the same thing on LIFO, I mean with the Fed and the Treasury acting more and more like one every day, I think we will start to see rates moving in the other direction from where they are today given what – how we feel the economy is starting to pick up in 2010.

[Charlie Strauzer:]

And what do you – what are you factoring in, in terms of FX for next year? Are you planning to keeping it neutral or are you factoring any positive benefit or negative benefit to that?

[Miles McHugh:]

It's a little bit positive, but it's not much in the whole scheme of things.

[Tom Quinlan:]

Our top line will be slightly impacted. But overall, as you go through the P&L because of locations we are in and the currencies that we stay within those locations, it has little impact when you get down to the margin.

[Miles McHugh:]

And Charlie, on your earlier question on the – into that year-over-year on the margin, it's about a $70 million negative impact for those items for the LIFO. And those are just to declare our all non-cash changes, so those are – that's the impact. And the other thing to keep in mind in the same way is in Q3 of 2009, if you recall, we have the $12 million benefit from a contract termination that we won't see in 2010. So those are some good items to keep in mind when you look in the upcoming year.

[Charlie Strauzer:]

Good. And do you plan to breakout some of these non-cash adjustments in your reporting?

[Miles McHugh:]

We'll keep talking about them on calls like this. But I don't think we're going to break them out anywhere else on that.

[Charlie Strauzer:]

All right. Good. And then, just in terms of paper prices, I mean there's been talk that this – some paper price increases being seen in the marketplace. What are you hearing now in – what is this speaking, if anything?

[Miles McHugh:]

Yes. We still see a trend in lower paper prices, in different grades, in different types of paper. You may see a little bit of aberration from that. But overall, we don't see any major up-tick in there.

[Charlie Strauzer:]

Got it. Okay. And then, just bigger picture looking at the Bowne acquisition, it seems like (inaudible) especially with a lot of talk about increased regulation, the bulk of rule, et cetera. It seems like a timely transaction for the company. Can you talk a little bit about potential synergies there? And also, can you talk a little bit to – would this transaction basically preclude you or prevent you from maybe pursuing – or take you out of the marketplace for pursuing something like a WorldColor, again given that they're back in play.

[Tom Quinlan:]

I'll start with your second question first, Charlie, and thank you. Look, Miles went through with you here pretty – in detail our strong cash flow that we have. You combine that with the liquid currency that we have in our common stock and our access to capital markets. We have ample financial flexibility to continue to make the right strategic investments. But I would hope is that this management team has proved to everybody on the call or over the years that we recognize all the different constituents that are part or R.R. Donnelley from, obviously, customers being first, equity, bond investors, employees, and that we will do the right thing by everyone as we go through. So you know we don't comment on acquisitions, but that's all say on that part. The exciting part this morning for us, though, is on getting together with Bowne. Again, I think from our standpoint, I mean the – Bowne is filled with just a number of experienced employees. They have a great reputation for serving clients. We need to have that in our minds before we can proceed to talk about any strategic initiatives that we're going – that we're looking at. And when you – as you've talked about technology, if you just go back in time, if people have a chance, to go back and look at the announcements that we made in 2009 along the technology front, and you'll see that a number of them were made in the financial area as far as what we're looking to do with the introduction of the apps for broker dealers and financial advisors, the enhancements that we did to venue, the right content, share content solution that we did. On and on, we went throughout 2009 to get us ready. Because again, to your point and others' points, this is an area that we look at that is growing. We talked to you at great length about content management, document management, content distribution, document distribution. We believe this is the future. What takes place at Bowne and R.R. Donnelley covers these points. We don't look at content as just numbers or data. And we don't look at distribution as just limited to being physical. So it's a digital world. It's a virtual world as well that we're coming to. The technology that's developed in this area by both of our groups is transferable across all of our products and services, which is something that, again, makes us excited when you think about magazines, catalogs, retail inserts, statements. This innovation takes place by us by Bowne to make it easier for customers. And quite frankly, it's ahead – further ahead than any other product or services lines that we go ahead and have. Everyone's talking about the electronic reader and what's taking place in that marketplace. But understand, what our two groups deal with on an everyday basis, from privacy, to speed, to accuracy, to ease of access, any device, this information and data has got to be on. It helps us again, from a technology standpoint, with other products and services. Is it going to happen tomorrow? No. But is it going to happen in the near future? We believe so. So you take that, you take the digital infrastructure and distribution capabilities that Bowne has that they assist their customers with in compressing their costs and improving their return on investment combined to what we've got going on. And again, I think you'll see that the creation for us to develop solutions that address the changing regulatory landscape, as you called it, for document management, from creation, to filing, to distribution, to storage, those are all going to be important parts of what's going to play, not only in this particular product line that we talked about, but it's going to take place in other product lines as well. Bowne has a global footprint and have customers that they both serve physically and virtually throughout the globe. So we're excited by it, and looking forward to getting started.

[Charlie Strauzer:]

Just a quick question, I know that Bowne has roughly 50 offices, roughly 2,800 employees. Can you give me a rough estimate of how many Bowne employees are focused on financial plan, and how do you financial print offs that you have as well?

[Miles McHugh:]

So Charlie, we don't disclose that. But I will tell you as we start to go through the integration, obviously, the infrastructure there, there are cities where we're close in proximity to each other. There'll be opportunities there. Understand, we’ve done – the group that you have before you, the R.R. Donnelley that I talked about, we’ve done a number of integrations of printing companies. You can go back to properties that some of you may remember on the phone from George Rise, NorthKey Graphics [ph], Meredith/Burda, Alden Press, More Wallace, Banta, Perry Judd, VonHof [ph], I can go on and on to talk to you about some the things that we do. And we all know as we do these that there is a tremendous amount of uncertainty for people that work in these areas at both of our companies. And it’s our responsibility to eliminate that uncertainty as quickly as possible so that – excuse me, so that everyone continues to focus on bringing value to the customer. Again, this is the most crucial time between announcing and closing for an integration to be successful, and for the combined company to hit the ground running upon closing. Dave, (inaudible), and I started the integration process basically last night and appreciate all the things that we’ve started to get rolling. We’re going to do everything within the limit of the law to accomplish everything we need to do by closing, while at the same time, individuals are going to have to continue to do their day job. No one can take their eye off of what they’re currently doing, which is again serving customers at what we think is at a highest level. So we’ll look at everything that one normally looks at. You’ll look at benefits. You’ll look at public company costs, real estates, supply chain, and we’ll get together and make one-and-one equal three.

[Charlie Strauzer:]

Sounds great. Thanks a lot, Tom, and congratulations.

[Tom Quinlan:]

Thank you.

[Operator:]

Your next question is from Scott Whistleman from Goldman Sachs.

[Tom Quinlan:]

Good morning, Scott

[Scott Whistleman:]

Great. Thanks for taking the questions. Congratulations on the transaction. First, just can you discuss how you plan on funding the acquisition? I'm recognizing you guys also have $325 million coming due in May. I guess I’m just trying figure out whether you foresee tapping the bond market at some point.

[Tom Quinlan:]

Yes. Again, as Miles talked to you about, we’ve got ample capacity underneath our credit facility at this point in time. So we don't feel as if closing the deal, as we've said in documents, is all going to be hang up by financing. Yes, we’ll see what the markets look like as we get closer to what we’re going to do, and see what’s best for us to do at that point in time. But again, we’ve got the resources to do it today if we had to.

[Scott Whistleman:]

Sure, understood. And then maybe a more philosophical-type question, and obviously, I appreciate your comments previously about how you think about additional M&A. But can you just give us color on how you think about the balance of pursuing M&A versus protecting the balance sheet in your investment grade rating? And I guess what I’m trying to ask is would you do a deal that could potentially jeopardize your investment grade ratings?

[Tom Quinlan:]

Yes. It’s another way to get at it. Good for you for asking it that way. What I would tell you is look, we said publicly and we’re still going to say publicly, we enjoy the fact that we’ve got investment grade metrics. We told you in the past we’re trying to live between two and two-and-a-half times. We paid down $1 billion worth of debt last year, net debt. I mean that for us is significant in a year when, again, we didn’t know if we were going to be able to recommend to our Board whether or not we’re going to able to keep the dividend. We didn’t know whether customers were going to go out of business. We didn’t know if the American consumers specifically were going to just stop buying things. The great thing now is that people are starting to brand again. People are starting to you – banks, credits starting to open up again, and all that stuff. It is good and good printed. Unemployment is a significant headwind and we’re not blind to that. But we will do what we believe is right for our shareholders, for our bond holders. We will do – we will make the decisions that we’ve done over the last six years together. And again, hopefully we've built up some equity with the people on the phone today that say, “Okay, we’ve managed this business through some of the toughest times anyone has ever seen. And at the same time, we’ve been able to deliver for you." And we look – that we’re going to continue to keep that. There’s going to be – there’s no brain surgery going on here. There’s no physics going on here. We’re going to continue to manage the business as we have and go from there.

[Scott Whistleman:]

I appreciate that. And then, maybe this is more operational, can you just give us some more color behind the expectations for growth in 2010, maybe just for some segments you could highlight you feel better about? Is it international versus US, just any additional color will be helpful?

[Tom Quinlan:]

I think we said low to mid-single digits in 2010 from a top line standpoint, low. Which again, it's a $480 billion – $400 billion industry. I’m trying to add $80 billion to it this morning. But it’s a $400 billion global industry. At year-end 2009, we have $10 billion of it if we have a drop in the bucket of what’s out there. So again, our sales force, our operational people are charged with going ahead and making sure that we can bring profitable work on to this platform. There's no excuse, if we have, for you. And we give up – we have the resources, the financial strength, and the flexibility to go to our customers to assist them in lowering their costs and improving their return on investment. Our print management program that we put in place has started to get some pretty good winds behind it. We think that’s going to grow in 2010. The states, from a textbook standpoint, from an adoption standpoint, Texas, I believe adopted literature. Florida adopted math. That’s significant given the fact that most of the states in the United States are running out to deficit. We do believe educational spending at some point in time is going to have to come back. I don't care what anybody says about all these nice electronic devices. If our country can't feed children on a daily basis, give them paper and pencils, I have a hard time believing in the near future that we’re going to get ahead and give them electronic devices to learn from. So there're going to have updates there. Automobile industry is starting to feel better about it, so that’s great for us. The financial institutions are starting to prospect again from a direct mail standpoint. Credit card solicitations are going up. The candidate, the acquisition, us and Bowne, I mean both organizations, you in particular on the phone are starting to see more deals take place, more capital markets activity starting to take place. People are starting to feel a little bit stronger about things. Retail inserts, even though newspapers are getting beat up pretty good, there’s still a good distribution network there with newspapers for retail inserts in addition to dropping them off at the back stores in addition to putting them into your mail boxes, so. Again, I think if you go across, I could go on about statements, electronic presentment, collateral material, the pharmaceutical industry. Each one of those verticals is starting to see signs of life, which again we need to translate into the top line and bottom line for our company.

[Scott Whistleman:]

That’s great. I really appreciate it. Thank you

[Operator:]

Your next question is from Edward Atorino from Benchmark.

[Tom Quinlan:]

Good morning, Ed.

[Edward Atorino:]

Hi, good morning. First of all, congratulations on Bowne. I think that’s just a terrific deal, just a terrific deal.

[Tom Quinlan:]

Thank you. We appreciate that.

[Edward Atorino:]

It’s a long story, but I see that someday you’d come knocking over there. Anyway, three questions quickly, one, you talked about – I know you said growth in the – for the year, you want to give us some view of the tunnel, maybe the quarterly patterns, number one? Number two, margins in 4Q were lower than estimated. As I said, this quarter, but what about the margin trends in 2010 both for the growth number and the SG&A? That’s two questions. That's enough. Thanks.

[Miles McHugh:]

Okay. Ed, it’s Miles. On the growth, we’re looking at for 2010 revenue growth in the low-single digit. And for quarterly spread of that, I think we’ve talked about in the past and we’re seeing in the continuation, about what we call a return to more normal seasonality, where we’re going to see more volume and more revenues in the back half of the year because of the cycle of advertising and the like. So that is a little bit more normalcy there. Then on the margin question, operating margins, we’re looking at for 2010 to be in the 6.5% to 7% range. And that’s a little bit down from our 2009 because of the non-cash increases in the pension, which I mentioned is going to be a big component of difference in 2010 because of the discount rate changes that are required under GAAP, and all measures as of the December 31st, 2009. And then also, the non-cash LIFO inventory provisions, we had released this last year and we’re not going to see those – we’re not forecasting to see those again in 2010.

[Tom Quinlan:]

Thank you, Ed.

[Edward Atorino:]

SG&A as a percent of sales in the 10% range, 11% range?

[Miles McHugh:]

Yes. Now that’s where – you know that seems reasonable, yes.

[Edward Atorino:]

And in 1Q continued reduction in the rate of decline?

[Miles McHugh:]

Yes.

[Edward Atorino:]

Thank you.

[Operator:]

Your next question is form Sachin Shah from Capstone Global Markets.

[Miles McHugh:]

Good morning.

[Sachin Shah:]

Hi. Good morning, guys. I just have a question about the timing. I know it’s pretty broad about second half closing. So I just want to find out, can you narrow that timeframe for us? And can you also talk about any divestures that you see? I know that DMA has a cap on that. So I just wanted to get your thoughts on what you see potential as divestments. Are there going to be issues on any closing standpoint? And second part is synergies, DMA already extracted approximately $100 million in synergy cost cuts, excuse me, over the past two years. So that’s a good operating leverage for you guys acquiring the company. So I just wanted to find out, in addition to that, what synergies are you expecting?

[Tom Quinlan:]

Thank you for the question. I mean from a closing standpoint, we expect to close these transactions on the second half as you stated. Understand, when you talk about the divestiture part, there are no barriers actually to these services. There're many examples of companies in the financial (inaudible) sector who have become real competitors to the traditional financial service providers. The financial service sector, it’s diverse in a multi-faceted business model. You've got XQRL [ph]. You've got composition. You've got print. You've got translation. You've got virtual data rooms, all vary, all with unique constituents in all part of our offering. Over the years, we’ve seen new entries from around the globe entering into this area. And let’s not forget that as our number come – these are sales that's doing these services for themselves. So the digital age, without a doubt, is upon us. It’s not only physical, but obviously it’s also virtual. And again, we’re looking forward to working with the people from Bowne and Donnelley bringing it into the one R.R. Donnelley, as I said, during the second half of the year.

[Sachin Shah:]

Okay, and the synergy question?

[Tom Quinlan:]

Yes, synergies again, as we talk about it, the normal ones that you would look at, probably company costs. We'll look at real state benefits. You have the supply chain, IT, all that takes place. Understand, we will not be a bowl in a China shop when it comes to the selling part of this. We get it. We understand it. And again, the integration process that’s going to take place between now and when we close is critical to us to understand what everyone does, what the relationships are, what value gets broad as we go through this. So if you are good – if you got a good pair of hands, you’re a good sales person, whoever it is, this is a great day for you. Like Dave runs his organization now, like we run our organization now, if you’re not hitting on all cylinders, it may not be that great of a day. But again, nothing should change between the way these two companies are managed. We think it’s a – culturally, it’s a great fit. And we think it will be seamless to the customers, which is the most important thing.

[Sachin Shah:]

Okay. So just as far as numeric amount, you’re not writing any transparency on that at this point? If so, determined or–?

[Tom Quinlan:]

No. I think I would hope the key line and hope today, as we’ve said, it’s accretive. And from that standpoint, we’ll go from there, and that’s what we’re – yes, that’s what I’m saying.

[Sachin Shah:]

Okay. Thank you, guys.

[Tom Quinlan:]

Thank you.

[Operator:]

Your next question is from Ken Silver from RBS.

[Ken Silver:]

Hi, good morning. Thanks for taking the call. Two questions I guess, you gave annual guidance. Can you give us a sense of first quarter, at least to know what your expectations are in the top line?

[Miles McHugh:]

Sure. I mentioned for the annual, there’s – we’re expecting for low single-digit revenue growth in 2010. Normal seasonality, which I mentioned a couple of minutes ago, is what we’re looking at. And that means that we’re going to have the back end of the year likely more highly weighted with that revenue. And 2009 was a challenging year for a lot of reasons. So there's a lot going on that’s massive. If you go back a couple of years and look at the seasonal growth in revenues over quarter-to-quarter, it’s probably a good way of trying to anticipate what we’re – we may be expecting in 2010.

[Ken Silver:]

Did you think you’re going to have revenue growth year-over-year in the first quarter?

[Miles McHugh:]

It’s going to be close. Later on with that kind of seasonality expectation, you’re going to see a normal trend to drop from the fourth quarter to the first quarter. How that interplays with economic growth in the overall market, it’s hard for us to pin it down exactly.

[Ken Silver:]

Just for a second, I mean first quarter of 2010 versus first quarter of 2009. So taking out – that’s to take out the seasonality.

[Miles McHugh:]

Well, right. To begin 2009, you have the whole economic changes going on. So it’s going to be close call, right?

[Ken Silver:]

Okay, fine. Thanks, another question.

[Tom Quinlan:]

Let’s just stay for a second. One thing I want to emphasize to you, look the Fortune 1,000 that we deal with on a daily basis and what we’ve got from a product and services platform and the print management role that we’ve been going forward with that we started a little bit into 2009 last year has legs to it, has wind behind it. We're starting to see where people are more receptive to what we are all about and what we’re bringing to them. If it was just long-run printing, I could tell you that R.R. Donnelley maybe in a little bit more – would not have done as well as it did in 2009. The fact that we have transactional products that we can bring to market, the fact that we have relationships from the chief marketing officer, through procurement, through the CFO, to the CEO, and they see that we’re a trusted partner, this is all starting to pay dividends for us. We talked to you about it for a period of time. And again, this is a year where I said we should see organic growth take place, and again, I think we will.

[Miles McHugh:]

And maybe to add a little bit to that, too. The legs we are seeing in the economy, particularly internationally, we saw stronger growth in Asia and some of the other international locations. And I think going into Q1, you’re probably – we're probably expecting to see a similar type trend. So that’s still favorable quarter-over-quarter from last year.

[Ken Silver:]

Okay. Thank you. One other question, what capacity utilization rate are you running at?

[Tom Quinlan:]

Yes. As you know, if you've been in our calls before, we don't go there. We don't talk about that, but thank you.

[Ken Silver:]

Do you have an industry number?

[Tom Quinlan:]

I think the Fed puts that one that you can get through their Web site.

[Ken Silver:]

Do you know what it is?

[Tom Quinlan:]

I don't know. Top of my head, I don't.

[Ken Silver:]

Okay. Thanks.

[Tom Quinlan:]

Thank you.

[Operator:]

Your next question is from Hale Holden from Barclays Capital.

[Hale Holden:]

Hi. I just have two quick ones. I was wondering, Tom, if you could break out on a percentage of revenue basis where your additional revenues were or – that you initially talked about at October – at the call? And second on the balance–

[Tom Quinlan:]

No.

[Hale Holden:]

No. Okay. On the balance sheet, I was wondering if there is any interest or desire on your part to get a waiver on the credit facility to maybe increase it back to full utilization.

[Tom Quinlan:]

I'm not understanding your question. We don't need a – we have done – we’re one of the few people in the industry that haven’t had to go back for a significant waiver or something like that in the credit facility. So we’re comfortable if the credit facility works out, and we plan on living within what it says.

[Miles McHugh:]

Right. We finished the year with nothing drawn under the credit facility. So there’s ample liquidity there.

[Tom Quinlan:]

When you see the 10-K with the notes there, you’ll probably get to.

[Hale Holden:]

Okay. And in the press release, you disclosed that $2 billion facility that becomes the leverage covenant, you only have $1 billion for – available.

[Miles McHugh:]

That’s right.

[Tom Quinlan:]

But understand that comment; please don't get confused by that. That assumes that no additional EBITDA comes in. So we’re making the assumption without being forward, if we spend any money that we don't get the benefit of any EBITDA associated with that. We look at it on a conservative basis at the highest level of constraint when we talk to you about that.

[Hale Holden:]

Okay. And then maybe on WorldColor Quad, if you can talk about how that changes the competitive (inaudible), and maybe in what percentage of revenue is directed in line up against them?

[Tom Quinlan:]

You can give them a call. We don't comment on acquisitions or anything like that. And we’ll just – we'll continue to worry about ourselves and go to work every day.

[Hale Holden:]

Okay. And then, we’ll take them a stronger competitor against you, right, when you go head-to-head with them?

[Tom Quinlan:]

Again, look, we’ve got what we think is a great long-run platform that thank goodness we complement it with other products and services. So with that I appreciate it, and we’ll move on to the next question. And I think we got time for one more.

[Operator:]

You have a follow-up coming from Charlie Strauzer from CJS Securities.

[Charlie Strauzer:]

Just two quick housekeeping items, the pension and LIFO expenses, is that going to be in the corporate expense line, Miles?

[Miles McHugh:]

Yes. That’s where you’ll see the biggest impact.

[Charlie Strauzer:]

And that’s why you see the jump year-over-year obviously?

[Miles McHugh:]

Right.

[Charlie Strauzer:]

And then, and Tom of the – I have the expense utilization for January for last year with about 67% for the industry.

[Tom Quinlan:]

Great. I appreciate that. And if you could send it in the Web site for the other gentlemen, we would all appreciate it. But, I think that’s all.

[Charlie Strauzer:]

Thanks, guys.

[Tom Quinlan:]

Operator, we’ll end on that note. But again, I appreciate every one taking the time to join the call today. A lot of exciting stuff going on. And we look forward to talking to you in a couple of months. Have a good week.

[Operator:]

Thank you for participating in today's teleconference. You may now disconnect.