R. R. Donnelley & Sons Company
Q3 2015 Earnings Call Transcript

Published: 5 Nov 2015

[Operator:]

Welcome to the R.R. Donnelley Third Quarter 2015 Results Conference Call. My name is Adrian 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 being recorded. I’ll now turn the call over to Dave Gardella. Dave Gardella you may begin.

[Dave Gardella:]

Thank you, Adrian. Good morning everyone and thank you for joining the R.R. Donnelley Third Quarter 2015 Results Conference Call. This morning we released our earnings report, a copy of which can be found in the Investors section of our Web site at rrdonnelley.com. During this call we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further 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 Web site in the Investors section a description as well as reconciliations of non-GAAP measures to which we will refer on this call. We are joined this morning by Tom Quinlan, Dan Leib, Dan Knotts and Drew Coxhead. I'll now turn the call over to Tom.

[Tom Quinlan:]

Thank you Dave and good morning everyone. I will begin with a few introductory comments on our third quarter performance and then provide an update on the progress being made on the strategic initiative we announced in August to separate R.R. Donnelley into three industry leading companies. I will also share a few of the recent achievements within these areas of the business, and following that, Dan Leib will discuss our financial performance for the quarter in detail. With respect to our third quarter results, while the demand environment remained challenged, we achieved a non-GAAP adjusted EBITDA margin of 10.8%, a 20 basis point increase from the same quarter last year. We’ve effectively managed our cost structure to match demand, and going forward, we will continue to do so with the same level of discipline, which is reflected in our improved outlook portfolio margins. On August 4th we announced our intent to separate R.R. Donnelley into three independent publicly traded companies; one business focused on financial communications and data services; one business focused on publishing and retail centric print services; and one business focused on customized multichannel communications management. This planned separation represents a significant opportunity to unlock value as these three businesses pursue their own strategies and invest according to the dynamics and opportunities within their respective industries, thereby enhancing long term value for all stakeholders. Understandably there continues to be a desire for additional information on the future structure and management of these companies. We will provide additional detail in the Form 10 registration statements, the first version of which we are targeting to be filed with the SEC in the first quarter of 2016. In the interim, on calls like this, we will provide status updates. Many of you reacted about the target capital structure of each of the spin-cos. To reiterate and elaborate on what we said on our August Investor Call, we intent to appropriately capitalize each of the PRSCo and FinCo. The cash proceeds that are raised at PRSCo and FinCo, will be distributed to CMCo. In a moment, Dan Leib will provide you with more information on the target leverage for each of the spin-cos. Somebody reacted about the dividend. We intent to recommend to our Board the same level of dividend, $0.26 per share until the transactions have been consummated. Following the completion of the transactions, each company obviously will determine its own capital allocation policy. In order to effectively manage the complexities of the strategic initiative, an internal project management office, PMO, has been established. This project management office is responsible for guiding, planning and supporting the execution of the new structures. The PMO team is set by key R.R. Donnelley employees from each of the main functional areas of our business and is supported by an experienced external team with R.R. Donnelley senior management providing guidance and oversight. We are making very good progress on the execution of the separation and feel very good about our ability to do this cost effectively. Based on this solid progress that we have made to-date, we now anticipate that the completion of these strategic transactions will occur in October of 2016, which is a few months earlier than our initial target. At this point, I’d like to highlight a few of the recent achievements within the business areas that will make up these three independent entities; FinancialCo, PRSCo, and CMCo. R.R. Donnelley’s ongoing transformation has been supported by the acquisitions that expand our capabilities, diversify our portfolio, and add scale to key businesses. We continue to pursue this strategy in last month specific to the financial services group, we announced that we have made a minority investment in Mediant Communications, a technology leader and provider of electronic and printing shareholder communications. This investment formalizes an existing relationship to provide the sales and development of our joint proxy services and wholesale fulfillment offering to broker dealers and advisers. More and more organizations are seeking innovative ways to engage readers by using digital and navigational devices that draw the readers to key content. Shareholder communications are no exception. Last month we launched the new addition of the R. R. Donnelley guide to effective proxies designed to assist organizations in optimizing their shareholder communications as they work to transform proxy statements from traditional compliance documents to more compelling shareholder communications. This guide combined and leverages our expertise in financial communication services with our ability to design powerful communications and offers new insights to help clients create forward taking shareholder communications that fit their communications objectives and meet the expectations of their audiences. In today’s global marketplace, communication is that connect with all audiences in all applicable languages, are both critical and increasing complex to manage. Our language translation offering has developed and broaden considerably in recent years to meet the changing needs of our customers. As more and more of our clients consolidate their multi-lingual assets our solutions play a key role in generating greater efficiencies and improving the overall quality of content. This year R. R. Donnelley Language Solutions Translation Management System was recognized in the market leader category of market research firm Common Sense Advisory’s evaluation of such systems. Common Sense Advisory’s report was the first in a series of research reports on supply chain management tools related to language technology. Our MultiTrans system offer a unique solution to enterprises seeking a comprehensive system for the global translation activities. This system manages, secures, automates and audits our customers’ multi-lingual communications process adding value to each step from authoring to publish. In addition it gives our customers significant control over their translation supply chain and offers them greater efficiency, reduce cost and improved overall quality of the multi-lingual content that is so critical in today’s world. Within FinancialCo, our simple yet powerful solution streamline processes support regulatory compliance and help manage the increasing challenge of financial reporting worldwide. Our broad and extensive capabilities create value for our clients and position FinancialCo to be a leading provider of financial communication solutions. Within our publishing and retail services segment, in June, we announced the completion of an important addition to our Company. The acquisition of Courier Corporation; a leader in digital book printing, publishing content management, and customization, in both new and traditional media. This acquisition provides expanded capabilities in our publishing and retail services segment contributing to our unmatched offering of print and related services. The integration of Courier is going smoothly and continues to progress as planned. Courier is already adding value as our customers benefit from their enhanced printing capabilities, particularly digital print which provides them with greater flexibility, best to turn to market and additional supply chain efficiencies. For example by combining Courier’s digital inkjet capabilities with R. R. Donnelley’s book fulfillment services platform, we have expanded our ability to provide publishers with greater flexibility to manage their book inventory. Rather than taking slower moving titles at a print, publishers can turn to us to manage their titles be in automated replenishment program that is supported by our digital inkjet book manufacturing capabilities. Slow moving titles no longer have a demand level that supports traditional book manufacturing and distributions are set up in our automatic replenishment program. Manufacturing specifications print ready PDF files, and min-max inventory levels are established for each title. Auditor fulfilled from on hand inventory until a title reaches its minimum inventory level at which point a print order is automatically generated to appropriately back build the inventory. The benefits of this expanded capability for our publishing customers are significant. The efficiency is driven by this automated replenishment program allow publishers to keep their titles imprint for a longer period of time thereby generating more revenue and at the same time dramatically minimizing inventory. As we continue with the Courier integration, additional benefits to our customers will include expanded capabilities and content management, custom publishing, e-book distribution, market analytics, inventory management, warehousing, distribution and more. Additional capability such as these were produced an PRSCo as a service provider that publishers and merchandisers will turn to, to prepare, produce and distribute their books, magazines, catalogs, inserts, directories, and office products. This October we showcased our integration communication solutions at the 2015 Direct Marketing Association annual event. This event attracts thousands of marketing professionals from all over the world to share their latest trends and best practices in direct response marketing. We demonstrated a suite of cross channel products and solutions designed to create personalized high impacting paints that help marketers improve customer engagement, increase customer loyalty and elevate return on investment across the direct response metrics. We also took this opportunity to demonstrate our expertise in managing data in a rather unique way. R. R. Donnelley’s custom wave RFID printing electronics technology was embedded in every attendee batch upon entering our interactive booth, each attendee receives a personal greeting by name and by company. This application of our technology and date management knowledge also enables us to provide the DMA with valuable real time data such as information on the most frequently visited exhibit areas. And enabling them to make improvements to the conference both on the spot and over the long-term. Our communication solutions are made even more robust by RR Donnelley’s international scale and scope. For the seventh year in a row we have completed a complex project for the Brazilian Ministry of Education to produce and deliver to the Brazilian postal service an important national called the NM exam which is used as an [indiscernible] exam to public and private universities and to award scholarships. The NM exam was an exam was administered this October in more than 15,600 location in 1,700 cities throughout Brazil. According to the Brazilian Ministry of Education the NM exam is now the second logic exam in the world with 16.9 million exams being administered for 7.7 million students. In addition to the exams we printed nearly 40 million pages are material for use in the administration of the exams and packed and delivered more than 64,000 mail packages each with an electronic lock and RFI detail. This sophisticated security features registers the date and time of the package is filled and the date and time it is opened which enables the customer to determine if an exam package has been opened before the stipulated time of the test. When the strategic separation of RR Donnelley is complete organizations around the world will turn to CMCo just as they have RR Donnelley for support and creating managing and executing their multichannel communication strategies. CMCo will be a daily position to support customers with technology leading solutions across the breadth of the communication supply chain. And with that I will turn it over to Dan Leib. Dan?

[Dan Leib:]

Thank you Tom. As with 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. As we mentioned in this morning’s press release, despite a continued challenging demand environment our margin performance in the quarter improved from the third quarter of 2014 due to our disciplined cost management. Revenue of $2.8 billion represented a decline of 4.4% from the third quarter of 2014. Adjusting for a 220 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 3.1%. Modest increases in our strategic services and international segments only partially offset volume declines in the publishing and retail services and variable print segments as well as continued price erosion. Third quarter gross margin was 22.2%, 26 basis points higher than the third quarter of last year driven by cost control initiatives across the company positive impact from changes in foreign exchanges rates and the impact of the Courier acquisition partially offset by volume declines and price erosion. SG&A expense in the quarter was $321.4 million. As a percentage of revenue SG&A was 11.4% or 6 basis points higher than the third quarter of 2014. Our third quarter non-GAAP adjusted EBITDA was $305.2 million compared to $313.2 million in the third quarter of 2014. Non-GAAP adjusted EBITDA margin in the quarter of 10.8% increased by 20 basis points from the third quarter of last year. Similarly, third quarter non-GAAP operating margin of 6.7% increased 70 basis points from the third quarter 2014. Our non-GAAP effective tax rate in the quarter was 37% or 292 basis points higher than the third quarter of 2014 reflecting in part unfavorable mix of income. Now I will discuss revenue and non-GAAP adjusted EBITDA performance for each of the segments in more detail. Revenue in our strategic services segment was $635.6 million in the third quarter of 2015 an increase of 0.8% from last year’s third quarter. On an organic basis year-over-year revenue was up 0.1% despite a negative impact of declining fuel prices which negatively impacted the segment’s organic revenue by 325 basis points. Logistics organic revenue growth in the quarter was 1.8% driven by higher volume in freight brokerage services and pass through postage, partially offset by decline in fuel prices which negatively impacted revenue growth by approximately 690 basis points and lower volume in print logistics. Our sourcing business continues to grow reporting double-digit organic growth for the sixth consecutive quarter. In our financial offering the overall organic declines was 2.6% driven by the impact volatile capital markets worldwide partially offset by higher volume in compliance products and translation services. Non-GAAP adjusted EBITDA margin of 11.3% for the strategic services segment decreased by 39 basis points from the third quarter of 2014 primarily due to unfavorable mix of revenue including last year’s benefit from royalty license fees partially offset by our ongoing productivity initiatives. Third quarter revenue in our international segment was $571.6 million, declining by 13.1% from the third 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 growth was 0.1% as volume increases in global turnkey and Latin America offset declines in Asia, Europe and Canada. The non-GAAP adjusted EBITDA margin in the segment of 9%, improved 112 basis points from the third quarter of 2014, driven by productivity initiatives across the segment, positive impact from changes in foreign exchange rates, and favorable mix of revenue, which were partially offset by wage and inflationary pressure, primarily in Asia and Latin America, and price erosion. Revenue in our variable print segment was $935.9 million, a decrease of 5.3% from the third quarter of 2014. On an organic basis, year-over-year revenue decreased 4.9% driven by lower volume in commercial and digital print, forms direct mail and labels. Direct mail organic decrease of 4% was driven by lower pass through postage volume, while label’s organic declined to 5.1% was driven by lower commodity volume, which was partially offset by volume growth in higher value products. The segment’s non-GAAP adjusted EBITDA margin of 10.6% in the third quarter declined 136 basis points from the third quarter of 2014. Lower volume and unfavorable pricing were only partially offset by our cost control initiatives, including the cost savings achieved in connected with our 2014 acquisitions. Revenue in our publishing and retail services segment was $684.9 million, an increase of 0.6% from the third quarter of last year. After adjusting for the impact of the Courier acquisition, as well as a 300 basis point decline related to lower pass through paper sales, organic revenue declined 6.4% year-over-year. We experienced volume declines across the segment and continued price pressure in magazines, catalogs and retail inserts. Non-GAAP adjusted EBITDA margin for the segment of 12.4% increased 99 basis points from the third quarter of 2014, primarily as a result of the impact of the Courier acquisition and ongoing productivity initiatives which were partially offset by price erosion. Our third quarter 2015 non-GAAP unallocated corporate expense were $1.9 million, lower by $6.1 million compared to the third quarter of 2014, primarily due to lower worker’s compensation cost, which marks the second year of favorable adjustment to workers’ compensation expense reflecting the evolving business mix and continued strong safety performance. Free cash flow in the quarter was $91.5 million or $34.5 million lower than the third quarter last year primarily due to higher cash tax payments in the quarter. 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. Third quarter capital expenditures are $51.7 million, $6.5 million lower than the prior year. As of September 30, 2015, our gross leverage was 3.1 times flat to the third quarter of last year with the acquisition Courier closing in June, our reported leverage is 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 will continue to reduce our leverage as we incorporate Courier into our results, and enter the strong free cash flow fourth quarter. We ended the quarter with $1.2 billion of net available liquidity with $225 million drawn on our $1.5 billion revolving credit facility. The drawn balance on the credit facility includes the pay down of our May bond maturity of $200 million as well as funding the cash portion of the purchase price for Courier. From 2016 to 2018, our annual average maturity is $240 million with the highest maturity of $251 million due in January 2017. As we enter the last quarter of the year, let me share more details on the updated full year 2015 guidance that we summarized in this morning’s press release. We expect revenue in the range of $11.2 billion to $11.4 billion. At the midpoint this implies an organic revenue decline of approximately 1.7% for the year, consistent with our year-to-date performance. We expect our non-GAAP adjusted EBITDA margin to be in the range of 10.6% to 10.8%, 10 basis points higher than our previous range as we continue our ongoing focus to improve business mix and aggressively manage the cost structure. The remainder of our guidance remains unchanged from the previous guidance. Depreciation and amortization expense is expected to be in the range of $460 million to $470 million. We expect interest expense in the range of $270 million to $275 million. Our full year non-GAAP tax rate is expected to be in the range of 33% to 34%. We project the full year fully diluted weighted average share count to be approximately 207 million shares. And lastly, we expect capital expenditures in the range of $225 million to $250 million and free cash flow in the range of $400 million to $500 million. Before I turn it back to Tom, I would like to provide some additional perspective on the spinoff transaction specifically as it relates to the expected capitalization of PRSCo and FinancialCo. As Tom noted earlier we continue to expect the initial Form-10 documents to be filed toward the end of the first quarter of 2016 and expected transactions to be effective in October 2016. Our current plan subject to market conditions at the time is to be in the capital markets in the few months leading up to October in anticipation of raising debt at PRSCo and FinancialCo. With respect to the projected leverage ranges and amounts of debt to be raised at each of the companies, let me share our expectations for each. We expect PRSCo’s leverage to be in the range of 2 times to 2.5 times. As previously communicated PRSCo has revenue of approximately $3.5 billion with a low double-digit EBITDA margin. As such we expect to raise debt at PRSCo in the range of $700 million to $1 billion. We expect FinancialCo’s leverage to be in the range of 3.25 times top 3.75 times. Also as previously communicated FinancialCo has revenue of approximately $1 billion with an EBITDA margin in the high teens to low 20s. Thus, we expect to raise debt at FinancialCo in the range of $650 million to $750 million. Based on this math, the aggregate proceeds from these debt offerings are expected to be in the range of $1.35 billion to $1.75 billion. And as we noted on last quarter’s call, these proceeds will be paid to CMCo. We will continue to provide periodic updates on status and other relevant details regarding the transactions in upcoming filings and communications. And with that, I will turn it back to Tom.

[Tom Quinlan:]

Thank you Dan. In the last 10 years we have worked to strategically develop a diverse portfolio and business mix of significant scale with a goal of successfully evolving to become more service oriented and focused on value add products. The successful execution of our strategy has paved the way for the transformative separation we are now embarking on. We will continue to work every day to leverage our innovation, our product and services diversification and our worldwide resources to meet the needs of our ever changing marketplace. While fulfilling our objective of creating three independent entities our focus will continue to be business as usual. We will work towards a 100% a 100% of the time and supplying high quality products and services for all our customers. Our strategic evolution has taken us from a printer to a full line printing services provider to a leading provider of multichannel communication services. Our customers find value in our ability to evaluate their needs and identify opportunities for cost containment, product innovation and faster or more efficient time to market. Pre-communications that connect our customers with their audiences will continue to be relevant and important to each of the new companies taking shape. Our focus will remain on leveraging our capabilities and innovation in support of our customers’ diverse communication needs as we move through this next logically step in our company’s journey. And now with that operator, let’s open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Charles Strauzer from CJS Securities. Please go ahead.

[Tom Quinlan:]

Hi Charles.

[Charles Strauzer:]

Hey Tom if you could talk a little bit of the challenges and opportunities that the economy is kind of slowing around kind of presenting to you and also you’ve done a very good job over the years of kind of managing your cost structure to meet those challenges over the years. But can you talk a little bit more about as we have seen, what we can expect further cost reductions to kind of maintain on that kind of level?

[Tom Quinlan:]

Sure Charles, when you think about the environment economic backdrop of yesterday, historically when we do see global economic conditions become tougher is that’s when RR Donnelley as had some of its greatest successes. Our customers look to further -- for us to further manage their costs during tougher economic cycles. Time like these bring opportunities to those that are ready to assist customers. Our customers are rethinking everything from the most efficient ways to communicate to their customers to who is better equipped to handle the distribution of their content. Customers again are -- they are asking themselves how can they make their cost structure less fixed in nature and more variable? RR Donnelley provides the answer to every vertical whether it be retail, financial healthcare of moto, leisure or publishing. We have wisdom now to learnings to get what needs to get done. Our targeted Charles still remain and will continue to be businesses, beauty of communication processes as sort of competitive advantage and differentiation. Those businesses that are trying to drive top-line and bottom-line growth, those are businesses that look to have employee advocacy and increased customer engagement. In our pipeline are you think about ‘16 both for PRS and CMCo we currently have opportunities just like what I just described and by the time of our call in February to still head and share those with you. But I will tell you Charles, the management team here, we’ve been together 11 years, so we’ve seen some unbelievable cycles in that time, anybody who’s been working during that time have seen that. We completely understand the importance of delivering on what we tell you we’re going to deliver on, no matter what’s taken place, either external or internal, to R. R. Donnelley. There is no excuses, whether it’s natural disasters, weather related global economic conditions, or pricing. The management team manages the business the same way every single day regardless of what has taken place in the world. We stride everyday to make sure that customers continue to help -- we can help them succeed by lowering their cost and improving the customers, the return on the assets. When you wake up every day with that as your number one priority, everything else will fall into line for all of our R. R. Donnelley stakeholders. A year from now when we spinoff the two companies that Dan and I just finished talking about and we currently will have CMCo, we’ll have three companies that are going to represent the market dynamics that we serve. And those three companies Charlie are going to be led by the people that are managing and leading our business today that have embedded in that D&A the importance on delivering on commitments to stakeholders. Every year we open up the doors, we know we’ve got a 1% to 2% price hit on the top line of $11 billion. Every year we do that. From January we know no matter what there is going to be 1% to 2% they defer by product line but they’re there. In addition to that, you’ve got healthcare, you’ve got salary increases. So when a Company our size take a company of our size you’re talking anywhere between $150 million and $300 million you’ve got to go find every year. We do not talk about it. We just go ahead and get it done. And we go ahead and deliver on that. And it’s not something that we go ahead and think about as being new or different for us as we go through the operation of the business. I know in ’16 we’re going to be faced with that again and I know this management team in all three of those businesses is going to be able to deliver on that.

[Charles Strauzer:]

And think up on that Tom if you look at the troubles that the foods and services had the past three years, maybe some updated commentary on your thoughts on local service and where they’re at? And then maybe also too talk about some of the things on the variable print side that -- especially the growth drivers next year maybe like the selections et cetera? Thanks.

[Tom Quinlan:]

When you think about, let me take, start off with just what we think about some of the businesses, FinancialCo for example, even though the elections are coming next year. You think about what the SEC proposed from a modernization rule standpoint that allows the SEC to collect even more data to better understand and oversee the new products and practices that are taking place in the fund industry. Our fund suite act our platform which effectively helps funds and manage content in data, it is being further developed to ease the burden on the modernization rules for our clients. So there is some upside there that’s going to take place, even though no matter what’s going to take us from the capital market standpoint. When you think about in the election year and you think about historically where consolidated graphics has been able to do during the presidential election year, they’ve had good days and we think that’s going to be there for us as we go through what’s taken place there. When you think about our retail solutions opportunities that we’ve got in ’16, we continue to make great progress with our retail value proposition and solutions. We now have as our core -- our core now is in the in store marketing production capabilities and capacity. Next year we’ll have enhanced breadth of in store capabilities and services and then we expect we’re looking at in 2017 to expand beyond in store to other promotional and advertising distribution channels. To give you a feel our in store experiences include digital signage, in store graphics, price tags and labels, permanent display. This is a $31 billion spend right now by customers that are out there. We have very little of that $31 billion spend even though we count as customers a 100% of the top 10 retailers in the United States and we have a relationship with 90 of the top 100 retailers, we don’t have a lot of it. This is a great opportunity that we’re going to need to take advantage of in 2016. From the postal service standpoint we’ve got to continue to look to mitigate the cost that the postal service is putting on us. And it’s putting on these higher mailing industry, we’re no different than anybody else that’s out there. We’re making great strides from our logistics standpoint to get further discounts to get into the marketplace further. We would love to see the [agitate] rate case eliminated from next year we’re not banking on it, the industry isn’t banking it but it doesn’t make a lot of sense to go ahead and have that in there when back in 2006 when most of us were around when that ball was put into place it was only supposed to be for natural disasters or for an act of war. I don’t care what happened in 2008 or 2009 neither one of those things happened, so how they got away with putting that in there that’s another story. But hopefully the commission will see its way to eliminate that and I guarantee if they do that then there will be more people that want to prospect and put mail into the system because that mail generate sales, it’s improving from a catalog standpoint and it’s improving now with some of these e-retailers are opening up brick and mortar stores, and it go ahead and advertise it. Dan, do you want to add anything?

[Dan Knotts:]

I would just add to what Tom stated, I think Charlie as you look at the variable print side of it, stated very well and where the opportunities exist where we talk about the commercial print side, the digital print side, the direct mail side, the label side, in store marketing being part of commercial print as they talk about. All those represent significant opportunities for us on a going forward basis and we look forward to executing on those in 2016.

[Charles Strauzer:]

That’s helpful. Thank you very much.

[Operator:]

And your next question comes from Jamie Clement from Macquarie. Please go ahead.

[Jamie Clement:]

Good morning gentlemen.

[Tom Quinlan:]

Good morning.

[Jamie Clement:]

Hey Tom just to ask a follow up question on leadership of the spinCo’s. I mean is there you are not spending a lot of money on an executive search firm, find count over the next year, I mean are you now coming out on this thing definitively that leadership talent is going to come from current inside RRD?

[Tom Quinlan:]

Yes, I think Jamie look, I think hopefully those you’ve been around us long enough, we have CEOs sitting in each one of these businesses that can run this. Are we going to outside for some talent as we breakup? Sure. But the leadership again is going to take place in these three companies that are here. They understand what leverage and they understand what customer service means. They understand what it means to deliver on [regiment]. We have all been brought up that way. I was brought up that way 20 years ago by, when I first saw in the industry was Bob Burton, there are no excuses of what you go ahead and do. You can’t blame other things you go ahead. For us from a standpoint of a pricing standpoint as we think about a long run business which is only 25% of what we have it’s significant to us but our pricing we know what it is going into the year. So for us as we manage our business we know our long run pricing when year sums up. We don’t know the volume, we don’t know the page count. But everything else for us is locked in there and that will continue to be the case when we go ahead and spinoff PRSCo. When you think about the future of CMCo, this continues to be an age of customer engagement, an integrated content management transformation and delivery strategy had got to be given. Focusing on the customer experiencing is going to be imperative today and in the future. There is no single production solution that can get you -- our customers to their customers. Our customers’ customers have multichannel preferences. We need to make sure that we help our customers attract on-board service retrain and grow their customers. As you grow through Jamie migration is going to be a connected digital experience. It’s going to be different from all of us and one side doesn’t fit all. RR Donnelley, whether it’s CMCo, FinancialCo, or PRSCo, has the ability in the playbook to make sure that we give our customers connected experience. So I think as we look at things, this management team has never complaints it, we never feel like we are comfortable with the lead over any of our competition and we know we have to do more for our investors, and we never forget what our mission is to make sure that communication is more powerful, more efficient and cost effective for our customers.

[Jamie Clement:]

That’s very helpful, I appreciate that. And Dan if I could switch to you, your comments on targeted leverage ranges of the spinCos. Given the asset profile of those two businesses, would it be fair to say for PRSCo you might go revolver plus secured plus unsecure and with FinancialCo you might go revolver plus unsecure. Is that the right way to think about this?

[Dan Leib:]

Yes, I think it’s early to talk about that. We are engaged with the banks presently but looking at being in the market and nine months from now or so and so lot of dictate what current market conditions are. I think the important thing is that our goal and as we are articulated those leverage ranges that they are appropriate for the underlying assets that each of the businesses will have and the prospects that are in front of those businesses and we think that positions each of them to execute their strategy effectively. And so we worry about the particulars of the financial structure, capital structure detail few months from now. And I will share that with you as that becomes available. But we feel good about those leverage ranges, the implications that we will have that for CMCo and the financial flexibility that each of the three companies will have post then.

[Jamie Clement:]

That’s helpful and fair and I appreciate. Last question and then I will get back in the queue. Clearly not a big acquisition but one that I did want to ask you about was the Courier Advisor Group acquisition, what that kind of business the last mile business, that kind of thing, what that does for your logistics business, would you think of last mile the potential growth area for you as you look at potentially some of your customers and some of the big guys that are out there looking at doing more same day delivery from retail that kind of thing, just curious for your thoughts, so that’s I thought was interesting?

[Dan Knotts:]

Jamie, Dan Knotts here. I think the -- to answer that question to take a quick step back to focus on our overall logistics offering, our ability to provide the logistic services on behalf of all of our customers beyond retail as Tom mentioned particularly was going on with the USPS very, very critical part of our business, so we remain focused in driving expanding our offering of our logistic services business in support of all the challenges that our customers face across the multiple industry segments, market segments industry verticals. Relative to Courier Advisory Group if you think about our current ability to deliver large volumes of printed material and other types of materials we deliver to logistics, that last mile segment relative to the growth that you talked about is a very large and emerging market. And our acquisition in that space is be able to provide that offering to allow the same customers that we have today. So we feel very good about our position there because we already have relationships with those customers who are moving in that direction us now having our own capabilities to support them in that last mile delivery is a core part of the broader offering that we’re taking to those customers and we like our position there and we’re focused on that space and we’ll continue to look for opportunities to grow that business.

[Tom Quinlan:]

Adrian we got time for one more question.

[Operator:]

Our next question comes from Michael McCaffery from Shenkman Capital Markets.

[Michael McCaffery:]

I apologize if you explained this in your commentary, I just missed it. But as it relates to your change in guidance for the fourth quarter, can you just speak to which segments are really driving that decline? Is it primarily the printing and retail versus the other segments? And then along the same lines the improvement in margins that you’re expecting. Which segments in particular are really driving those efficiencies?

[Dan Knotts:]

This is Dan I’ll start and others can jump in as well. I think if you look at we gave five year guidance going back at the beginning of 2014 and if you look at our relative performance and we’re very careful to state that those are not meant to be quarter in quarter out. But just if we look over the past couple of quarters our PRS segment is within the guard rails it’s towards a little bit of the higher end and services was a little bit at the lower end. So as we think about Q45 and our variable print it is within the guidance that we gave was really bumping up organically against the lower end of that guidance. And really is on the top line of the change in guidance really meant to just be reflective of the entire business, it’s not in one particular area. We have seen a bit of a rebound in the capital markets as we entered into October, et cetera. And so it’d be reflective of the broader economic environment out there. And as we stated in my prepared comments that the revenue number looks a lot like what we’ve achieved year-to-date. So that’s the comment on the revenue. On the margin side, it’s been as we referenced in each of the segments and also at corporate it’s been just the overall focus on cost and recognizing that our job is to match cost to revenue. And so it will not be in one particular segment. Clearly the business mix and where we’ve been making investments in the past has been quite helpful with the margin, we’ve seen increasing EBITDA margins here for in Q2 and then seen it again in Q3 and our full year guidance as we stated of expanding margins is really just more reflective of the overall cost management focus.

[Michael McCaffery:]

And just one final question, at this point as you’re focused on getting everything ready to display for three separate companies, is it unlikely that we’re going to spending material M&A right now and when those spinoffs occur?

[Tom Quinlan:]

As you know we don’t comment on M&A taking place. But obviously as forms are open, we get things, people talking as these things come by we’ll continue to look and go through the things. But otherwise than that, we don’t really comment on anything. But thank you.

[Michael McCaffery:]

All right, thank you very much.

[Tom Quinlan:]

Thank you. Look, as we close today’s call, we’re hoping that you take away a couple of things. One, that the initial initiative to spin off the two business is going well, no matter what the economic climate is, we continue to evolve the supply chain and make our customers’ communications more cost effective, more powerful, and more targeted as they continue to go ahead to their customers and that we remain good fiduciaries for all of R. R. Donnelley’s stakeholders. Appreciate you spending time with us today, hope everyone in the United States has a great Thanksgiving holiday. And then we look forward to talking to you in a couple of months. Take care.

[Operator:]

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.