R. R. Donnelley & Sons Company
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Welcome to the RR Donnelley Second Quarter 2014 Results Conference Call. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. I will now turn the call over to Dave Gardella. Dave, you may begin.

[David A. Gardella:]

Thank you, John. Good morning, everyone, and thank you for joining us for RR Donnelley's Second Quarter 2014 Results Conference Call. This morning, we released our earnings report, a copy of which can be found in the Investor section of our website at rrdonnelley.com. During this call, we'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 provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We also posted to our website, in the Investor section, a description, as well as reconciliation of non-GAAP measures to which we will refer on this call. We're joined this morning by Tom Quinlan, Dan Leib, Dan Knotts and Drew Coxhead. I'll now turn the call over to Tom.

[Thomas J. Quinlan:]

Thank you, Dave, and good morning, everyone. During our last conference call, we talked with impact that the winter storms had, particularly on dampening consumer activity and on transportation costs. We also said that we had begun to see a positive trend emerge in March as the cold and storms finally retreated. That uptick continued into the second quarter and was reflected in our organic revenue increase of 0.8% versus the same quarter a year ago. Two of our reporting segments grew organically during the quarter on a year-over-year basis. Variable Print was up 3.2%, and our Strategic Services segment's organic revenue growth was 3.8%. These 2 segments combined to deliver 57% of our total revenue during the quarter. Services, in particular, play an important role in differentiating our extensive product offering across the breadth of our platform in sustaining long-lasting customer relationships by creating more deeply integrated company-to-customer touch points and in opening the door to new revenue opportunities that complement the existing products we are providing to our valued customers. Let me illustrate this last point. In many instances, our Services capabilities help us to retain vital share in areas being impacted by technology. As a global integrated communications services provider, our ability to provide creative and design services, content management, multi-channel digital presentment, content archiving, supply chain management and logistics services helps us to retain and win share in the markets we serve. We have built the most extensive platform of products and services in the industry that we utilize to help our customers create, optimize and execute their multichannel communication strategies. So whether they are communicating with their customers, their investors, their employees or their suppliers, RR Donnelley provides the broadest offering to support their dynamic communication needs. With regard to services during enhanced -- driving enhanced revenue opportunities during the quarter, our Logistics Services offering again posted a double-digit organic revenue increase as compared to the same quarter a year ago. Much of this growth was driven by our third-party logistics or 3PL capabilities. 3PL continues to be an attractive space because it leverages our extensive carrier network and does not require significant capital investment to support future growth opportunities. We will continue to direct our resources into innovations, geographic locations and product and service offerings that offer the best potential to drive growth and to win additional share in more mature product segments. Now with that, I'd like to turn it over to Dan to take you through the quarter in detail. Dan?

[Daniel N. Leib:]

Thank you, Tom. As with the prior quarters, the focus of my comments will be on certain non-GAAP results and measures. Please refer to the support schedules of our earnings release for a reconciliation of GAAP to non-GAAP results for the second quarter. Our performance in the second quarter was consistent with our expectations. Reported revenue growth of 12.9% in the quarter was driven by the acquisitions of Consolidated Graphics and the North American operations of Esselte, both of which were completed in the first quarter of this year. Despite the continuing price erosion inherent in the business, year-over-year organic revenue returned to positive growth, increasing 0.8%, led by organic growth in our Strategic Services and Variable Print segments, partially offset by declines in the Publishing and Retail Services and International segments. Our free cash flow was $92.8 million, $14.5 million below the $107.3 million that we generated in the second quarter of last year, primarily due to a higher use of cash for working capital, higher capital expenditures and a higher contribution to our pension plans, partially offset by an improvement in EBITDA. While working capital is traditionally a use of cash in the second quarter, from a year-over-year comparison perspective, last year's second quarter benefited from billing efficiencies in our financial print business, smoothing the working capital seasonality that we have seen historically in that offering. As highlighted in this morning's press release, we remain on track to deliver full year free cash flow in the range of $400 million to $500 million and continue to focus on reducing our gross leverage to our targeted range of 2.25 to 2.75x on a long-term sustainable basis. Second quarter non-GAAP adjusted EBITDA was $325.6 million compared to $304.1 million in the second quarter of 2013, and non-GAAP adjusted EBITDA margin in the quarter of 11.2% was 60 basis points lower than in the second quarter last year. On a like-for-like basis, adjusting for the impact of the acquired businesses that historically carried a lower margin, adjusted EBITDA margin declined approximately 35 basis points. Price pressure across our 4 segments and wage and other cost inflation more than offset lower employee-related expenses. Our non-GAAP operating margin of 7% in the second quarter of 2014 was 50 basis points lower than the second quarter of 2013. Relative to the change in EBITDA margin, lower depreciation and amortization as a percentage of revenue narrows the decline in operating margin by 10 basis points. This is an ongoing trend resulting from reduced levels of capital spend as our business continues to become less asset-intensive. On a like-for-like basis, adjusting for the impact of the acquired businesses that historically carried a lower margin, operating margin declined approximately 10 basis points. Second quarter gross margin was 22.9%, 37 basis points lower than the second quarter of last year. Price erosion, inflationary pressures on wage and other costs and unfavorable mix of business and increased transportation costs more than offset higher volume. SG&A expense in the quarter as a percentage of revenue was 11.7% or 23 basis points higher than the second quarter of 2013. A higher provision for bad debt and business mix were partially offset by higher pension income. Our non-GAAP effective tax rate in the quarter was 36.6% compared to 34.2% in the second quarter of 2013. The 2013 rate included a benefit related to the restructuring of certain foreign entities. Now I'll discuss revenue and non-GAAP adjusted EBITDA performance for the segments in more detail. Revenue in our Publishing and Retail Services segment was $625.9 million, representing a decline of 3.6% or $23.4 million from the second quarter of last year, 60 basis points of the decline related to the negative impact of lower passthrough paper sales resulting in an organic year-over-year decline of 3%. We experienced volume declines in books and directories and continued price pressure, primarily in magazines, catalogs and retail inserts. Non-GAAP adjusted EBITDA margin for the segment of 10.9% declined 180 basis points from the second quarter of 2013 as a result of price erosion and lower volume, which more than offset the impact of our productivity initiatives. Revenue in our Variable Print segment was $957.4 million, an increase of 52.9% from the second quarter of 2013, due primarily to the acquisitions of Consolidated Graphics and the North American operations of Esselte. On an organic basis, year-over-year revenue increased 3.2%, driven by improving volume across most of the offerings, partially offset by lower pricing. Given the product line makeup and its transactional nature, the Variable Print segment tends to be the area of our business that is most sensitive to changes in the economic environment. The segment's non-GAAP adjusted EBITDA margin of 11.7% in the second quarter improved 30 basis points from the second quarter of 2013. Higher volume and the impact of productivity initiatives more than offset price pressure. Revenue in our Strategic Services segment were $687.5 million in the second quarter of 2014, an increase of 4.1% or $26.8 million from last year's second quarter. Similarly, organic growth for the quarter was 3.8%, driven by Logistics, which had another solid quarter with organic growth of 10.7%, and sourcing, which reported organic growth of 20.6%. Non-GAAP adjusted EBITDA margin of 15.1% for the Strategic Services segment was flat to the second quarter of 2013. Second quarter 2014 sales in our International segment were $631.7 million, declining by 0.6% or $3.7 million from the second quarter of 2013. After adjusting for the unfavorable impacts from changes in foreign exchange rates and the disposition of our global real estate services offering and our direct mail operation in France, as well as the favorable impact from acquisitions and higher passthrough paper sales, organic revenue declined 2%, primarily due to price pressure across most offerings in the segment. Volume increases in Asia and global turnkey were offset by volume declines in business process outsourcing in Europe. The non-GAAP adjusted EBITDA margin in the segment of 8.5% was 110 basis points lower than the 9.6% margin in the second quarter of 2013 due to wage increases and inflationary pressure, as well as price erosion across the segment. Second quarter 2014 non-GAAP unallocated corporate EBITDA was negative $11.8 million or $1.3 million worse than the second quarter of 2013. As I noted earlier, free cash flow in the quarter was $92.8 million, $14.5 million lower than the $107.3 million in the second quarter last year, primarily due to a higher use of cash for working capital related in part to last year's second quarter benefit in our financial print business, higher capital expenditures and a higher contribution to our pension plans partially offset by an improvement in EBITDA. We remain on track to deliver full year free cash flow in the range of $400 million to $500 million, and our estimate for capital spending remains unchanged from our previous guidance in the range of $225 million to $250 million. Our controllable working capital rate, which we define as accounts receivable plus inventory less accounts payable, decreased 30 basis points on a like-for-like basis when adjusted for the impact of the Consolidated Graphics and Esselte acquisitions. With respect to pension contributions, we expect to make contributions this year in the range of $59 million to $79 million, and looking ahead to 2015, we expect to make contributions in the range of $24 million to $29 million. As of June 30, 2014, our gross leverage was 3.3x, down 0.1x from where we ended the first quarter. As has been the case for the past 2 quarters and will be the case for a few more quarters, our reported leverage was elevated as the impact of our acquisitions this year are fully reflected in our debt levels but the base EBITDA and synergies are not fully reflected in the income statement. We continue to target gross leverage in the range of 2.25 to 2.75x on a long-term sustainable basis and expect that we will continue to reduce our leverage in 2014 as we incorporate the acquisitions into our results. At the midpoint of our 2014 guidance, pro forma for our fully synergized full year of the completed acquisitions, gross leverage is expected to be at the top end of our targeted range by the end of this year. We paid down our April 1 maturity of $258 million, and our next term debt maturity is not due until May 2015. From 2015 to 2018, our average maturity is $230 million, with the highest maturity of $251 million due in January of 2017. As of June 30, 2014, our term debt is 90% fixed at an average interest rate of 7.3%. At the end of the quarter, our net available liquidity was $1.2 billion, and we had $193 million in borrowings outstanding under our revolving credit agreement. As we begin the second half of the year, let me share more detail on the updated full year 2014 guidance that was summarized in this morning's press release. We continue to expect revenue in the range of $11.5 billion to $11.8 billion. The midpoint of this range applies an organic growth rate similar to what experienced in the second quarter. We continue to expect our non-GAAP adjusted EBITDA margin to be in the range of 10.5% to 11%. Depreciation and amortization expense is expected to be in the range of $480 million to $490 million, $5 million lower than our previous guidance. We continue to expect interest expense in the range of $275 billion to $285 million. We expect our full year non-GAAP tax rate in the range of 34% to 36%, the midpoint of which is 100 basis points higher than our previous guidance. We continue to project the full year fully-diluted weighted average share count to be approximately 200 million shares, and we continue to expect capital expenditures in the range of $225 million to $250 million and free cash flow in the range of $400 million to $500 million. Before I turn it back to Tom, I'd like to make one additional comment with respect to the timing shift that we are expecting to see between the third and fourth quarters relative to last year. In each of the past few years, we've commented on the timing of a significant customer project in our International segment that has shifted between the third and fourth quarters. This year, we expect the revenue on this project to be recognized in the fourth quarter. Whereas, in 2013, the revenue was recognized in the third quarter. While it has no impact on the full year comparisons, it does impact the year-over-year quarterly revenue comparison by 200 to 300 basis points for the International segment or 60 to 70 basis points on a total company basis. And with that, I will turn it back to Tom.

[Thomas J. Quinlan:]

Thank you, Dan. We're already into the third quarter, and this particular autumn will have a special significance to all of us at RR Donnelley. It will mark the attainment of the company's 150th year of continuous service to our customers. As an organization, we focus much more on the future than the past, but we are deeply proud of our heritage, particularly because it reflects some of key business fundamentals that we believe continue to distinguish RR Donnelley. I would like to reflect on RR Donnelley's 150-year history by sharing the core tenets of our company that were initially established in 1864 and remain deeply embedded in our culture today. I'd like to start with integrity. Honesty, trust and integrity guide our business and our people every day. Integrity is who we are, it is what we stand for, it is what we do. Next is dedication. Our greatest passion is helping our customers succeed, from the local entrepreneur on Main Street to the largest of the Fortune 500. Our people are inspired by each and every customer relationship we have developed, and we are honored to serve the 60,000-plus customers who rely on us to deliver their critical communications every day. We have built our industry-leading platform of products and services to help our customers connect with their audiences across all channels, from traditional print to the most advanced multichannel digital communications. At RR Donnelley, we connect people with the power of words and images. The third is integration. When RR Donnelley built its first new building in the 1870s, it reflected a unique vision. It was an operation that housed the company's production resources, but also complementary businesses, such as book designers and binders. The concept was to offer customers end-to-end services under a single roof. Today, through internal development, organic investments and external acquisitions, we have assembled the industry's broadest in-house portfolio of products and services under a virtual roof. The breadth of our offerings gives us the most possible avenues for establishing relationships with new customers and allows us to expand our relationships with the existing customers over time. Today, given our broad range of products and extensive geographic reach, we simply can't fit all of our capabilities under a single physical roof. That is why so many of our global resources are connected by our robust information technology infrastructure. Much of our IT infrastructure features proprietary capabilities that we utilize to serve our clients' needs, ranging from providing secure information access and content management with our venue data room, which is used internationally in M&A, pharmaceutical development and other complex applications to self-service on-demand printing that is utilized by tens of thousands of individual users to interact with RR Donnelley facilities on multiple continents. Our proprietary CustomPoint system offers a host of features, including ordering capabilities, inventory management, usage reporting and more. The importance of this system is reflected in CustomPoint's usage figures as customers' self-service orders flowing through our CustomPoint platform were up 10.1% in the current quarter as compared to the same quarter a year ago. Our ability to provide a single system to connect multiple touch points is becoming even more important to our customers as they work to implement omni-channel marketing and communication programs. We believe that we are significantly easier to work with than multiple vendors, each of which can do only a piece of a customer's program. In executing our One RR Donnelley strategy, we are drawing on a long legacy of being a single-source solution for our customers. Our fourth core tenant is innovation. Just about 30 years ago, RR Donnelley produced a magazine. I know that is not surprising. What may be surprising is that this single issue of that magazine featured 8,896 different versions, and we used an RR Donnelley innovation called Selectronic binding to individualize the editorial and advertising according to readers' interest, zip codes and other variables. Today, we continue to build on our pioneering capabilities to offer unique ways to personalize content in a variety of ways. For example, the groundbreaking proprietary ProteusJet high-speed digital presses that we developed are used in our direct response, TransPromo and other demand book production and other applications. Our imaging scientists have further enhanced ProteusJet's ability to print on glossy papers, which allows us to offer advertisers variable coupons, which, in turn, complements our extensive and growing offering for the retail segment. ProteusJet is also being piloted as a vehicle for producing custom standardized testing booklets, a new application that complements our already robust offering to educational publishers. In China, we are printing on the glass and film substrates of the kind that you touch when you use your smartphone. The films, for example, provide enhanced scratch resistance and touch responsiveness. Our capabilities may even open the door to personalizing glass graphics, helping our customers take their own branding to another level. So whether we're personalizing glass graphics, websites, printed or electronic statements, direct marketing vehicles or more, the ability to create, manage and individualize content is a continuing point of differentiation for RR Donnelley. RR Donnelley's history features a long list of firsts, but we are not just sitting on our patent portfolio. We continue to listen to our customers and to engineer solutions that address their most important needs. For example, we are leveraging our digital inkjet technology to print antennas using radio frequency identification applications, which help to automate inventory management, shipping, shelf restocking and other vital business and supply chain processes. And to take labels that incorporate sensors to the next level, we are developing sensor labels that can not only tell where an item is, but what has happened to it. For example, these can measure and communicate information about how a package has been tilted, dropped and exposed to variations in light and temperature. These sensor labels can provide supply chain managers, retailers and package forwarders with information that can be used to evaluate shippers, adjudicate claims and more. As we've said before, we are not naïve to the effects that technological substitution can have on some of our products. That is why we continue to innovate, to enhance our existing offerings and to expand their range. It is also why we continue to leverage our demonstrated ability to make and integrate strategic acquisitions and drive greater efficiency in our core operations. For example, I'm very pleased with the job that is being done by our new employees and our longer-term employees to take advantage of the selling, marketing, procurement, production and other synergies associated with our most recent acquisitions, such as the North American operations of Esselte and Consolidated Graphics. And last but certainly not least, our fifth core tenant, sustainability. We care deeply about the environment we all share. We give back to the communities around the world we call home, and we are 100% focused on safety and responsible practices for all our employees. And with that, John, could you please open it up for questions?

[Operator:]

[Operator Instructions] And our first question is from Charlie Strauzer from CJS Securities.

[Charles Strauzer:]

Tom, if you can talk a little bit first about -- in the Strategic Services space there, it seems like you had some good growth in Logistics. Can you expand a little bit more about some of the other areas there in terms of maybe some tough comps in some of the other areas? I know financial had a very strong year last year. Is that the case again? Did that impact them at all this year?

[Thomas J. Quinlan:]

Yes, sure. I mean, as you've seen, IPO activity in the United States in the second quarter, I think, was at an all-time high going back a number of years. Europe and Asia are starting to recover. M&A activity started picking up towards the end of the quarter. And again, to your point, the comps back to 2013 in the quarter are pretty tough ones. But GDP coming out at 4% today. I think that all bodes well for a lot of activity in the marketplace as we sit here going through the third quarter. And Dan Knotts will take you a little bit more in detail on that.

[Daniel L. Knotts:]

Yes, Charlie, a little more detail on the financial services side. The primary difference there is the IPO market, as Tom mentioned, remains very strong. Our filing activity, we're very happy with our position there as well. Tough comps on a year-over-year basis, primarily because there were several large deals that came through in Q2 of last year that didn't come through in this year. So while activity is actually up for us, the larger deals last year offset the increase in activity that we have with smaller deals this year.

[Thomas J. Quinlan:]

And Charlie, just to -- just I mean, our global business solutions initiative that we continue to talk about with you, more and more customers are looking to avail themselves to this team. They're asking us to take a fresh look at their processes and buying habits. More times than not, those processes haven't been reviewed in a very long time. All customers are requiring that we look for ways to reduce their costs, increase the return on their investment and reinforce their brand integrity. Our global business solution team does this. We bring a truly agnostic sourcing platform, featuring proven methodology and deep expertise, allowing our customers to best match vendor capabilities against their demands. So we're helping our customers gain efficiencies across all their communications channels, to their customers, to their employees, to their investors and to the suppliers, and at the same time, we're knocking down silos within the organization. We're unifying the departments and we're making their supply chain stronger. So this is a great opportunity for us here, and we're excited about what that's going to bring in the future.

[Charles Strauzer:]

And then Tom, you talked to some of the -- kind of your counterparts in the C suites at larger companies, are they getting more positive on the idea of outsourcing a lot more of their printed to folks like you?

[Thomas J. Quinlan:]

Yes, it's -- everyone is looking to do the same thing. There is no one out there right now who is successful that's not. Everyone is looking to go ahead and lower their total cost of ownership and improve their return on their investment. They're looking at every single dollar that's out there. The thing that -- where we play a great part is communications -- we talk about being 150 years old. Communications continues to evolve during that time frame. Dan Knotts and we like to say, look, the old days, we could reach it through just that one printed product, and that's all we had to do. We sent that out. We reached it. Nowadays, we don't -- our customers don't know where their customers are. So we've got to go ahead and be able to help them send their communication pieces to whatever electronic device exists. We've got to make sure that we can get to them at any particular moment of the day, and this has all got to be in what I'll call the same branding that exists across the board. Print is obviously at the core of it, but as you go through, everyone right now is trying to go ahead and reach their customers, customers' customer to make sure that they can go ahead and get their message across. And we're the only ones that can go ahead and do that. So that's where I think -- you talk about outsourcing, but that's something where we're seeing a bigger and bigger role that we're playing that, again, we're excited about.

[Charles Strauzer:]

That's helpful. And then lastly, Tom, just if you can give us a quick -- a kind of a quick update on your thoughts on the -- now that you've had CGX under your belt for 6 months, the synergies and the progress there. And are you finding any additional upside there for -- on the cost side?

[Thomas J. Quinlan:]

Yes. The fun part for us, I think -- I think we've -- everyone on the phone and anybody that follows us knows from an integration standpoint, we do a good job there and continue to do a good job there. So I think we're excited about what that platform brings to us. Only been on board a couple of months and we've already seen some great activity taking place for our customers, where we're helping them because of having those particular products on board. So I think -- you know I'm not one to give out synergy numbers, but I would tell you that very, very pleased as far as what that platform is bringing with us, as well as Esselte. Esselte, great opportunities there, another great product set, and 2 good transactions, 2 good properties that we've brought on to the Donnelley platform.

[Operator:]

Our next question from Jamie Clement from Sidoti.

[James Clement:]

Tom, a little bit of a follow-up on Charlie's question, although different side of the coin. Most of your comments, post announcement of the CGX acquisition, focused on cost synergies, and obviously, Charlie asked that question. What I'm actually curious to get your thoughts on, having owned the business, although not that long, but certainly 3 months longer than the last time you spoke publicly, it seems to me that I -- there are print brokers out there, some of whom are national, some have had have successes, many have not had successes. I'm wondering about your thoughts on the roughly 70 plants. But basically you could think of them as storefronts, too. It seems to me that, that opens up an opportunity for you to fill in a gap that may be RR Donnelley was perhaps not as comparatively strong in as perhaps some of your other business lines. So now, having all of those locations, is -- are we going to see more of an emphasis over the next couple of years in really trying to be that one-stop shop and being able to guarantee consistent quality to customers, large and small, across their communications and print needs?

[Thomas J. Quinlan:]

Yes, Jamie, I mean, look, there's a lot there, but I'll start off and then the team can jump in here. But we're in this position because of what -- the way customers describe us. I mean, they allow us to play such a role because we are a technology leader. We're trusted. We're innovative. We're easy to work with. We're best in class. All of this leads to us being a communication service provider. Build better, buy smarter. I would tell you that I'm still a big believer that doing work on your own assets is beneficial to the customer at the end of the day because they have one point of contact to either reward or complain to. I don't believe our industry needs what I'll call a brokerage mentality with the -- it's still an industry of pennies, nickels and dimes. And if you go back and think about what we've built here over the years, we talked early about Variable Print segment growing organically at 3.2%, Strategic Services segment growing at 3.8%, that was 57% of our business. Go back to when we talked to you about it at Investor Day. At Investor Day, we talked about Variable Print on a pro forma basis for 2014, that it would be 32% of our top line. Publishing and Retail would be 23%; Strategic Services, 22%; and International, 23%. So we have projected Variable Print and Strategic Services at 54%. For the quarter, obviously, as we stated, we're at 57%, which I think again is a good thing. Each one of those segments by themselves, they'd be the third largest in North America in our industry. We've talked to you about, on Investor Day, all the capabilities that we have. Commercial and digital services, with the acquisition that we just did, a business by itself would be $1.6 billion. Logistics is $1.2 billion. Financial services, over $1 billion. Office products, $600 million. So when you think about the broadest and deepest product portfolio any company could have bailed themselves to, we've got that here, and we're able to do this because of our reputation and because we drive free cash flow and margins through aggressive cost compression of our platform.

[Daniel N. Leib:]

I think you put it very well in the framing of your question. And if you look at the performance of Variable Print here at 3.2% organic revenue growth and you look at the component pieces where each of the reporting units had organic growth except for forms and statement printing was down a bit, and you take our comments about -- Tom's opening comments about global business solutions and how this all comes together in that one-stop shop, I think you're starting to see this as we gave out longer range projections, obviously, in this quarter, Variable Print exceeded those longer-range projections, but it is exactly the model as you articulated it.

[James Clement:]

Okay. Now... I'm sorry, Tom. Go ahead.

[Daniel L. Knotts:]

Dan Knotts here. Just to add on to that for a second. I think what's important, and I think your question is spot on relative to the impact of a Consolidated Graphics coming into our network. And if you look at the 4 go-to-market approaches that we previously designed or are rolling out, the impact of Consolidated Graphics starts with our ability to sell individual products and services in those local geographies, which, for the most part, were geographies that we did not have a presence prior and now we can reach of that customer set, continue to sell the local products and services, which is a very important part of the consolidated business model in order to continue to -- and we're going to continue to do that on a local level. However, if you go into the second, third and fourth parts of our go-to-market strategy, servicing enterprise accounts, to your question about the consistent quality and service levels, we now have the ability to a much greater extent than what we've ever had to provide that consistent network of products and services to those very large enterprise accounts to deliver that seamless experience for them. Coming back to Charlie's question just for a second and feedback we're getting from the C suite, the other part of that is a significant portion of -- is the number of channels, delivery channels are increasing. And what comes along with that is an increase in the number of companies that those customers are having to deal with. So a lot of the feedback is I would much rather deal with fewer less companies. As Tom talked about previously, our ability to leverage the consolidated network to help them to do that plays right into that. The third part of our go-to-market strategy in servicing these selected segments, particularly retail, healthcare and retail banking, the leveraging of Consolidated Graphics to fit right into that strategy gives us capabilities that we didn't have prior that we can leverage in servicing those customers within those targeted segments. And last but not least, to Dan's comments on global business solutions and the whole brokerage network, we now have a much more extensive network that we own. To Tom's comments, don't believe that the middle person needs to be involved in that process. It's a direct relationship with us and our customers. We now have a much more extensive offer to plug into our global business solution offerings on behalf of sourcing for our customers.

[James Clement:]

Just a change in gears just a little bit, and I'm actually looking at your sales by reporting unit in the presentation slides, not the earnings release. I think you got 18 line items there. I just want to focus at the -- on the Publishing and Retail Services. Can you just remind me -- I mean, I think for the first half of this year, you're in sort of low-20% range as a percentage. Where was that number 6 years ago, 8 years ago, 10 years ago? You can pick the year. Entirely up to you. I was just looking for a point of reference.

[Daniel N. Leib:]

Yes. If you go back to 2000, the year 2000, it was about 70% of the overall company. And then we've articulated through points in time, I think in 2009, yes, we've seen a significant reduction since the 2009 time frame as well.

[Thomas J. Quinlan:]

And what -- it's -- obviously, we know that, that has been one of the segments that has been hit particularly hard with technology. But at the same time, things open up from that, and it provides a -- it's still an area where we believe there's a lot of opportunity for us to go as we continue to evolve from a communications company. Those publishers are going to need to reach out to their customers directly. Where can we play a role there? Again, switching gears a little bit, Dan Knotts talked about healthcare. Look today as far as how the insurance payers are now becoming, in essence, retail companies. They are -- they've got -- they have to go out and reach out to individuals as opposed to reaching out to companies. If you look at the hires that are being made by these insurance payers in certain high-level, C-level positions, people have retail background. If you look at the board members that they're adding to their company, they have retail background. No one is better-situated than us to help them serve their needs to make sure that their business continues to perform at the levels that they want to given our capabilities that we have there.

[Daniel N. Leib:]

One thing I'd add, Jamie, it was 36% in '09. It's still an important segment for us, and we feel like we perform very well in that segment. So as we look at our organic revenue performance, and we can do it at the reporting unit within that segment or we can do it at the total segment level, and this quarter being down the 3% or so and looking back over the past couple years or so, we're very happy with how that group is performing.

[James Clement:]

Okay. Great. And I know I've taken up a lot of your time. One last question. The transportation/highway bill, could -- I'm sure you're monitoring that. I'm not an expert in those kinds of things, but could that be a material benefit in terms of funding requirements?

[Daniel N. Leib:]

It would be a benefit in terms of funding requirements, both in 2014, and then, on a go-forward basis, would have a significant impact on the level of funding for the domestic U.S. plants. And we're hopeful it passes, and we'll see. Understand that the desire is for it to happen before the August recess, so here in the next few days.

[Operator:]

And the question is from Mark Levine (sic) [Mike Levine] from Oppenheimer Funds.

[Michael S. Levine:]

I'm just trying to get a better understanding of why you're targeting that leverage ratio of 2.25, I guess, to 2.75? What's the magic there? And somewhat related to that, are there refinancing opportunities on the debt? You mentioned, I think, the average cost of debt was over 7. And where does -- where do share buybacks fit into all of this, just given the after-tax cost of debt versus your dividend yield?

[Daniel N. Leib:]

Sure. So if you look at our maturity profile coming due over the next several years, we have done a number of issuances and tenders to get it to the point where, with what we did this past April of paying down debt, and we do have a desire to pay down the overall amount of debt and delever via that way. We do keep our eye on the market, understand attractive rates. The last issuance we did was the 10-year at 6% with the subsequent -- rather, issuance at 6% with a subsequent tender offer. But as we keep our eye on it, and we've done that transaction in the past. As we look at the 2.25 to 2.75, we did take that down at -- as a range in the beginning of 2012 and think that, that's the right level for a company with our mix of businesses. Don't want to get too extended. We do -- as we've talked a lot about the diversity of our overall company amongst the different platforms, we feel very good about the mix of assets that we have, but we do understand that there are some secular headwinds in some of the offerings. And so we think that being in that 2.25 to 2.75x range as the long-term sustainable target gives us the right access to capital and is a prudent area for us to get. And we'd like to get -- we've articulated this before publicly, we'd like to get to that top end and then go below the top end of that range as well.

[Thomas J. Quinlan:]

And Mike, look, we've been together for 10.5 years now, which is a long time for a team to be together. But we've return $3.5 billion to the shareholders, equity shareholders, just in the form of dividend and share repurchases, and we've returned over $2 billion to our bondholders during that time frame, and that's why we're investing back into the business, going ahead and making sure that we are able to grow the business from where we are. And the range that you have, we -- still gives us the flexibility to, again, invest back in the business for growth and reward shareholders and investors at the same time. So we do think that's the right place to be, and I think what we've proven to you over the last couple years with the amount of free cash flow that we've generated, that we've deployed that capital in a good way. Look, in closing, I appreciate everyone's time today. I know this is a busy day with GDP out and all the other earnings out, so I appreciate that you spent time with us. We know you have choices where to go ahead and invest your capital. And hopefully, we've shown you today that given our intent, product mix, our geographic and our innovation, that RR Donnelley is worthy of being one of those companies you invest in. We are going to continue to evolve the supply chain and make our customers' communications more cost effective, more powerful and more targeted. And with that, I hope everyone has a good day, and we'll be back to you in a couple of months. Thank you.

[Operator:]

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