R. R. Donnelley & Sons Company
Q2 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Welcome to the R.R. Donnelley Second Quarter 2015 Results Conference Call. My name is John and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode, later we will conduct a questions and answer session. Please note the conference is bring recorded. Now I’ll the turn the call over to your host, Dave Gardella.

[Dave Gardella:]

Thank you John, good morning everyone and thank you for joining the R.R. Donnelley Second Quarter 2015 Results Conference Call. In addition to discussing our quarterly performance we will also discuss our intention which we announced this morning to create three independently publicly traded companies. Thomas Quinlan, President and CEO, and Daniel Leib, CFO will discuss the transactions and then our second quarter results after which we will open up the call for questions. Copies of our earnings report as well as the press release and slides related to this morning's transaction announcement can be found in the Investors 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. The presentation, however, is 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 Investors section a description as well as reconciliations of non-GAAP measures to which we will refer on this call. In addition to Tom and Dan, we're joined this morning by Dan Knotts Chief Operating Officer and Drew Coxhead Chief Accounting Officer I'll now turn the call over to Tom.

[Thomas Quinlan:]

Thank you Dave and good morning everyone. We have a lot of ground to coverage during this call and I'll begin by discussing the strategic rational of the exciting announcement that we made today regarding our plans to create three industry leaders. After that I'll comment on our second quarter's performance and then turn it over to Dan Leib to take you through details of the quarter and the plan spin-offs. Let's begin with the strategic separation of R.R. Donnelley into three independent public companies. One will be a financial communication service company. The second will be a leading publishing and Retail Centric Print Service Company and the third will be focused on Global customized multichannel communications management. These transactions will allow each company to have greater strategic and management focus with significant opportunity to unlock value by enabling each to pursue their own strategies and invest according to their unique dynamics and opportunities within their respected industries. I'll touch on four topics related to this initiative. First, the ground work that paved the way for the strategy; second, the benefits of these transactions; third, a brief description of each business and fourth, the timeline and other considerations. To address the first topic, how we got here, I would like to recap our R.R. Donnelley has involved and grown during the past decade. During this period we developed an executed and deliberate plan that strengthen every part of our business through a combination of organic growth and strategic acquisitions developing new products and services, inventing fresh ways to serve customers, investing in new equipment, attracting additional talent creating information technology systems and much more. As a result we have built three businesses that individually offer the scale, expertise, product and service mix, and other resources to excel as standalone companies. Each of these businesses must now pursue its own strategy in order to capitalize on unique dynamics in their respective industries. This morning's announcement of the transactions represents the successful culmination of that strategic evolution. I'll discuss first our Financial Communications Services business which we have strengthened and expanded over the last several years. For instance, we acquired bound in 2010 and Edgar online in 2012, enhanced our offering with expanded language service capabilities and have continue to invest in our collaborative work flow and content management tools to increase the value of our financial communication services business to income issuers, corporations, investment banks, and asset management organizations worldwide. We’ve also strengthened and expanded our publishing and retail centric print services business. For example, we’ve recently acquired Courier, expanded our customer base as well as our digital print and content management offerings. Through organic investment we’ve enhanced this businesses capabilities so that it's an even more robust provider of print and related services to publishers, merchandisers and retailers. In addition, we completed the acquisition of Esselte’s North American operations in the first quarter of 2014 to extend our offering within our office products platform. The third business is our customized multi-channel communications management company. For more than 10 years we have systematically expanded our R.R. Donnelley’s capabilities to build a global leader in this arena. For example, we recently enhanced our distributed network of print assets and geographic reach with the acquisition of Consolidated Graphics and we have made a number of strategic bolt-on acquisitions that increased our capabilities in wide format printing, labels, point of purchase displays and packaging. We’ve talked extensively on the past calls about how we serve our targeted markets on a product-by-product and service-by-service basis, but also much more broadly with our integrated offerings. We’ve also talked about our vertical market solutions focus and our extensive suite of workflow management tools. We have expanded all of these offerings to create a leading customize multi-channel communications management business. We make today’s announcement with much excitement and from a position of strategic, financial and operational strength. As I highlighted earlier, each of these three businesses now has the scale, innovative technology, broad product and service mix and other resources to be leaders in their respective segments. The second topic I’ll address is in regard to the benefits of the planned transactions. As we continue to develop these three businesses. It became increasingly clear that the capital needs, growth trajectory, market requirements and strategy of each business is different. We also recognized that each has now achieved a scale to become a standalone company with the foundation in place to continue to be its customer’s first choice in the target market segments it serves. As a result, we believe that the best path to maximizing the value of each business and to maximizing long-term shareholder value and aggregate is to separate them into three independent public companies. We expect to realize substantial operational and strategic benefits from these transactions. Separating the businesses will further increase the strategic and management focus of each. This will enable each to execute their defined business strategies and even better compete in their evolving markets, each of which has different dynamics. For customers the separation is expected to provide even more focus support and services that are more finely targeted to meet their challenging needs. In addition, each business will be able to develop its own brand more suited to its offering and its specific marketing objectives. We believe the financial benefits are also significant. For instance under our plan each business will have a tailored capital structure so that it can better finance its strategy and growth plan and each company will be better able to optimize its investment and capital allocation policies. We believe the separation will enable each entity to achieve improved market recognition of its standalone growth prospects and profitability. As a result, we anticipate that it will enable investor’s evaluations to reflect each businesses’ unique operating and financial dynamics. Let me move to the third topic, providing more detail on each of the business and their extensive growth strategies. We have not yet determined official names for the three businesses, so for now we will refer to them in the short form as FinancialCo, PRSCo and CMCo. I’ll begin with FinancialCo which will be a leading financial communication services company serving both the investment and capital markets worldwide. FinancialCo has proprietary technology, extensive capabilities and deep subject matter expertise. Its products and services include content management, multi-channel content distribution, data management and analytics, collaborative workflow and business reporting tools and translations services. FinancialCo is one-stop-shop offering leverages a new combination of technology, service and regulatory expertise. Again it was built through the combination of R.R. Donnelley’s financial print business, Bowne and Edgar Online. As a standalone company FinancialCo will be positioned to invest aggressively in leading technology and workflow tools to support its customer communication requirements. In a growing and fast evolving marketplace it will have the capacity to generate strong margins and cash flow and capitalize on significant opportunities in content collaboration, data analytics and compliance and regulatory services. The second business, PRSCo will be trusted worldwide by publishers, merchandises and retailers to prepare, produce and distribute their periodicals, catalogues, books, office products for re-sale and directories. In a fragmented industry that is quickly evolving due to technology in customer consolidation, PRSCo can create value through scale, innovation and cost leadership. Looking ahead PRSCo will continue to expand its unmatched scope of print related capabilities to better serve customers worldwide. It will be well positioned for further value creation through continued cost restructuring and accretive acquisition opportunities. The company's expertise, deep customer relationships and strong cash flow generation are expected to support both organic and acquisition opportunities. The third business CMCo will be a customized multichannel communications management company. This business will assist organizations around the world to create manage and execute their multichannel communication strategies. As we do today, CMCo will provide customized digital and printed communications services including the direct mail, short run commercial printing, statements, business process outsourcing, supply chain management, logistics, creative design, contact management, forms, labels packaging's, [indiscernible] fulfillment and more to support its customers dynamic communication requirements. As an independent company CMCo has a clear growth opportunity driven by increasing demand for customized multichannel communications. CMCo is well positioned to grow by offering integrated solutions that help customers, better manage their brand execution, marketing and supply chain strategies. We expect CMCo to have the capital flexibility to fund growth investments and develop additional capabilities. The last topic that I'll address regarding the transactions is a timeframe and executive leadership. In terms of transaction timing, we have a detailed work plan laid out and expect the transactions to be completed before the end of 2016. Dan Leib will tell more about the process in a moment. With regard to leadership R.R. Donnelley has a deep bench of talented executives who are instrumental in getting us to where we are today. No decisions have been made with respect to the management teams of FinancialCo, PRSCo, or CMCo and we will provide more details about the senior management of each company in the Form-10 registrations statements when they are filed with the SEC. We have demonstrated an ability to manage complex transactions while effectively operating our day-to-day business. I'm confident that the R.R. Donnelley employees will continue to focus on taking care of customers, managing cost and building for the future. Now before I turn it over to Dan Leib, I'd like to make a few comments regarding our second quarter performance and highlight our employee's ability to quickly adjust to any swings in demand. With respect to second quarter results we experienced softened demand in the quarter which resulted in an organic revenue decline of 2.1%. While strategic services in international segments posted positive organic revenue growth, declines in publishing and retail services in variable print more than offset those gains. Even in the phase of this headwind the R.R. Donnelley team did an excellent job managing cost allowing us to achieve a slight improvement in our non-GAAP EBITDA margin as compared to the second quarter of last year. Additionally, second quarter free cash flow was a $153 million, an improvement of $60 million from the same quarter in 2014. We also completed the acquisition of Courier Corporation in June. The integration is going smoothie and we are on track to deliver the results we expected when we evaluate the acquisition. Despite of demand headwinds we faced in the second quarter, the opportunities we seen in our pipeline make it increasingly clear that our messages resonating with customers. Our ability to evaluate their needs and identify opportunities for cost containment, product innovation and faster or more efficient delivery to market is compelling. Allowing customers to leverage our capabilities and innovation to support their communication needs will remain a focus for the perceivable future. And with that let me turn it over to Dan Leib before we move to Q&A.

[Daniel Leib:]

Thank you Tom. As our prior quarters, the focus in my comments will be uncertain 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 first quarter. As Tom noted, the demand environment was challenging but we are pleased with our cash flow and margin performance in the quarter both of which improved from the second quarter of 2014. Revenue of $2.7 billion represented a decline of 5.3% from the second quarter 2014. Adjusting for a 200 basis point unfavorable impact of changes in foreign exchange rates as well as the impact of acquisitions, dispositions and pass through paper organic revenue declined 2.1%, roughly 30 basis points of the decline reflex the April performance of our Venezuela operation that was sold on April 29. Increases in our strategic services in irrational segments only partially offset volume declines in the publishing and retail services and variable print segments as well as continuing price erosion. Second quarter gross margin was 22.5%, 37 basis points lower than the second quarter of last year primarily due to price erosion, higher health care costs and volume declines in the variable prints and publishing and retail services segment. The unfavorable impact of these items was partially offset by cost control initiatives across the company and a favorable mix amongst our four operating segments. SG&A expense in the quarter was $309.8 million. As a percentage of revenue SG&A was 11.3% or 40 basis points lower than the second quarter of 2014. Our SG&A expense has been reduced to pre Consolidated Graphics and Esselte acquisition levels. As a result, our second quarter non-GAAP adjusted EBITDA was $309.2 million or 11.3% of net sales compared to $325.6 million or 11.2% of net sales in the second quarter of 2014. Similarly, second quarter non-GAAP operating margin of 7.1% increased 13 basis points from the second quarter of 2014. Our non-GAAP effective tax rate in the quarter was 34.3% or 230 basis points lower than the second quarter of 2014 reflecting in part a slight decrease in the continuing operations rate. Now I’ll discuss revenue and non-GAAP adjusted EBITDA performance for each of the segments in more detail. Revenue in our strategic services segment was $697.6 million in the second quarter of 2015, an increase of 1.5% from last year’s second quarter. On an organic basis, year-over-year revenue increased 2.1%. The organic revenue was driven by logistics and sourcing, logistics had another solid quarter of organic growth despite lower revenue related to declining fuel prices that negatively impacted the segments revenue by approximately 250 basis points. Our sourcing business reported double-digit organic growth for the fifth consecutive quarter. In our financial offering, the overall organic decline was 3% driven by soft performance in overseas capital market volumes that was partially offset by higher activity in the domestic capital markets, compliance and virtual data room offerings. Non-GAAP adjusted EBITDA margin of 15.2% for the strategic service segment increased by 14 basis points from the second quarter of 2014, primarily due to our ongoing productivity initiatives, partially offset by an unfavorable mix of revenue. Second quarter revenue in our international segment was $557.5 million, declining by 11.7% from the second quarter of 2014 largely as a result of unfavorable changes in foreign exchange rates and the dispositions of our operations in Argentina and Venezuela. Organic revenue increased 1.4% over coming a 130 basis point negative impact from the one-month of operations of Venezuela in the quarter. Growth was driven by volume increases in global turnkey, Canada, Asia and business process outsourcing. The non-GAAP adjusted EBITDA margin in the segment of 8.3% decline 18 basis points from the second quarter of 2014. The change in foreign exchange rates negatively impacted the segment EBITDA margins by 36 basis points. Revenue in our variable print segment was $911.3 million, a decrease of 4.8% from the second quarter of 2014. On an organic basis year-over-year revenue decrease 4.6% driven by lower volume and price erosion across the segment. Volume declined in the economically sensitive offerings of commercial and digital print and direct mail resulted in segment performance that was worse than recent trends. The segments non-GAAP adjusted EBITDA margin of 11.2% in the second quarter declined 49 basis points from the second quarter of 2014. Lower volume and unfavorable pricing were only partially offset by our cost control initiatives, including the cost savings achieved in connection with our 2014 acquisitions. Revenue on our publishing and retail services segment was $581.7 million, representing a decline of 7.1% from the second quarter of last year. After adjusting for a 280 basis points decline related to lower pass-through paper sales as well as the impact of the Courier acquisition organic revenue declined 6% year-over-year. We experienced volume declines and continued price pressure, primarily in magazines, catalogues and retail inserts. Book organic growth was nearly flat, an improvement in trend from the last several quarters. Non-GAAP adjusted EBITDA margin for the segment of 10% declined 96 basis points from the second quarter of 2014 as a result of price erosion and lower volume. Our second quarter 2015 non-GAAP unallocated corporate expenses were $3.2 million, lower by $8.6 million compared to the second quarter of 2014. Lower bad debt and incentive compensation expense were partially offset by higher healthcare cost. Free cash flow in the quarter was $152.7 million, a $59.9 million higher than the second quarter last year. Relative to last year’s second quarter, the increase is primarily due to working capital being a lower use of cash as well as lower pension contribution. Approximately two-thirds of the working capital benefit is result of lower sales in the quarter with the balance of the benefit being driven by strong working capital performance in June. Second quarter capital expenditures were $52.6 million, $4.7 million lower than prior year. As of June 30, 2015, our gross leverage was 3.1 times, up 0.1 times from the first quarter and down 0.2 times from a year ago. With the acquisition of Courier closing in June, our reported leverages elevated, as the impact of the acquisition is fully reflected in our debt levels, but the base EBITDA and synergies are not yet fully reflected in the income statement. 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'll continue to reduce our leverage as we incorporate Courier into our results. We ended the quarter with $1.3 billion of net available liquidity with $300 million drawn on our $1.5 billion revolving credit facility. The balance on the credit facility is primarily related to the pay down of our Mabon maturity of $200 million as well as funding the cash portion of the purchase price for Courier. From 2016 to 2018 our average debt maturity is $240 million with the highest maturity of $251 million due in January 2017. As it relates to pension, we review our actuarial assumptions annually as of December 31 and we have not made any re-measurements of obligations or funded status in the interim period. However, we estimated that the net underfunded status of our pension and post retirements plans decreased by $145 million to $677 million from December 31, 2014 to June 30, 2015. As we begin the second half of the year let me share more detail on the updated full year 2015 guidance that was summarized in this morning's press release and includes the impact of the Courier acquisitions, the sale of our operations in Venezuela and the negative impact of foreign exchange rates. We expect revenue in the range of $11.4 billion to $11.6 billion. At the midpoint this implies an organic revenue decline of approximately 0.7% for the year. We expect our non-GAAP adjusted EBITDA margin to be in a range of 10.5% to 10.7%, 20 basis points higher than our previous guidance as we continue our ongoing focus to improve business mix and aggressively manage the cost structure. Depreciation and amortization is expected to be in a range of $460 million to $470 million, $5 million higher than our previous guidance. We expect interest expense in the range of $270 million to $275 million, $ 2.5 million higher than our previous guidance. We continue to expect our full year non-GAAP tax rate to be in a range of 33% to 34%. We project the full year fully diluted weighted average share count to be approximately 207 million shares, an increase of 5 million shares from our previous guidance as a result of the equity consideration used to fund in Courier acquisition. We continue to expect capital expenditures in the range of $225 million to $250 million and free cash flow in the range of $400 to $500. I want to add some details to a few points that Tom covered earlier with respect to this morning's announcement of the two spin-offs. For your reference as Dave mentioned, we posted slides to our websites to provide more detail on the three companies. First, FinancialCo will be a global company with approximately 85% of its revenue in the United States. Revenue of approximately $1 billion with high teens, low 20s EBITDA margin. This business has posted annual organic sales growth of approximately 1.4% from 2012 to 2014. The business is asset lite but we’ll continue to invest largely in IT to develop further its industry leading collaborative than data management tools. Next PRSCo will be an industry leader with approximately 88% of its revenue in the United States. Revenue of approximately $3.5 billion with EBITDA margins in the low double digits. This business is posted annual organic sales decline of approximately 3.1% from 2012 to 2014. The business has a large capital installed base and requires moderate incremental CapEx and has good opportunities in M&A. And the remaining entity will be referred to as CMCo and will be a global company with approximately 70% of its revenue in United States. Revenue of approximately $7 billion with EBITDA margins in a high single digits. This business has posted annual organic sales growth of approximately 2.6% from 2012 to 2014. The business includes our asset lite higher growth offerings of logistics and sourcing. As Tom highlighted earlier, the separation will allow each entity to have greater strategic and management focus. We believe that the best path to maximizing the value of each business and to maximizing long-term shareholders value in aggregate is to separate them into these three independent publicly traded entities each with an appropriate capital structure that reflects the business and financial profile of each company. We expect that the currently outstanding R.R. Donnelley notes will remain at CMCo with cash proceeds from the capitalization of each of the spin-off companies being paid to CMCo. R.R. Donnelley management intense to continue to recommend to the board of directors, a quarterly dividend of $0.26 per share, consistent with its current level until the transactions had been consummated. Following the completion of the transactions each company will determine its appropriate capital allocation policy. From a timing perspective there are a variety of actions that will take place to effect the transactions. As Tom also mentioned, we have a detailed work plan laid out and expect to file our Form-10 in the first quarter of 2016 with the spin-offs effective no later than the end of 2016. Immediately following the completion of the transactions existing R.R. Donnelley shareholders will own shares in all three companies. In the interim, we plan to provide periodic updates on status and other relevant details regarding the transactions including the names of each company and the respective leadership teams. And with that I'll turn it back to Tom.

[Thomas Quinlan:]

Thank you Dan. Before we'd open the line of questions I want to reiterate a few of the key points that we just covered. First, over the last decade we’ve made a series of targeted investments through both capital spending and acquisitions to strengthen our portfolio of offerings. Second, we fortified the portfolio even more by complementing it with the appropriate information technology, innovative customer solutions and an outstanding work force. Each of the three standalone businesses now has the scale, innovative technology, work product and service mix and other resources to be leaders in their respective segments. And finally, we believe now is an appropriate time to pursue the announce transactions which we believe will enhance shareholder value and enable investors valuations to better reflect each businesses’ unique operating and financial dynamics. And now operator let's open it up for questions.

[Operator:]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question is from James Clement from Macquarie.

[James Clement:]

If I could ask a question first on operations in the quarter and then we’ll switch over to the transaction, looks to me obviously with the first quarter numbers in mind and with your guidance in mind, looks to me like -- it seems like EBITDA margins are kind of looking like they are bottoming here or if you look at the trend over the last couple of years you look at the first quarter. Looks like your guidance is little bit more optimistic than kind of where the trend line has been, can you talk little bit about that?

[Thomas Quinlan:]

So as we laid out in our -- going back to our early 2014 Investor Day and the various projections for each of the segment as just stated we are benefitting from a business mix phenomenon as we expected and laid out, and we always talk about we’re aggressive on the cost side and recognize that there are headwind challenges at time -- times rather and we need to make the appropriate investments in other areas and in other time. So we would agree with you and if you look at over several years than it certainly to path that we’ve seen of a dropping of the margins in this range.

[James Clement:]

And Tom could you -- broadly speaking I’ve got a couple of more detailed questions, but broadly speaking why now for this transaction? Why not 12 months ago or 24 months ago or 12 months from now?

[Thomas Quinlan:]

Jamie, I mean simply put a customer requirements in industry dynamics are the reason to do it now, a decade ago I would tell you we set out on being an integrated communication services provider, we believe that this was the right strategy and no question, we were correct. All of our stakeholders have benefited from the strategic initiative and it has been the foundation of every decision that this management team has made. But Jamie, few things are done in a vacuum and nothing static. The market that these three businesses serve are evolving at completely different speeds and with completely different industry dynamics and that results in each business facing different customer priorities, growth opportunities and capital requirements to meet their customers’ requirements -- to meet their communication requirements. I mean with the accelerated rate of change in our customers communications in the ever changing evolving markets that our customers compete in it became evident to all of us that in order to aggressively capture these customer opportunities, we need to manage the business differently and as a result each business will have a tailored capital structure and its own currency to finance its growth and better optimize its investment policies. And there is no better time to do this when you're at a position of strength, each of these three businesses now has the scale, the acquisition of Consolidated Graphics solidified our scale with CMCo, Courier did the same for PRS and we talked about Bowne and Edgar Online and what they did for financial call as well. Each of them have innovated technology, they each have broad product and service mix and most important they have got the talent and employee base to assist the customers and to continue increasing what we think is a differential between us and our competitors and same time, we’re unlocking value for our stakeholders. 2016 when this is going to hopefully be executed on, look it's a Presidential Election next year, it's an Olympic year, we think the economy will be even stronger then. So I think all of this came into play as you think about why we are -- why we’re doing it now.

[James Clement:]

Do you all have a rough estimate and obviously, certainly pinpointing a number at this point would be awfully premature, but do you have a rough range of what we might think about, do you want to think about at some of the parts analysis here, of what adding back office legal accounting and that kind of thing to, let's say two new entities, would roughly add to the expense picture of the overall entity of RRD, as it stands today?

[Dan Knotts:]

It's Dan, there are -- we’ve done a lot of work obviously leading up to this point and as you articulated there will be some of those incremental cost, we’ll certainly look at changing process, et cetera, to minimize them and we would expect to provide more detail in the Form-10s when this file.

[Thomas Quinlan:]

And Jamie look, there is the samples here of what we’ve done throughout the organization everyone understands what cost are as it relates to support function, sales, operations; that’s not going to change. So what I would tell you that you got scores of people here who have drank the Kool-Aid and know how to run businesses, so that’s not going to be something we'll come back to surprise you next year and say we have XYZ has taken place, so we're comfortable with that.

[James Clement:]

Okay. I'll let other people ask the questions now, but thanks very much for your time.

[Operator:]

Our next question is from Charles Strauzer from CJS Securities.

[Charles Strauzer:]

Hey just a couple of things. Starting off with the CMCo and the thought process there behind logistics not being maybe a separate company or was there a thought in creating a separate entity with logistics?

[Thomas Quinlan:]

Hey Charles, I would say look, you know as you look at these things there’s a lot of things that go through to -- you come to a decision what made the more sense for us right now is PRSCo and FinancialCo. CMCo is going to need logistics for mailing kitting fulfillment and services going forward. PRSCo and FinancialCo have long-term commercial agreements utilized in the services and capabilities of CMCo logistic capabilities, but we think right now these are the right two to go ahead and get out there. But the most important thing out of all these, the customer experience is going be first and foremost in whatever we do, just as it is today and it will be seamless to the customers.

[Charles Strauzer:]

Great and then you addressed partially about the dividend fund, keeping the dividend at least through the spin. Can you explain a little more in terms of the discussions maybe you’ve had or some of the strategy post-spin, what to expect on a dividend fund? Thank you.

[Thomas Quinlan:]

Sure. Thank you. Look all this understanding and importance of the dividend which is why we iterated today that we expect over the next year to continue to recommend to the R.R. Donnelley board that we pay the $0.26 per share. Let's not forget, let's look for those of you who are new, let's go back; this management team, back when we had the great recession in 2008, the stock prices as low as five, this management team never once recommended a change to the dividend to the board -- of anything less than $0.26, so I think we’ve proven to you over the long period of time, we've been good fiduciaries in deploying capital and taking into account all of our investors requirements and needs and I know the new management team when the time comes to decide capital allocation, they are going to do the same.

[Charles Strauzer:]

Got it. And just picking up on up on what Jamie was asking about, when you said -- you look at post-in, any thoughts on potentially what the evaluations might look like there and if you’ve had any earlier discussion about that?

[Thomas Quinlan:]

I mean, -- you look at FinancialCo and you think about what some of their trading comps might be. I mean some of those comps are trading at two plus times where we trade today as one entity. If you look at PRSCo, PRSCo the comps there, they trade a little less than where we trade today and when you think about CMCo, CMCo is probably higher than where we trade at today. So obviously we are not doing this unless we feel strongly that there is a tremendous value that’s finally can be unlocked in this beast that we have, So we're excited about it and looking forward to continuing to deliver for the customers and unlocking the value.

[Operator:]

[Operator Instructions] Our next question is from Michael McCaffery from Shenkman Capital.

[Michael McCaffery:]

One question on the revision to the revenue guidance. It's sounded like the majority of that was related to FX in Venezuela. I just wanted to confirm that?

[Thomas Quinlan:]

Sure if you run the math, about 100 million or so is the Venezuela impact, the impact of FX and Courier roughly offset one another. And then our guidance at the midpoint is organic revenue decline of about 70 basis points. So that is the balance of our prior guidance was positive about 50 basis points or so. So, reflective of what we saw in the quarter predominantly in the variable print area which is always a little bit tough to guide based off of because it is much more transactional by nature, but we thought it was prudent to take that down a bit and then continue the focus on the cost side which obviously mathematically drives up the margin.

[Michael McCaffery:]

And out the four segments was it the variable print more so than the other one, in terms of what you’re seeing for the back half then?

[Thomas Quinlan:]

Well. Yes, so based on what we saw in the second quarter that’s what does underpin the guidance. When we gave the five-year guidance going back in 2014, if we compared each of the segments against that and at least in the second quarter the other three segments were within line of our expectations. We did mentioned the headwinds that -- logistics faces with fuel surcharge et cetera, given fuel rates, but outside of that everything was within the expected ranges.

[Michael McCaffery:]

And then you made a reference point -- you made a comment regarding 2016. You know lot of things that you make for a healthy year in '16. From where you sit right now, how does the global economy feel as you are looking towards the back half of this year into '16?

[Thomas Quinlan:]

I think none of this is a surprise to anyone, I think if you go around the globe there is a lot of stress and tension within all the major country’s economies that are taking place right now. There is uncertainty in anywhere you look, so that uncertainty then drives hesitation, we believe by people. You look at May’s real consumer spending, in June’s consumer spending, I think May was four-tenth of percent, June was zero flat, but yet we have 2.9% growth of real GDP in United States, there is a disconnect there without a doubt. So look I think the election -- Presidential Election in United States is going to be a good for the global economy, I think China at some point is going to settle in here and go beyond their way to get whatever it might be, 4%, 5% growth which I think we in United States would be jumping up and down and throwing a party to have. So that all bodes well for communications materials and that’s what we do. And if that is if I’m anywhere close to being right on that, that’s going to be a good day for everybody.

[Michael McCaffery:]

And just final question on the three separate capital structures, obviously, in the release you indicated that that’s still to be determine, but maybe if you could just speak generically about how much leverage you think each of the three entities -- what’s appropriate vis-à-vis the current standalone RRD, where you’ve been pretty consistent in wanting to target between two in a quarter, two and three quarters. It is just mathematically that even with proceeds coming from the other two entities that the standalone CMC business holding the existing notes or probably looking at an increase in leverage from current levels, can you speak to that?

[Thomas Quinlan:]

There is a lot of work that remains to be done on that, obviously we’ve done a lot of work to-date and there is the designing of the structures for each of the organizations and what those look like which obviously have an impact on the EBITDA and the margin side. So pretty mature for us to get into the ranges, we’re very confident that the capital structures of each organization will be appropriate for the underlying business dynamics and that will continue to act conservatively as we have and make sure that the capital structures are appropriate. But would expect more of that detail to come out overtime and to be detailed in the first-half.

[Daniel Leib:]

And Mike as you think about the globe prospects and the culture that Dan Knotts and team have built up here to support of each of these businesses, these businesses are fully developed. PRSCo is going to grow through making the supply chain more efficient for publisher’s merchandises and retailers and through acquisitions. There is still way too much inefficiency in the supply chain there, just look at the book product for example, there is great growth opportunities for us in warehousing and distribution that we’re currently vigorously going after and that we’re going to really continue to go after that on a go forward basis. Can PRSCo become a demand signal for their customers and as a result help change the deal structures for publishers and retails and merchandises. When you think about FinancialCo, where is that going to -- what we’re excited about there, that has the outstanding technology with content management tools and collaborative workflow tools which I am sure your organization uses whether it's venue, fund suite ark [ph], an act of disclosure, our tools allow data to be archived, retrieved and accessed more quickly and confidentially. The compliance regulatory demands and transactional events in the financial markets they are not going away or declining, they are always going to increase. So we feel really good that FinancialCo is set up well for growth. And then when you think about CMCo customize multichannel communications, the bottom-line is that this business helps our customers communicate more effectively with their customers. Consumer communication is still very complexion and the media fragmentation and technology guarantees complexity will continue to increase. We want people when you think about if you have a communication piece that is going to go whether our customer is going to send it to their customer, their employee or their vendor, we want that customer to think about us when they go ahead and do that. So regardless of the capital structure, we think we’ve proven to you over decade that look we get it, we know that we can’t go out over our skies and be too levered. And at the same time, the growth opportunities that are there with these three independent businesses in the focus because of having a tailored capital structure is going to allow for what we think is very, very strong businesses.

[Michael McCaffery:]

And I guess just a final question and I’ll move on. Is it premature to have had discussions with the rating agencies for what their views are?

[Thomas Quinlan:]

We have ongoing discussions with them and so we would refer you to them for their views, but we have ongoing discussions with them.

[Operator:]

Our next question is from [indiscernible] from Sidoti and Company.

[Unidentified Analyst:]

Most of my questions have been answered, but one question regarding the three new companies, the management teams are they coming -- going to come from inside the company right now or you're planning to look also outside?

[Thomas Quinlan:]

We believe that as I mentioned in my prepared remarks, we’ve got the talented -- we got the talent here, we’ve got the bench strength here. We wouldn’t be in a position to do what we are today if we didn’t have the people in-house to help us do that, So, obviously we're going to -- where we have short falls or think we need bench strength, we'll go outside and look. But I think as you sit here today, the comfort that you said take is that the reason we’re able to announce this is because we have the team in place to go ahead and do this.

[Unidentified Analyst:]

Just one more question. Would you still be looking at possible acquisitions right now or is that now completely focused on separating the company?

[Thomas Quinlan:]

This is business as usual. We will continue -- Dave Gardella and team continue to get a lot of inbound calls and we'll continue to look at acquisitions and run the business as we see fit and as we should.

[Unidentified Analyst:]

Okay. Thank you. That’s all from me.

[Operator:]

Our next question is from Robert Newman from Morgan Stanley.

[Kathy Brady:]

Hi actually it's Kathy Brady with Morgan Stanley. I'm going take another stab at some of the credits stats with regards to the CMCo. As the prior question was asked, it sounded as if the leverage at that entity would actually be increasing from your current target. You've talked about not getting over your skies and having a reasonable capital structure, but can you comment directionally, would you look for a higher leverage number more than you’ve currently target or would you continue to stick within the range that you been operating then?

[Thomas Quinlan:]

Sure. Yeah Correct. I would -- we think it's too early to comment in specifics, what I would tell you is, and the rationale behind these transactions are the different business mix, different financial profiles, and so what will have at RemainCo [ph] will be a different business mix and different financial profile than what we have today in terms of margin structure, in terms of Return On Capital site metrics, et cetera. So all of that being taking into consideration as we construct the appropriate capital structures and like I said a lot of work is going into getting us to this point and there will be a lot of additional work and we will reflect that in our public comments as well as in the Form-10, where certainly will be much more detail than what we’re getting today.

[Dan Knotts:]

And Kathy the reason I wanted to go into -- so I talk about the growth opportunities, was all those growth opportunities are further going to require us to have a flexible balance sheet. So we know that if we're going do this the right way. We've got to continue to make sure that we got the flexibility in the balance sheet to take advantages of opportunities when they arise.

[Kathy Brady:]

Okay and then the couple of other questions. With regards to the pension where were those beside?

[Thomas Quinlan:]

So -- there will be an additional detail on that in the Form-10. Again we're going on and work has gone in to this point and looking at those obligations we articulated the underfunded status of the pension and post retirement and about $677 million and so as we look at -- to the earlier comment of rating agency discussions, look at the calculations of leverage, obviously factoring those unfunded obligations as well -- are underfunded obligations.

[Kathy Brady:]

Okay and then you discussed the fact that, to the extent that there is cash that comes in, from spinning of the two other entities that those would go to CMCo for purposes of -- well you don’t say what the purpose would be? I assume it would be for pay down of debt?

[Thomas Quinlan:]

Correct. We would outcast coming back to CMCo, obviously we have maturities that will come due between now and the effective date of this transaction, so we’ll continue to look at and factor that into the capital structure, but yes that is the concept.

[Kathy Brady:]

And then as I think about your capital structure you have variety of bonds, some of which are heritage investment grade with different type of indenture package versus high yield deals you've done more recently. Are there any covenants that you need to be cognizant of?

[Thomas Quinlan:]

Hey Kathy let me go first and then Dan will. Our indenture is the same throughout every single bond that we basically have outstanding. So there is nothing from a covenant standpoint otherwise in the normal covenant you would see that are going to constraint us and what we're trying to do here.

[Kathy Brady:]

Okay got it. Alright that’s it for me. Thank you.

[Operator:]

Next question from Doug wooden from Forewarn Capital.

[Doug wooden:]

Got of quick one on some of the sort of shared facilities. So I thought part of the reason that the conglomerate made sense was that you could share a lot in terms of back office and operations and transportations and that kind of stuff. Is it going to be difficult to separate into these three businesses given sort of integration that I thought was in the business?

[Thomas Quinlan:]

I'll start first and then Dan will go. Good question. I mean we've been out on the road and we've been talking to, we've talked about R.R. Donnelley and from an external standpoint, a customer facing standpoint without a doubt the customer comes first and it has been on R.R. Donnelley when anything arises, but from an internal standpoint the company comes first. So I mean we’ve looked at R.R. Donnelley and put R.R. Donnelley out there. When challenges occur, we act as one, but we developed these three businesses while acting as one. Now is the time to have the three independent businesses, will provide greater flexibility in management business, it will be a focus on distinct strategic initiatives and there will be transparency for investors to the value of each business, but I’ll let Dan go into more detail there.

[Dan Knotts:]

Yes Dan Knotts, from the facility standpoint I think it's fair to say that the facilities that we have that are going to be going with each of the businesses for the most part our majority of those aligned with those businesses that they’re going with the experience that we have had historically, as it's our job internally to make sure that we have a connectivity across those facilities when serving our customers with a multiple product lines that we have. So it’s a seamless experience for them, we do the work of managing across the facilities, but the simple answer to that question is the majority of our facilities are aligned with the businesses that they are going with.

[Doug wooden:]

And then on the logistics business, I had thought a big part of sort of the growth opportunity there with the empty space being created in the publishing side of that business shrinks, but now that that seems to be separate from logistics is that going to limit sort of the growth potential for logistics going forward?

[Dan Knotts:]

Dan Knotts again, absolutely not. We feel very strongly about the continued growth opportunities that exist within our logistics, within our logistics offering and think that they have a very strong future given the fragmentation remains in that -- in the markets and the different offerings that they have plenty of room left for them to continue to grow.

[Thomas Quinlan:]

And that’s an asset lite business, so we’re not running our own trucks, we’re utilizing industry capacity and freight management and so continue to see great opportunity there.

[Doug wooden:]

And then I guess just the last one on leverage, I know this has been asked a couple of ways, but when I run rough numbers it seems like leverage ticks up meaningfully, call it above five times, is that something you would be comfortable with?

[Thomas Quinlan:]

So depending on your assumptions on the cash coming back and the use of those proceeds. So we said before and I’ll reiterate here, we’ve obviously done a lot of work, would rerun that math and think about the capitalization of the other companies and how that cash gets deployed and if you're looking at a gross debt or net debt number you have quite a different answer in the way you are calculating it. But that seems a little bit still high there.

[Daniel Leib:]

Yes Doug I will be more direct, I don’t want anybody leaving this call think we’re anywhere near there, so you got a small error in your formula, give us a holler or so, but there is no -- we’re not close to that.

[Operator:]

And our next question is from James Clement from Macquarie.

[James Clement:]

Tom in the next couple of days when customers call you and say or ask you the question, what does this mean for me , I used to use our procure two products and services from R.R. Donnelley 10 years ago than five years ago or six and now it's 10. What’s the answer you're going to give them?

[Thomas Quinlan:]

Yes there is still going to be going ahead and procuring products and services from us. Look, a year from now when this happens they will have the opportunity to continue to work with the people that they are working with, we know there will be commercial agreements, long-standing commercial agreements that we’ll put in place. It will be very good for our customers, it will be good for our sales people. But the thing that this does is it drives where we need to go to for our customers in a quicker fashion. It accelerates what needs to happen from them from a communication standpoint. The way that the things are changing is much more faster and much more unique in the dynamics of each of the industries. Publishing retail services, are they using a lot of labels, if some, were they using a lot of forms in it, probably not. But are they going ahead and look into figure out how they can make this supply chain more efficient? Yes. And those are the areas that we look at, as we think about it, for as far as what we can do whether it's multichannel communications or FinancialCo, which again when you think about FinancialCo and all the things that they have going through their pipes relates to data and content and analytics those things are even going to be even further enhance as we go ahead and look that do this.

[Daniel Leib:]

And just add to that I think it's important to note that we have extensive experience in working with third-parties today as part of our global print management and global business solution offerings we have a vast network of third-party suppliers that realize to develop a complete offering for those customers. So the ability to continue to do that across these three companies is something that we have a tremendous amount of experience doing, we feel very comfortable that it will continue to be a seamless experience for our customers.

[Operator:]

Our final question is from Charles Strauzer from CJS Securities.

[Charles Strauzer:]

Just a quick follow-up on the organic growth numbers, Dan I don’t know if you gave some logistics, does it have good organic growth. Any more granularity on that and what the numbers look like there?

[Dan Knotts:]

In the quarter it was, let me just verify, it was 6.2% and so you add on another 250 basis point headwind on fuel and it starts to get you up to what, the more normalized double-digit growth that we've been seeing.

[Charles Strauzer:]

Obviously, you would expect to fuel to start coming down as the headwind more of [indiscernible] think of some point there?

[Thomas Quinlan:]

Alright. As we start taking the calendar.

[Charles Strauzer:]

Great. Thank you very much.

[Thomas Quinlan:]

Thank you everybody for joining us for today's call. We know we’re a little earlier than we normally are, so I appreciated you changing your schedule around. Look we're doing really good right now and over the next couple year we're going do even better. So thank you and everybody have a good day.

[Operator:]

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.