R. R. Donnelley & Sons Company
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Welcome to the R.R. Donnelley Third Quarter 2014 Results Conference Call. My name is Larissa, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to David Gardella. Mr. Gardella, you may begin.

[David A. Gardella:]

Thank you, Larissa. Good morning, everyone, and thank you for joining us for R.R. Donnelley's third 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 reconciliations of non-GAAP measures to which we will refer on this call. We're joined this morning by Tom Quinlan, Dan Leib, Dan Knotts and Drew Coxhead. I'll now turn the call over to Tom.

[Thomas J. Quinlan:]

Thank you, Dave, and good morning, everyone. Before Dan takes us through all the results in detail, there is one area in particular that I want to touch on and that is organic revenue growth. For the quarter, versus the same period a year ago, we posted organic revenue growth of 80 basis points even after the nearly 70 basis points unfavorable impact of a significant customer project that was recognized in the third quarter last year, but moved into the fourth quarter this year. We have said repeatedly that we are not naïve to the changing landscape in our broader industry and that we are continuing to remake R.R. Donnelley to stay ahead of it. This strategy comes to life in two ways. First we use our comprehensive and innovative portfolio of products and services to help us win share in every segment, including our traditional ones. Second, we continue to find new avenues of growth from the many new products, services and capabilities that are emerging from our internal pipeline and from strategic acquisitions. We believe that organic growth even in the face of secular declines in the demand for certain products that we provide demonstrates the success of our continuing evolution as a communications services provider. Now Dan will take you through the numbers and then ahead of opening it up for questions, I will amplify this point and share examples and that help illustrate it. 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 third quarter. We are pleased with our third quarter performance. Reported revenue growth of 13.1% in the quarter was primarily 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, as well as difficult year-over-year comparison during the previously noted timing shift of a customer project in our International segment, we achieved positive organic revenue growth of 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. As highlighted in this morning's press release, we remain on track to deliver full-year revenue within our previous range of guidance. With only two months remaining in the year, we have tightened that estimate and currently project full-year revenue to be in range of $11.6 billion to $11.7 billion. The midpoint of this estimate, $11.65 billion, remains unchanged from the midpoint of our previous guidance. Third quarter gross margin was 21.9%, 8 basis points than the third quarter of last year as increased volume and a favorable mix of business more than offset the unfavorable impact of price erosion. SG&A expense in the quarter as a percentage of revenue was 11.3% or 20 basis points higher than the third quarter of 2013 primarily due to business mix, partially offset by higher pension income and a lower provision for bad debt. Third quarter non-GAAP adjusted EBITDA was $313.2 million compared to $280.1 million in the third quarter of 2013. Non-GAAP adjusted EBITDA margin in the quarter of 10.6% was 12 basis points lower than in the third quarter last year. Similarly, third quarter non-GAAP operating margin of 6.5% was 10 basis points lower than the 6.6% we reported in the third quarter of 2013. Our non-GAAP effective tax rate in the quarter was 34.1% or 100 basis points higher than the third quarter of 2013. Last year's rate included benefits related to the resolution of certain state tax matters. 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 $681million, representing a decline of 4.8% from the third quarter of last year; 50 basis points of the decline related to the negative impact of lower pass-through paper sales resulting in an organic year-over-year decline of 4.3%. We experienced volume declines in each of our reporting units within the segment as well as continued price pressure, primarily in magazines, catalogs and retail inserts. Non-GAAP adjusted EBITDA margin for the segment of 11.4% declined 230 basis points from the second quarter of 2013 as a result of lower volume and price erosion, which more than offset the impact of our productivity initiatives. Revenue in our Variable Print segment was $988.1 million, an increase of 53.5% from the third 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 1.3%, 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 11.9% in the third quarter improved 27 basis points from the second quarter of 2013. Higher volume and the impact of our productivity initiatives more than offset price pressure. Revenue in our Strategic Services segment was $639.7 million in the third quarter of 2014, an increase of 8.4% from last year's third quarter. Similarly, organic growth for the quarter was 8.3%, driven by Logistics, which had another solid quarter with organic growth of 11.2%, and Sourcing, which reported organic growth of 16%. Non-GAAP adjusted EBITDA margin of 11.7% for the Strategic Services segment increased by 63 points from the third quarter of 2013, primarily driven by productivity improvements and volume increases, which more than offset the impact of higher transportation costs within the logistics business. Third quarter 2014 revenue in our International segment was $658 million, declining by 2.4% in the third quarter of 2013. After adjusting for the favorable impact from acquisitions, pass-through paper sales and changes in foreign exchange rates as well as the unfavorable impact of the dispositions of our global real estate services offering and our operations in France and Argentina, organic revenue declined 1.1%, primarily due to the timing shift of a significant customer project into the fourth quarter, which negatively impacted this segment's growth by approximately 270 basis points.. Volume increases in Asia and global turnkey were offset by declining volume in Europe as well as price pressure across most offerings in the segment. The non-GAAP adjusted EBITDA margin in the segment of 7.9% was 279 basis points lower than the 10.7% margin in the third quarter of 2013 due to price erosion across the segment and wage and inflationary pressure, primarily in Latin America and Asia. Third quarter 2014 non-GAAP unallocated corporate EBITDA was negative $8 million or $21.3 million better than the third quarter of 2013. The favorable variance was due to lower healthcare costs and increase in pension income and lower workers' compensation costs. Free cash flow in the quarter was $126 million, or $67.9 million lower than the $193.9 million in the third quarter last year, primarily due to a higher use of cash for working capital and higher cash taxes partially offset by the increase 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. We expect to see a modest trend improvement in the year-over-year comparison by the end of the year. As of September 30, 2014, our gross leverage was 3.1 times, 0.2 times from where we ended the second quarter. As has been the case for the past few quarters and will be the case for a few more quarters, our reported leverage was elevated as the impact of our acquisitions this year fully reflected in our debt levels but the base EBITDA and synergies are not fully reflected in the income statement yet. We continue to target gross leverage in the range of 2.25 times to 2.75 times on a long-term sustainable basis and expect that we will continue to reduce our leverage as we incorporate the acquisitions into our results. At the midpoint of our 2014 guidance pro forma for a 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. Our next term debt maturity is due on May 2015. From 2015 to 2018 our average maturity is $230 million with the highest maturity of $251 million due in January 2017. As of September 30, 2014, our term debt is approximately 91% fixed at an average interest rate of 7.3%. On September 9, we amended our revolving credit agreement to increase the aggregate commitments of the lenders from $1.15 billion to $1.5 billion and to extend the expiration date from October 15, 2017, to September 9, 2019. At the end of the quarter our net available liquidity was $1.5 billion and we had $130 million in borrowings outstanding under our credit agreement. With respect to pension and post-retirement contributions the passage of the extension of the Highway Act in August of this year is expected to reduce required contributions this year through 2017. We expect to make contributions this year of approximately $39 million and we expect the next few years to require pension funding of approximately $25 million per year. Further, as previously disclosed we offered certain former employees an option to receive a lump sum pension payment or annuity with payments beginning in the fourth quarter of 2014. Given the difference in current interest rates used for calculating the settlement amount compared to the interest rate used for calculating the accounting liability, the reduction in the reported pension obligation is expected to be approximately $395 million to $415 million compared to expected cash payout of approximately $295 million to $310 million. We expect to finalize the transaction during the fourth quarter. In connection, we expect to record a non-cash settlement charge of approximately $105 million to $115 million in the fourth quarter of this year, representing the recognition of past actuarial losses. As we enter the last quarter 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 expect revenue in the range of $11.6 billion to $11.7 billion. This implies a fourth quarter organic growth rate similar to what we experienced in the second and third quarters. We expect our non-GAAP adjusted EBITDA margin to be in the range of 10.6% to 10.7%. Depreciation and amortization expense is expected to be approximately $480 million; we expect interest expense of approximately $285 million. We expect our full-year non-GAAP tax rate in the range of 34% to 35%. We continue to project the full year fully-diluted weighted average share count to be approximately 200 million shares; this implies a fourth quarter fully diluted share count of approximately 202 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. And with that, I will turn it back to Tom.

[Thomas J. Quinlan:]

Thank you, Dan. On October 21st, R.R. Donnelley was invited to open trading at the NASDAQ in honor of the company's 150th anniversary. We are proud of where we have been and pleased with the direction that we have set for the future. To help reinforce where we are heading, at the end of last year we began reporting our results in four new segments. We said at the time that this change was to provide even more transparency for our investors. We also believe that these reporting segments make comparisons easier as you look at R.R. Donnelley specifically and as you contrast our performance with our competitors. Please note that I said that these segments are especially relevant to investors. They are not noticeable to our customers. That is because our customers do not experience R.R. Donnelley as a collection of silos or reporting segments. Our sale and service teams look at our customer's goals and challenges across the board and recommend solutions that can and do reach across the full spectrum of our offering. We present ourselves to customers as one R.R. Donnelley. I'm going to talk about each of the four reporting segments to describe not just what we do but how we do it. The first segment is Publishing and Retail Services, which includes magazines, catalogs, inserts, books and directories. That's what we do in this space. How we do it is what sets R.R. Donnelley apart. Two such factors are innovation and quality. Please do not believe for a moment that innovation doesn't play a crucial role in what many are tempted to think is a mature set of products. Our publishing customers' needs are changing quickly and they are eager for new ideas that deliver additional value. For instance, for book publishers, a continuing challenge is to more closely calibrate production quantities with fast-changing demand. We are helping publishers do that with the ProteusJet digital presses that we developed in-house at our R&D center. These proprietary digital presses give us the unique capability to provide quick response, shorter run printing within our longer run platform. Now for instance a publisher that can introduce a title monitor demand, and if he comers to what people in the business caller a runner, we can seamlessly move the book from digital to conventional production to meet the emerging demand. And as demand for that book diminishes over time we can redirect production back to our digital platform to more efficiently support the lower print quantities. R.R. Donnelley can and does efficiently produce quantities ranging from one to millions, all in support of our customer's communications requirements. Our ProteusJet digital presses are already very busy and we are introducing even more flexibility for publishers with an enhanced ability to print on glossy stocks, which are used in consumer and text books that feature colored pictures. While innovation plays a vital role, our customers also count on our R.R. Donnelley for the quality that is driven by our employees' experience and craftsmanship. We were proud to be recognized recently with an onload of prestigious Gold Ink Awards. These 41 Gold Ink Awards reflect objective validation of our ability to bring our customer's visions to life in print. Our second reporting segment is Variable Print, which includes our U.S.-based short run and transactional print operations. This segment features our commercial and digital print, direct mail, labels, statement printing, office products, form and packaging offerings. In this space too, innovation sets R.R. Donnelley apart. Our capabilities enable our sales representatives to offer a consultative approach which involves much more than just bidding on commodity work. For example a new client in the financial services vertical just chose R.R. Donnelley to execute a complex program. This particular client markets its financial products online as well as through retail financial locations or stores. Their goal is to drive qualified traffic to the stores and they have turned to R.R. Donnelley for a complete program that begins with frontend database analytics. We use sophisticated analytics and geocoding to identify the prospects and create highly personalized hard offers for each, delivered on self-mailers and envelope packages that include digitally imaged content. A hard offer is actually linked to credit scoring which layers in another layer of complexity. Post-store optimization helps reduce cost and on the backend our campaign management resources include a customer-facing dashboard, which is a visual online reporting tool. Because the customer operates retail locations another opportunity to expand the relationship lies in our in-store marketing capabilities. Let me share one more example again of how we approach and serve customers. For another direct response client we are weaving together demographics and cycle graphics to create personalized direct mail booklets in which even the pictures and illustrations are specific to each recipient. We are helping them avoid the trap of sending a generic lifestyle picture of mom, dad, a yellow Lab and 2.3 children sitting against a minivan to an urban dwelling single person. Again, we are blending our IT resources with high tech digital production methods to offer 100% personalization. R.R. Donnelley is helping marketers unlock the potential of the big data that they have been collecting. Our third reporting segment is Strategic Services, which includes our financial services, logistics, digital and creative solutions and sourcing offerings. This segment in particular reflects fresh avenues for growth. For example, during the past three months, our logistics offering posted a double digit organic revenue increase as compared to the same quarter a year ago. This growth is not an anomaly. It is a trend. During the third quarter of 2010 our logistics revenues were $152.1 million. This quarter, they were a little over $300 million. Much of this revenue acceleration was driven by recently expanded third-party logistics and international mail offerings. As I have mentioned before, we find these offerings particularly attractive because they do not require significant capital investment and are complementary to many of our other products and services. This allows us to expand the many relationships that we have with our customers today to manufacture, distribute and mail their communications. In this segment, our content creation offerings, whether they are photography, creative or design services, are revenue generators on their own. But perhaps more importantly, when we are involved on the frontend of a project, it gives us even better opportunity to offer consultative solutions that span the complete project. This makes for deeper and stronger customer relationships, built by delivering unique value, not just by bidding on commodity specs that someone else compiled. Our fourth reporting segment is International which features a diverse mix of products and services in Asia, Europe, Latin America and Canada. These include sophisticated offerings such as our global turnkey solutions and our business process outsourcing offerings. Again, I'll offer an illustration of how we serve customers in this segment. Our international locations have allowed us to expand relationships with customers by being able to serve their global supply chain requirements. For example, we provide packing services in Asia where many fast-moving consumer electronics are manufactured and assembled. For R.R. Donnelley, packaging means much more than just putting components into a box. As an example, for a multinational electronics manufacturer, we were chosen to provide packaging services for a sweet new computer launch. We drew on our experience in packaging engineering to work with the customer to create designs for rigid box, plastic tray, pulp tray, sound module and embroidered sleeve. We then provided prototyping services so that the customer could run consumer tests before we started executing the packaging production. Upon the completion of these consultative services, we swung into full packaging and production. When new technology products hit the market a YouTube almost always accompany these. These are called unboxing videos and the feature a viewer unveiling the item. In this particular product's unboxing video, the reviewer stated, "best unboxing ever." That's a whole different kind of accolade from a Gold Ink Award and again reflects the quality of what we deliver on behalf of our customers. Let me give you one more example of how deeply our offerings integrate us with our customer's processes. In the UK we use an onshore/offshore service model to provide mail receipt, batching, scanning and indexing services. You are used to hearing us talk about what we send out to customers, but this particular offering involves processing inbound communications. We also provide print management and transactional communications outsourcing services for this customer. Across the world and across the breadth of our offering, we provide communications services that help our customers communicate more effectively with all of their audiences, consumers, prospects, shareholders, employees, communities and more. And one final point before we go to questions. You'll probably notice a common thread that runs through each of our reporting segments – information technology. Our customer-facing and internal systems provide a unique advantage as we win new business, serve our customers, and operate with more efficiency and speed. You would expect us to tout our capabilities in this area, but how do customers see our IT resources? To answer that question, let me share that we are in the process of implementing a new software service program for a Fortune 150 company. This means that our customer had a business problem to solve, took a look at one of our proprietary systems and said, "We would like to use your solution in our IT environment." Now, this customer has a great IT capability of its own as they have been recognized in the InformationWeek Elite 100 as one of the country's most innovative users of information technology. The fact that they chose our software as a service solution is a pretty strong endorsement of what we have going on in IT development. This agreement will drive both incremental revenue and further enhance our broad relationship with this customer. But more, it serves as a good illustration of the caliber of systems and applications that we are developing for our sales team to distinguish R.R. Donnelley by providing consultative services to our customers. And now Larissa, let's open it up for questions.

[Operator:]

Thank you. We'll now begin the question and answer session. (Operator Instructions) The first question is from Charles Strauzer from CJS Securities.

[Charles Strauzer:]

Hi good morning.

[Thomas J. Quinlan:]

Good morning Charlie.

[Daniel N. Leib:]

Hi Charlie.

[Charles Strauzer:]

Hi Dan, this is probably for you first. Just in looking at the margin by segment Strategic Services, while up year-over-year was down sequentially a fair amount from Q2 and also International, you talked about higher costs for employment in the quarter that caused a year-over-year decline there. How should we think about International going into Q4 trend-wise and also what was the driving factor between – for the Strategic – sorry, sequential drop in Strategic?

[Daniel N. Leib:]

Yes, yeah, good morning, so let's start with Strategic Services and if you look at the seasonality in the business and going back historically we have posted to our website a sales by reporting unit and you can see it pretty clearly that Q2 is the largest quarter that is driven by our financial business, largely driven by a peak that occurs following proxy season et cetera, and that accounts for the margin. So the margin structure in services has been consistent from a seasonality perspective going back over several years where Q2 is by far the largest and then the balance of the quarters are relatively consistent with one another. There is some variability in the segment from capital markets activity and from other overall sales. But the biggest driver there is just normal seasonality in the business and as you mentioned on a year-over-year basis that segment did enjoy margin expansion. As it relates to International, a couple of different factors. The large project that we talked about from a year-to-year swing this year will be reflected in the fourth quarter. Last year it was in the third quarter. That had some impact. We also did have some pricing pressure that we felt in the international business. There were some additional mix issues that caused some of the margin change and when we take a step back and look at the guidance that we gave, the five-year guidance and compare that relative to our expectations for the end of the year for financial, from a margin perspective, we would expect it to be within the range, a little bit towards the lower end. And you see some of the other segments performing better than the five-year ranges that we gave and our expectation is some of those will be better, specifically the variable print segment.

[Charles Strauzer:]

Got it. And then also what do you – how should we think about corporate expense for the full year?

[Daniel N. Leib:]

Yeah, sure so corporate in the quarter as we mentioned, a couple benefits that we had. One was the benefit from lower healthcare. And that is a bit of the way we do the accounting. So we charge out the business as a flat rate and then any reduction or increase in spending is cleared through corporate. So it results in a outsized impact on the corporate segment. The second factor is the pension expense which we've had each quarter, further pension income being higher this year than last year. And the third item, we've talked on all these calls and everyone about the importance of safety and that is a mantra throughout the company, very important way that we manage the business, and we realize the benefit in workers' comp from operating a safer environment. So from an expectation for corporate, not big changes in Q4 from what we had last year relatively speaking, we will have the pension benefit that will repeat and healthcare has been on a nice trend both from pushing consumerism into the plans that existed throughout the year. So we would expect it to be pretty consistent with last year.

[Charles Strauzer:]

Great. And Tom maybe if you could expand a little bit more on the segment performance from a topline perspective, maybe some of the puts and takes going on in there.

[Thomas J. Quinlan:]

Sure. I hope the prepared remarks we – everybody got a good feel there but I'll run through it for you again. Publishing and Retail Services, when you think about the magazine market, we're a leader, we continue to build share, we continue to perform at the highest level, we continue to develop costs, initiatives for our customers, we're expanding the portfolio there, that creates leverage. But most importantly we're helping our customers make their cost structure variable. And that to us is something that we think is an added difference for us there. Catalog, as customers continue to seek to postal expertise which we provide; we are helping catalogers increase revenue opportunities, we're using alternative methods there, we're assisting cataloger's transformation into omni-channel merchants through our digital solutions group. We think about inserts, seamless shopping experience has to occur across all the channels. The gap between the customer's experience between digital and physical continues to narrow and we're still there. Book, I think there by meeting and exceeding our customer's expectations around the delivery of the product allows us to capture even more share. Certain studies out there show that to be north of a $100 billion industry, still in 2017-2018. That's all good for R.R. Donnelley. When you go to variable print, commercial and digital print it's about having a local, regional and national approach with a continued focus on the local service model. We're developing regional opportunities that provide bundled and end-to-end products and services but all to support national efforts, especially in the retail healthcare and banking verticals. Direct mail, we solve customer's pain points here, in this area, with the unique capabilities that we have. We're developing more and more turnkey products and service offerings, our commingling capabilities here try to allow customers optimize and lower their postal cost. Statement printing, looking at that, the adoption of electronic statements has leveled off. The value of these communications to consumers, it's still huge and companies recognize this. We believe we provide an achievable path to transformation through a digital focus; there are still many, many fortune 500 companies out there that are doing this on an internal basis. We think there is opportunity there. Forms we are making sure that costs match revenues. Labels, we're performing well there. We're positioned to expand, our purchasing and manufacturing materials there result in us winning business. Our RFID sales, our print electronics, our sensor labels, all these things in this area have lots of room to grow and we look at that as being a good thing. Office products, we're winning market share there and recognized as a proven supplier, so we've got a good momentum there. Strategic service and digital solution group, here we are – here prints ride with digital experience, combining print with various digital challenges to become a more viable and recognized avenue for communications. We've talked at great length about logistics. The performance here has been solid. The third quarter logistics and print and mail solutions, mailing solutions and international are driving the logistics area here. Financial services and outsourcing, no doubt we are recognized as a leader of collaborative business and reporting products to public companies and their advisors. We need to continue to improve our customer's efficiencies through the constant consistent delivery of user friendly technology and continue to have that world-class service that we have. Sourcing, again there we think we've got a lot of upside; we need to capitalize that in 2015. We are real strong in print management and believe that us approaching the market with complete pricing transparency is paying huge dividends for us. When you think about the last segment, International it's about 22%, 23% of topline I think for the year we're looking at, we're excited about how we're operating there. We've got leaders and their teams in Europe, Asia, Latin American and Canada, they are doing a great job in servicing their local customers as well as the multinationals that are using the R.R. Donnelley platform on a global basis. I know that's a lot to sum it up but look, we can take small jobs for customers that are crucial for them so we can manage scale and complexity, we're creating value by just taking these broad array of products and services and providing solutions. So we've talked today quite a bit on the product services, on the segments, and again hopefully you are seeing the results here are showing that we are delivering on what we told we would deliver on.

[Charles Strauzer:]

Great, thank you very much Tom.

[Thomas J. Quinlan:]

Operator, next question?

[Operator:]

(Operator Instructions) The next question is from James Clement from Macquarie.

[James Clement:]

Gentlemen, good morning.

[Thomas J. Quinlan:]

Good morning Jamie.

[James Clement:]

Tom, I was wondering if I could ask you a follow-up question on the logistics piece of strategic services. It seems like overall the revenue in the broader segment accelerated in the third quarter compared to where it was in the first half of the year and I think you alluded in your prepared remarks the logistics component being a big piece of that. So what's going on there, what are you excited about that?

[Thomas J. Quinlan:]

Sure, I'll let Dan Knotts take that and we'll go from there.

[Daniel L. Knotts:]

Good morning Jamie. From a distribution services standpoint we continue to – our team there continues to do a tremendous job of both broadening the capabilities set, the offering that we are deploying in support of our customers' transportation and logistics requirements. The team there from expanding whether or not it's not our brokerage service or DLS Worldwide services or co-mailing services in support of our customers in rising postal increases, working very, very closely with our customers on the expedited freight side as well. It's just that segment, that offering within the company is doing a tremendous job of continuing to expand that offering and continue to further penetrate within our existing customer base and we expect that to continue going forward.

[James Clement:]

Okay, Dan, if – or Tom also, feel free to weigh in here, I think that a number of years ago – and I think that this is still going on right now in terms of investors' perception. The perception of logistics business was that it really supported your print customers and I think that that is a big piece of your business, and looking out a couple of years, that actually maybe the biggest sub-component of all of R.R. Donnelley conceivably five, seven years from now. What's – I think that's larger than just being co-mailing and mailing logistics and that kind of stuff. Can you talk a little bit about that and can you talk about the board's willingness to allocate capital in a bigger way to this segment going forward?

[Daniel L. Knotts:]

Sure, it's Dan Knotts again. From a logistics perspective, some years ago I think the statement was true was that it was a self-contained unit inside of Donnelley basically set up to service the freight that was coming out of our facilities in support of moving our customer's product that we were actually printing. Again a very focused strategy that's been deployed and will continue to be deployed on a going-forward basis to leverage two things within that business. Leverage the customer relationships that we have well beyond the print aspect of their business, number one; and two is to leverage the network of transportation carriers that we have in support of moving all different types of products, so your point beyond the print side of the equation, moving well beyond print, moving beyond the mailing, co-mailing, co-palletization, co-pal tray, commingling aspects within our distribution business, that will continue to be a very core part of our offering going forward. Again, leveraging all of the logistics and transportation requirements of our customers, not just print; and second, leveraging that network of carriers that we have and offer that scale to our customers and third parties as well.

[Daniel N. Leib:]

Yeah, Jamie, it's Dan Leib. I'd add a couple things to that. So if you look at the organic growth in these services unit, all four of the platforms or businesses did post positive organic growth this quarter. As Tom mentioned, logistics at 11.2% and that's been consistent, we've been in the double digits now for several years; as Dan mentioned, a lot of that coming from non-print related offerings. A positive is that we've also been growing the print-related as we've taken work for third party providers as well and in the financial business in the quarter, capital markets activity domestically actually was a little bit softer than last year but we did see good investment management work and then international capital markets activity was strong. We mentioned sourcing was organically a grower of above 16% and the digital and creative business grew about 11% organically. So good performance throughout the segment both on topline and bottom line.

[Thomas J. Quinlan:]

And then Jamie just to beat it up more organic growth in commercial and digital print, direct mail, labels, office products, when you think about international, Asia, BPO, global turnkey solutions in Canada, during a quarter that I would tell you that the economy obviously is not going at full speed for this platform to go ahead and generate that organic revenue, we feel real good about what the future holds. Dan already told you about the strategic services. There are some good things there, and again your outlook five to seven years out, we're going to continue to evolve and continue to go after things I think in all of these businesses. And publishing and retail services I would tell you, the team did a tremendous job in the quarter. Obviously not one of the easiest parts of our platform, but we're winning share, we're operating, we've shown our customers how we can take their fixed costs and make them variable. Those all bode well for us in that arena too.

[James Clement:]

Okay, very good. Thank you all for your time as always.

[Thomas J. Quinlan:]

Thanks Jamie.

[Daniel L. Knotts:]

Thanks Jamie.

[Thomas J. Quinlan:]

Operator, we got time for one more question.

[Operator:]

Your next question is from Edward Atorino from Benchmark.

[Edward J. Atorino:]

Hi, sorry I got on late.

[Thomas J. Quinlan:]

Morning Ed.

[Edward J. Atorino:]

Can you talk a little bit about how Consolidated Graphics has been doing now that it's been folded into your operations?

[Daniel L. Knotts:]

Hey, good morning Ed.

[Edward J. Atorino:]

Hi.

[Daniel L. Knotts:]

Dan Knotts. I think the Consolidated Graphics we are very happy with the performance of Consolidated Graphics on a number of fronts, the first being from an integration standpoint and blending right into the broader Donnelley offering. We talked at investor – on our investor day about the importance in the strategic fit of Consolidated Graphics into the four elements of our go-to-market strategy. The first one is selling individual products and services and the Consolidated Graphics team is doing a very, very good job of executing, continuing to execute against that and selling individual products and services in the local regions and local markets that they serve. The second piece of that was from how they support our enterprise accounts and the expanded offering that we can now take to those enterprise accounts and that work is proceeding nicely. The third part was in our market segment solutions side and how they fit right into our retail and healthcare, in retail banking approach and that transition is going very well. And the fourth is in our global business solutions offering, in particular global print management and they have greatly expanded the network of facilities that we can utilize in support of the global brand management customers that we have. So in summary, very happy with the integration and the melding of Consolidated Graphics into R.R. Donnelley and the second piece of that is very happy with the individual performance of Consolidated Graphics as they continue to perform very well in the regional markets in serving their local clients.

[Thomas J. Quinlan:]

And just to pile on to that, let's not forget commercial print drives engagement and strengthens brand loyalty. There's not another company in the United States that can lay claim to digital and variable print capabilities that we have on this platform, it's unparalleled. So we think that again bodes well as the economy starts to come back.

[Edward J. Atorino:]

Now they are into 70 local markets and Donnelly is a big national company, was there any problem melding the two sales forces, sales strategies, because they are local and you are national?

[Daniel L. Knotts:]

No, actually that's gone very well also. The Consolidated Graphics model was much more of a local market, local sales organization type model.

[Edward J. Atorino:]

Right.

[Daniel L. Knotts:]

The Donnelly approach in the commercial platform was more of the national account, global print management account model. The ideal scenario and the home run in this is bringing the two of those together to maintain that local market flavor focus on selling to the local customers while at the same time leveraging those facilities in support of those national enterprise accounts and the global print management offering that we take to the marketplace. We are deploying on a local basis the consolidated sales, Consolidated Graphics sales model with the legacy Donnelley plans and that transition has gone very, very well so as we look at the sales effort there and the integration and where we want to go with that going forward, we feel very good about that as well.

[Edward J. Atorino:]

Have you restructured any plans recently or closed any plans?

[Daniel L. Knotts:]

Yeah.

[Thomas J. Quinlan:]

Yeah, we have and you'll see that in the queue when that comes out later on today.

[Edward J. Atorino:]

Thank you.

[Thomas J. Quinlan:]

Thanks Ed.

[Daniel L. Knotts:]

Thank you, Ed.

[Thomas J. Quinlan:]

Look everybody, we know again we end these calls in a similar fashion. We know you have choices where you can invest your capital. Hopefully what we've shown you here today is that the foundation that we've put in place to support customers and deliver value for you, the shareholders, is taking hold. We thank you for spending time with us, we'll catch up with you actually in 2015. I want to take this opportunity to wish everyone in the United States a happy Thanksgiving and across the globe a happy and safe holiday season. Take care.

[Operator:]

Thank you, ladies and gentlemen, this concludes this conference. Thank you for participating; you may now disconnect.