Q2 2020 RR Donnelley & Sons Co Earnings Call
Welcome to the our or de <unk> second quarter Twentytwenty results conference call.
My name is Krish and I will be your operator for today's call.
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I'll now turn the call over to you'll have nice stuff or these senior Vice President finance.
Thank you Chris. Thank you everyone for joining argues second quarter 2020 results conference call joining me on todays call.
Okay.
D., its president and Chief Executive Officer.
Hi, Peterson, our Chief Financial Officer.
At the conclusion of today's prepared remarks fantastic I wouldn't take questions. As a reminder, we have prepared supplemental slides for today's call, which can be found on the investor section of our website at <unk> Dot com.
That's review second quarter responsible for these calls I would be advancing the slide forget conducted by webcast.
Turning to complete a reference page numbers from something about the slides for those pest spends for wish to follow along by Boston to slide some stops.
[music].
The information that will be reviewed during this call is addressed in more detail <unk> second quarter press release, a copy of which is posted on the investor section on our website at <unk> R&D Dot com.
This information before the Fotonation to the ecstasy and the form 8-K filed yesterday.
Throughout this call. We will also referred to forward looking statements. So any comments on our financial outlook and strategy all of which involve risks and certain tests.
For our actual results could differ materially from our current expectations.
For a computer discussions of factors that could cause <unk> actual results to differ materially. Please refer to the cautionary statement included in our earnings release.
The risk factors included in our annual report on form 10-K, a quarterly reports on form 10-Q, and other filings with the FCC.
For the Bill will discuss non-GAAP financial information.
We believe the presentation non-GAAP results provide investors with useful supplementary information concerning the campus ongoing operations and it's an appropriate way to evaluate the campus performance.
These non-GAAP results provided for informational purposes only.
Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the Investor section on our website, that's part of our press release.
I'll now turn the call over to Don.
Great. Thank Joe on good morning, everyone. Thank you for joining us today on behalf on behalf of all of US at our D. I hope, you're staying safe and healthy during this ongoing global pandemic.
In my comments today I'm going to provide an update on how our deals navigating the current business environment well also staying focused on a long term strategy review, our Q2 results and then touch on what we expect to see going forward.
The impact of the Cobot 19 pandemic on world economies global supply chains consumer behaviors and company business models has been sudden and severe.
In response, we are taking decisive in aggressive actions moving with the strong sense of urgency to guide already through this very challenging time.
We initially experienced the tremendous disruption potential of cobot 19 in the first quarter as our China operations were shut down for nearly a month based on that experience. We've been operating with three priorities to protect the health and safety of our employees to sustain operational continuity into effectively manage.
Our business performance through this volatile and uncertain period, let me expand upon each of these areas.
Our single most priority is protecting the health and safety of our 35000 global employees.
With a number of new infections resurging around the world, we remain very diligent in our approach to safeguarding our teams everywhere. We operate our cross functional Cobot 19 task force continues to ensure that we're closely adhering to the latest available guidelines from the centers for disease control in the World Health organization.
And we're utilizing rigid screening procedures in a robust case management process to lower the chances of spreading the virus.
We are staggering shifts reconfiguring operations to accommodate physical distancing and requiring employees to wear masks are shields at all times.
We have also posted instructional signage throughout our facilities as another layer of education and positive reinforcement of good hygiene, social distancing and say practices.
Our second priority is used to sustain operational continuity in order to provide uninterrupted service delivery for our clients well, we also onboard new business due to the terrific work of our teams around the world. We remain fully operational across the 29 countries in 250 plus facilities we utilize.
As to serve our more than 50000 clients.
As a key part of our operational continuity plan. We're also working very closely with our supply chain partners to prevent any product or service disruptions and ensure that we fulfill our client commitments.
Our third priority is to prudently manage our business through the near term challenges well further strengthening R&D for the long term.
Our roadmap to accomplish this objective is very straightforward.
To reduce cost I missed a lower demand environment to preserve liquidity into capture the emerging growth opportunities being created by the pandemic.
On the cost reduction front, we have acted swiftly and aggressively to curtail capacity drive productivity it improved operating leverage by lowering our total cost infrastructure.
Actions. We've taken include furloughs temporary facility shutdowns permanent facility closures suspension of all merit increases and elimination of travel.
Given that these plans are implemented throughout the quarter, we saw a partial benefit in the second quarter and expect to see additional benefit in future quarters.
We have modeled multiple future demand scenarios, and we will continue to make adjustments to our cost structure based on the pace and magnitude of the economic recovery.
We've also acted decisively to preserve liquidity, including suspension of the dividend a reduction in capital spending in a proactive draw on our revolving credit facility to increase cash on our balance sheet.
Further as a key component of our long term strategy to improve our financial flexibility, we executed multiple transactions during the quarter to significantly reduce our near term debt maturities.
These transactions included these successful execution of Threed debt exchanges.
The opportunistic repurchase of additional 2021 debt and the repayment of our 2020 senior notes upon their maturity using cash on hand.
Since the beginning of the year, we have now reduced our senior notes in debentures that are coming due between 2000 in 2024 by $628 million. Additionally, we reduced our total debt outstanding during the quarter by $133 million.
No well significant portion of our time and attention has been committed to cost reduction in liquidity actions. Our sales teams remain highly focused on pursuing new market opportunities being created by the pandemic.
Let me share a few examples of how we're leveraging our industry leading capabilities to capture these opportunities across various industries in health care.
We are securing new revenue streams to our point of care in diagnostic test kit solutions.
Cobot 19 has given rise to a significant increase in demand for virtual health care, which has prompted it increased need for home diagnostic testing solutions. Our end to end supply chain solution integrates all stages of test kit development in execution from initial design to packaging and label production to product fulfillment.
Distribution.
As an example, we're providing everly well in at home Health testing company with the supply chain components kitting and fulfillment services required for many of the at home test kits, they provide to health care professionals and consumers with the growing demand for these at home test kits, one of Everly walls health insurance customers or.
After nearly 1 million testing kits and Everly, well turn to R&D to produce this highly regulated project.
Within the retail industry.
These are seeing significant increases in their ecommerce volumes, which require an expansion of the current operating models for the gap. We are supporting their ecommerce offering which allows consumers to order pulled in online and then pick up their orders curbside thousands of their stores by providing the millions of labels that are required to fulfill their online order.
There's after nearly a decade of working with the gap, we're proud to support their expanded communication needs as they adapt to the rapidly changing dynamics in the retail industry.
For hospitality and travel industries, we're leveraging our extensive capabilities to provide the communications those companies are utilizing to enhance consumer confidence.
We're supporting leading hotel chain in their efforts to ensure a safe environment for guest in employees at their more than 5000 locations worldwide.
In close collaboration with this plan will develop branded floor details remote wraps and mirror claims to reinforce staff and guests safety and designed to customize Dorsey all that is placed on each hotel room door once cleaning is completed.
We're also helping a major airline reinforced critical safety measures because they welcome back travelers building on our long standing relationship with this client providing weight finding signage floor decals, an informational cards for their membership lounges as well as revamped seatback safety materials updating guess on new cleanliness practices and social.
Distancing guidelines were executing similar programs or the number of other airlines as we leverage our marketing business communications capabilities to help support this industry. During this unprecedented time.
In automotive, we initially saw volume declines driven by shelter in place orders that impacted showrooms and other onsite purchasing options for consumers today, we're helping our automotive clients safely returned to their offices manufacturing locations in dealerships across the country.
Prior to their reopening.
We supported a major U.S. auto manufacturer with the rollout of internal signage for many of their offices and production locations. We developed returned to work kits, including educational brochures masks temperature strips and other essential items that they sent directly to their employees to prepare them for their returned to work and other dealership locations we provided mask.
Vehicle sanitizer kits customized covers steering wheel covers and formats to help enhance the safety and comfort both staff and consumers as they returned to their dealerships.
To further line R&D with the evolving market opportunities during the quarter, we announced unification of our content in creative services and global outsourcing organizations under a new group called R&D goal creative.
Lighting these capabilities, we will be better positioned to address client needs to a single centralized global resource platform for creative design managed services transaction processing in intelligent digital solutions.
I'm very proud of how the R&D team has collectively aligned and responded to our near term challenges while at the same time continue to execute our stretch strategic priorities for the long term.
Let me next touch on our Q2 performance.
Actual net sales for the quarter were $1.16 billion, which was well within the range of our guidance. Despite the negative impact on changes in foreign exchange rates and lower fuel surcharges in our logistics business organically sales fell 17.1% with marketing solutions experiencing a greater organic sales decline.
Our clients significantly curtailed their marketing spend.
Within the quarter.
The largest total company sales decline occurred in the month of May with June showing sequential improvement from May as economies began to reopen.
Adjusted income from operations was 25.1 million down 14.1 million from the prior year period.
Despite the sizable revenue decline related to cope with 19, our adjusted operating margin declined 40 basis points from the prior year due to the deleveraging of our fixed depreciation and amortization expense.
Our adjusted gross margin actually increased by 10 basis points in our adjusted EBITDA margin improved by 20 basis points as compared to the 2019 period.
Consistent with our strategic focus on lowering our cost to serve we also reported a 20 basis point reduction in SGN expense as a percent to sales versus the prior year quarter.
Operating cash flow improved 22, and a half million from the prior year period, which represents our second consecutive quarter of improving cash flow person at the corresponding quarters in 2019.
These results demonstrate the swift and aggressive approach, we are taking to manage our business in this period of reduced client demand.
While we remain deeply immersed in executing our near term operating plan, our long long term strategic priorities and focus remains unchanged.
Those priorities to strengthen our core drive revenue performance and improve our financial flexibility are firmly embedded in our culture in our serving us well as we navigate through this crisis together, our strategic priorities are leading R&D to a future state in which we have fundamentally reshaped our portfolio shifted.
Our business mix reduced our total cost structure, and becoming even more agile market driven company.
The cost takeout actions, we are executing are essential to protecting profitability in adjusting to the volatility we're seeing in the market.
As we continue to rationalize our operating footprint, we are working in close partnership with our clients to assess their evolving needs and future buying behaviors. So that we can make these critical decisions with an eye towards the future and be fully prepared to respond as client volumes recover.
For marketing solutions, we expect to see a gradual return of client marketing spend as the economy reopens in our clients adjust to working with smaller marketing budgets amidst higher demands to restore growth.
While they're focused on increasing marketing ROI will make data analytics more vital.
We anticipate large scale martech projects will continue to be delayed in the near term.
We expect content in creative services to remain relatively stable as client needs for communications design continue even if the execution of those materials across channels may change.
We believe our direct mail offering will remain a critical avenue for marketers to utilize in combination with digital channels to enhance connections with their customers in for retail solutions, we anticipate a rebound for our in store marketing offering to align with the overall pace at which retail stores reopened.
For business services, we anticipate the reopening of businesses will increase demand for print and related services across our commercial print and forms offerings.
These products and service categories have experienced more significant volume degradation as client, but businesses either shut down or significantly reduced spending.
Importantly, we started to see early indications of improvement as we closed out the second quarter.
For our packaging labels logistics and supply chain offerings, we expect to see a rebound occur in line with increased consumer in business product spending.
Additionally, we believe the impact of Tele health and the shift to alternate forms of diagnostic healthcare as well as continued growth and E. Commerce will serve to improve market demand for these offerings.
Before turning the call over to Terry I'd like to touch on a number of recent awards that we received first we're pleased to be included as one of the best places to work for disability inclusion on the 2020 disability equality index, a national transparent benchmarking tools that offer that offers the opportunity to self report disability inclusion policies.
And practices second.
R&D is proud to take part in apples supplier clean energy program through which we are committing to power all of apples production with 100% renewable energy.
This agreement is consistent with our these longstanding commitment to protect the health and safety of employees clients in the public independent conduct activities in an environmentally friendly manner.
R&D pursues energy efficient programs across all its plan some facilities worldwide and we continually work with clients and suppliers to make environmentally sustainable packaging.
Additionally, the company has extensive supply chain expertise that provides clients with recycled and responsibly sourced raw material options.
Finally, we're excited that our marketing solutions group rank as one of the top 10 US agency companies in Eddie just prestigious annual Agency report.
This is the second consecutive year.
R&D has been named on the list again ranking amongst longstanding industry agencies, such as WPP Omnicom group Accenture and publicist group.
This recognition is a testament to the successful evolution of R&D marketing solutions as an industry later leader in this space and with that I will turn the call over to Terry.
Thank you Dan Please turn to slide 13, as I began my prepared remarks.
Third quarter was a very challenging period as the pandemic began to affect our global operations in the first quarter, beginning with China. We quickly engaged in Threeq critical finance related activities assessing the near term impact on demand for our products and services adjusting the cost structure, accordingly, and preserving liquidity.
Our clients provided us with candid feedback, which served as the basis for our second quarter sales guidance.
Our actual results were within that range, despite $20 million of headwinds from changes in foreign exchange rates and lower fuel surcharges in our logistics business.
As we plan for a smaller sales base, we accelerated many actions to reduce our operating costs on both the temporary and permanent basis.
Included in these actions are 39 plant facility closures, including manufacturing operations and sales offices.
While these cost out actions were implemented as quickly as possible throughout the quarter. Many only partially benefited the second quarter and will drive additional savings in future quarters.
In addition, we will continue to assess our cost structure based on updated client demand and we'll continue additional actions as necessary.
Over the years, we have developed core competencies around optimizing our cost structure, which we will continue to leverage as the pandemic unfolds.
As I mentioned last quarter, we took so we took swift actions to preserve our liquidity, which included adding extra cash to our balance sheet. Following a proactive drawn our revolving credit facility.
Throughout the second quarter, we have maintained strong liquidity, while focusing on ongoing strategic actions to reduce debt and extend maturities.
Our total outstanding debt is down versus the first quarter and is also down from June of 2019.
We took several actions to significantly reduce our near term debt maturities during the second quarter, including completing three successful debt exchanges opportunistically repurchasing additional 2021 debt and repaying our 2020 senior notes when they immaturity using cash on hand.
Since the beginning of the year, we have successfully reduced our senior notes and debentures coming due in 2020 to 20 to 24 by $628 million.
While none of us can accurately predict the impact and duration of the pandemic. We believe we are focused on the right actions that will make us a stronger company in a post covidien 19 economy.
On a reported basis net sales were down 23% in the quarter, which included a reduction of 5.2 percentage points associated with three previous business dispositions, including this year's closure of our China, Chile operations and another 0.7 percentage point associated with a stronger us dollar.
On an organic basis sales were down 17.1%, which included a decline of 15.7% and business services and a decline of 22.9% in marketing solutions.
Both segments were negatively impacted by lower volumes due to covert 19 pandemic and modest price reductions.
In addition, the business services segment was negatively impacted by lower fuel surcharges and its logistics business.
Cross our 11 different product and service categories. We saw notable differences in how the pandemic impacted demand.
Category is where the work is more transactional and clients can make quick decisions to reduce orders like in commercial print digital print and fulfillment and direct marketing we saw greater reduction in demand by contrast, other categories like supply chain services packaging logistics and levels experienced.
Less disruption and in many cases benefited from new products and additional covered 19 related orders.
Our sales decline was also impacted by our continued reductions in unprofitable business, including the planned impact from closing facilities.
And while we continue to believe that there are ongoing secular pressures in certain product categories like commercial print we are unable to differentiate those declines from the impact to covert 19.
Within the quarter may volumes, where the hardest hit from the pandemic. While June net sales performance was our strongest as local economies began to reopen.
As I've mentioned in previous calls we wrapped up most of our census work earlier this quarter.
Second quarter census, volume was approximately one quarter of the volume delivered and each of the past three quarters.
Well it continued to be awarded additional census related work, we do not expect to volume to be significant during the third quarter.
On slide 14, adjusted income from operations of $25.1 million.
Was $14.1 million lower versus the second quarter of 2019.
Our corresponding operating margins decreased from 2.6% in 2019% to 2.2%. This year due to a 60 basis point negative impact from de leveraging associated with depreciation and amortization expense.
The pandemic related decline was partially offset by the company's aggressive actions taken to reduce its cost structure throughout the quarter.
In addition, the 2020 quarter benefited from lower variable incentive compensation and employee healthcare expenses and the favorable and pack from changes in foreign exchange rates.
Adjusted SGN expense of $151.4 million in the second quarter is down $47.7 million or 24% from the prior year, reflecting our aggressive efforts to reduce our cost structure and the impact from recent dispositions.
Adjusted SGN, a as a percentage of net sales improved 20 basis points from 13.2% in 2019% to 13.0% and the current quarter.
Adjusted loss per share was nine cents in the second quarter as compared to a three cents loss reported in the prior year period.
The reduction was attributable to lower adjusted income from operations and an unfavorable effective tax rate, partially offset by lower interest expense.
Our adjusted effective tax rate was negative 4.9% in the current quarter driven by limitations on domestic interest deductions and tax on foreign earnings our interest expense benefited in the quarter from lower rates on our credit facility and term loans and a favorable mix shift to lower interest debt partially offset.
Offset by the impact from the recent debt exchanges.
Our GAAP results for the quarter included pre tax restructuring and other charges of $28.5 million, including charges associated with our aggressive cost out actions in response to Colgate 19.
In addition, the quarter included $8.8 million of other charges, primarily for the recently completed debt exchanges and ongoing investigation costs related to our R&D, Brazil.
Turning now to the balance sheet and cash flow on slide 15.
As of June Thirtyth 2020, we had total cash on hand up $341.9 million and total debt outstanding of $2.0 billion, including $410 million drawn against the credit facility.
Remaining availability on the credit facility was $117.8 million at the ended the quarter and total available liquidity, including cash on hand was $460 million.
Net cash provided by operating activities in the quarter was $35.4 million, which was an improvement of $22.5 million as compared to the second quarter of 2019.
This represents our second consecutive quarter of improvement.
The increase is primarily driven by improvements in working capital plus lower tax and interest payments and cash deferrals from the cares Act.
Capital expenditures of $20.4 million were $18.6 million lower compared to the 2019 period.
Decrease is permanent primarily rate related to a reduced investment level. During the covered 19 pandemic and spending in 2019 for the census project and the China facility relocation.
Next I would like to provide you with the remainder of our capital priorities.
Throughout the call good pandemic preserving liquidity is a top priority for us as such we are temporarily reducing our investments in our business. While we continue to evaluate our portfolio for further opportunities to optimize stockholder value.
In regards to the pending sale of our printing facility in Shenzhen, China on Slide 16, the buyer continues to work with the government to obtain the necessary approvals. So we can complete the sale.
Based on the buyers previous experience they estimate the required approvals will be obtained in 2022 at which time the transaction will close and we expect to record a significant gain on the sale.
Today, we have collected $98 million and deposits and we are scheduled to collect our next deposit of approximately $24 million in the third quarter.
Our contracted by requires them to pay the final installment in 2022, even if the government approval is further delayed.
If the buyer fails to comply with the terms of the agreement or terminate for any reason R&D is entitled to retain Sept, 30% of the purchase price and liquidated damages.
Slide 17 shows the various maturities of our outstanding debt as of December 30, Onest and June Thirtyth.
Since the beginning of the year, we have successfully reduced the amounts due on our senior notes and debentures maturing in 2020 to 2024 by $628 million in aggregate. These maturity is now total $394 million, which is down from over $1 billion at the beginning of the year.
During the second quarter, we completed three debt exchanges repaid our 2020 senior notes in full when they matured in June and Opportunistically repurchased $28 million of senior notes and debentures due in 2021.
Our 2021 maturities have now been reduced to $150 million in aggregate and we expect to repay them using existing liquidity.
The extent to which depend demick will ultimately impact our business results of operations financial position and cash flows cannot be fully predicted or estimated at this time.
As such we are unable to provide our typical full year guidance with that said I would like to conclude my prepared remarks on slide 18 with perspectives on our third quarter performance.
And our liquidity as we manage our R&D through the pandemic.
We continue to update our financial models for various recovery scenarios, which guide us as we develop and execute both temporary and permanent cost reduction actions.
In addition, we've updated our third quarter sales forecast taking into consideration current demand projections for our products and services among other factors.
Based on this assessment, we expect third quarter net sales to be unfavorable to a strong prior year between 325 and $400 million, including a reduction of $92 million from recent business dispositions.
Organically. This represents a range of down approximately 15% to 20% and takes into consideration further impact from the pandemic consensus work in the prior year period that will not repeat.
In addition, third quarter results will benefit from additional cost reductions and lower interest expense.
As I mentioned earlier, our liquidity consist of availability on the revolving credit facility and cash on hand.
At June Thirtyth, R&D had total liquidity a $460 million.
We expect to maintain higher cash balances and amounts outstanding on our credit facility for the foreseeable future as we preserve financial flexibility through the pandemic.
In addition, we're preserving our liquidity through aggressive management of our cost structure and accounts receivable collections.
We continue to pay our vendors on time as we believe our liquidity is sufficient to fund operations as well as our upcoming debt maturities. In early 2021. In addition, we continue to pursue opportunities to monetize assets, including certain investments and sales of real estate and noncore businesses.
Lastly, we are not currently subject to maintenance financial covenants in our debt agreements, which reduces our financing risk.
Now operator, let's open up the line for questions.
Thank you we will now begin the question and answer session.
If you have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the Q. Please press the pound side or the hashed.
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Your first question comes from Charlie Strauzer CGS. Your line is open.
Hi, good morning.
Good morning, Charlie I Charlie.
Turning to start off with a little below Q3, Q3 discussions and also just little bit more kind of current trends you look at the Q2.
Various business lines that you had in slide 13, I think it was.
Which areas are starting to see some pickup which areas are still seeing the most impact and.
Looking into Q3 Q4, what are the discussions you've had with clients in terms of potential future business.
Charlie It's Dan I'll start in terms of.
The areas that.
We're seeing towards the end of the quarter in the June period as economies began to reopen.
I think whats how I would explain that is to ask people to think about.
Demand for us.
Cross three categories. The first one is around marketing demand and that is going to be driven by clients returned to increasing their marketing spends as we think about direct mail, we think about in store marketing campaigns et cetera as businesses re reopen we expect to see a marketing spend.
Increase feedback from clients in that space as they are absolutely ready to go there obviously, they obviously need to restore growth for their businesses and their marketing efforts are a critical component of that.
The second category relates to consumer in business demand for products. So as I think about packaging and think about labels and we think about logistics. That's all predicated on the movement of products, which is all predicated on the purchase of products by either consumers or businesses and as we start to see economy.
Has reopened and we're starting to see demand in that in that space along with the new opportunities that we're capturing begin to recover late in the late in the second quarter.
In the third category is around regulatory and compliance portion of our business and that demand is really predicated on health care requirements. This also based on.
So to some level of hospital visits and healthcare and getting back to normal in that in that type of environment. So that's one that has.
Has been relatively stable throughout and really has dramatically changed much as we as we look as we look ahead here in the near in the near term. So as I think about that and ask people to think about in the space of as marketing demand and the other part of this is mark Indian demand recovers as products begin to flow again for consumers and.
And businesses, but the a caveat to that and the reason that we are uncertain about what that looks like as just the start stop the volatile the choppiness the volatility the choppiness of of the economy opening shutting down opening and shutting down and clients sharing that information relative to.
Do we go do we not go relative to launching of marketing campaigns.
And projecting demand for their products as well so I couldn't bring it on those three categories. We are seeking we did see June as a as recovery from May.
In early on in in July aligned with our our forecast, we expect to see that to continue a little bit.
Got it and then Terry maybe you could talk a little bit too about thoughts on margins in Q3, and then also your organic forecast down 15% to 20% does that exclude or include the census work.
Hi, Charlie the 15% to 20% does include the census, right that will be that will be organic pressure for us beginning in third quarter. So that does reflect the absence of the census work in the third quarter and the 15% to 20% range.
From a margin standpoint.
We are and you saw evidence of it in the second quarter results. When when you looked at our margin performance and how we held our margins that even increased our our adjusted EBITDA margin a little bit.
We're working pretty hard to protect does which means that.
The variable stuff comes out to a nice and easily when your demand comes down quite a bit challenges as to offset the impact fix portions of your cost structure. So.
A lot of the aggressive actions that we're going after our relate to get at.
Kind of offsetting that fixed element to the cost structure. So that we can do our best to at least hold onto the margins that we.
I have had in in the past.
As we kind of think ahead to the last part of the year the last half of the year.
I do think that.
From what we're hearing with our clients. We do expect that we will have a seasonal increases in our and demand in our business as we go ahead.
At this point, it's hard to.
Say, so much about fourth quarter, but we do see those increases coming into the third quarter.
Just probably not to the same extent that they have in past I think the economy is as reopening slowly.
But we do expect to see some of that seasonal build coming up here. So one of the added pressures I think that we'll see on margins that just present added challenge for us to continue to work hard on the cost takeout front is that.
In prior years, we've always enjoyed great leverage as that volume really picks up heavily in the third and fourth quarter. So that leverage on the fixed cost structure is really really significant evidence of I see the margins increasing so much in those quarters. So.
Again, we expect to see some of that seasonal increase this year as well probably not to the extent the in the past so that because we want peak as high as what we have in the past that'll create a little bit of extra pressure for us too as we up as we as we think about those margins with a little bit less volume and the back half.
When you're looking at Q3 versus Q2 sequentially.
We expect to see at least some.
Some improvement sequentially.
Into Q3, yeah, especially when you adjust for census, absolutely.
Got it great and then just the then maybe you could talk a little bit too, but it's a lot to talk about this election year.
About male imbalance and other things, where do you potentially that could benefit you.
True extra print work related to that you started to see some of that.
Early stages here, yet or do you think that will pick up more in Q4.
Charlie It's Dan given the the election revenue.
Election season, and the revenue that comes along with that we do expect to be a participant in that again this year.
Utilizing our commercial primarily our commercial print platform to support to support those efforts were seeing some of it flow through now we expect to see more flow through in Q3, it relative to the the mayland ballot piece, we've connected with every state.
On your given our work leveraging our work on the census in our performance on the census, we're staying very close to that each of those individual states as they as they make those as they make those decisions. So.
Much is unknown, yet there, but we will participate that in and some degree.
As it unfolds.
Great and then just lastly, maybe this view via the postal systems that having as their share of issues lot of that's driven by a lot of ecommerce package deliveries up are you seeing.
Any impact on your customers from some of the flow of delivery times at all.
We are really not relative to our close connection with the post office cloaks close working relationship.
With the post office in many in many cases working alongside the post office, we're not really seeing any sort of.
Deteriorating impact from postal delivery and they continue to support is very well.
Great. Thank you very much.
Thanks, Charlie.
Jason Kim of Goldman Sachs is online the question your line is.
Thank you and good morning first question is on working capital. It was a nice source of cash during the quarter, which is not a typical you've had been trying to seasonality. So how should we think about working capital for the balance of the year.
Well.
Sorry, I'll answer that one we have had actions and initiatives in place to really.
See improvements and to work working capital extra hard even going into the pandemic. So we've just been able to.
But the accelerator down a little harder on that as the append to pandemic has come up and we certainly have seen a little bit of degradation in something like DSL on the on the receivable side, but it's been pretty manageable and its and its really plateaued.
As we got through the month of June so so the negative impact from that Wasnt too.
To extreme for us so that would that that's a very good news for us as we are preserving liquidity here. So we will.
Continue to work it hard certainly as a business has come down little bit.
The need for working capital. It's also come down so thats provided some help with the cash flow.
As well so some of it it's a really answer your question some of it really depends on how aggressively and how fast the recovery happens in the back half and when does that recovery I really kick in because.
The rapid or a rapid.
Recovery.
After build up working capital out pretty quickly to support that so in that scenario, we're going to see.
We're not going to I don't expect that we would see the same level favorability coming through why we reestablished some of that working capital if something is.
The recovery is more gradual and slower.
That that replenishment of some working capital might get absorbed or almost.
Hidden if you well with with the progress and.
More initiatives that we had produced favorable results there too. So there can be a bit of an offsetting impact there. So lot of it a lot of I think what we'll see in the last half of just really depend on how sharp that recovery is.
Okay that makes sense.
And then you've been very accurate in pushing out maturities through debt exchanges I would love to get your updated view on the capital structure side is it from here what are your priorities what options are available to you at this point to continue to manage the balance sheet.
And if you can share with us how much secured debt capacity you have now going to be very helpful.
Yeah. This secured debt capacity on the junior secured right now there's not there's not much capacity because there is a spring covenant on the new 2027 debt. That's out there there is a little bit of capacity on first lien debt.
However.
That is really just temporarily reduced right now because of the extra draw that we have on the credit facility. So at the point in time, when when we're comfortable returning back to kind of normal treasury operations, and we bring the draw back down and take some of the cash off the balance sheet that will immediately free up first lien.
Capacity there literally dollar for dollar sub so as we as we see that coming down that will free up.
A secured debt capacity, that's probably the biggest us source right now will be that first lien debt.
As we pay down the as we pay down the credit credit facility.
And then in terms of actions in other sources of opportunities. There. We're really if you think of starting with what our current focus has really been on which has been those.
Those near and mid term maturities in 2020 as to the 2024 hours. We've really just taken every single one of those issuance is now down to very bite size pieces. There's just not a lot left to do with those maturities. So.
At most there might be an opportunistic repurchase here in their those I would expect will not be any.
Large dollar amount said be more.
Picking off small amounts as they became available in the marketplace. So not a lot of work left to be done on those I'm very thankful for us too.
To really have that really critical initiative behind us, which was to really kind of clear out that runway and make those stub maturity is very very manageable for us.
I think the probably next step for US is probably the credit facility Thats coming due to current facility comes due at the end of September in 2022. So.
We will.
One point turn our attention here to renewing that just to add to extend that out I see that just being a normal process on a normal timeline.
That we would do that and we get out of your to start to focus on on the whatever is left of the term loan B is that that's still remain out there and we'll look at what we need to do.
With that.
In terms of paying down debt we are.
Typically generating free cash flow right now so that helps to pay down debt or at least stockpiles cash so that when we do pay down the revolver, we can pin down even further.
We still look to to real estate opportunities.
For liquidating and monetizing assets.
You know, we still look to monetize.
Kind of noncore parts of the portfolio.
As well so those sorts of opportunities are still out there.
As well as other other investments and assets on the balance sheet that we are looking to monetize as well. So we've got a number of things that were working at it will be different and then what you saw us focus on in the second quarter, but that are.
Our list of opportunities out there is certainly far from far from being.
Incomplete.
Thank you very much.
Your next question comes from John Park of North capital.
Your line is.
Thanks for taking my question.
Just wanted to understand the men better why did recover you're seeing in Q3 month as strong sequentially.
Given the decline rates are not that different from Q2. So what are you guys seem that out there.
Yeah, well ziad there the rate again, remember, our third quarter, and especially our third and fourth quarter at those are much stronger quarters. So so.
Sequentially, that's still showing an increase in in levels of business from what we saw in the in the second quarter here. So it gets a little harder to add to see our results are to think about them because of the seasonality in the business sub while the rates are similar in decline.
As Charlie I was asking earlier too that decline rate in third quarter now and this will be true for the next few quarters.
Also has to absorb the absence of the census work, which.
You know benefited us for a full quarter and third fourth and first quarter of this year. So those three quarters, we'll have that added headwind there. So even though the rates of decline are similar the sales are actually forecasted to go out because of the seasonality and.
Again, it's we're doing our best to to read the tea leaves into I listen to what our clients are saying and to try to estimate and.
When we have estimates that are 15% to 20% decline that kind of guy. It's how we think about what we need to do with cost structure. So I would love nothing more than to sit here three months from now and say Hey, we kind of missed that and there were only down something much less than the 325 to 400 and and our cost structure is that much stronger because we.
Contemplated lower base so.
That's that's always a possibility we only know what we're hearing and kind of what we're saying and this kind of volatile environment.
Theres there is.
Theres a little more risks that we could be off there. So I'd love to for that to be the case, but right now with what we're seeing and what we're.
Hearing from Fox, we think the prudent expectation OSAT is the 325 to 400.
Great and great job on the cost cutting and margin enhancement for Q3 should we be expecting margins to be flattish to last year.
Well you will you will see us continuing to cut costs you will see actions that we took in the second quarter that will have a full quarter impact in the third quarter, so that will be benefit.
So you will see continued improvement to our cost structure wise that Dylan.
The one variable that also will be introduced in third and fourth quarter that we didnt see so much in the second quarter is the fact that in prior years as our volume shoots up a lot in third and fourth quarter, we get a lot of leverage off of that.
From that fixed cost base because of all the extra volume that's seasonally related. So again, we are expecting some of that seasonal lift this year.
Again early reads right now is that it will be there, but not as not to the same positive extreme that it's been in the past. So I think that will put a little bit of pressure on our margins too.
When we compare them to the prior year versus second quarter is usually are our lightest in weakest quarter. So comparing colgate quarter. This quarter to last year is a little bit easier than it will be when we get to third and fourth quarter. When they benefited from such a sharp increases due to seasonal work. Some so again, we're aware of.
We're watching that's extremely closely and we are using the Intel that we have to really guide our actions on net cost structure front, because we know that the way to preserve the margins, which is which is our goal here the way to preserve that margins as to be all over that cost structure right now and that's that's our focus when other elements to the too.
The sales cycle that that are beyond our control right now.
Thank you.
There are no questions with this time I will now I'll return the call to Mr. Dan.
Great. Thanks, Chris appreciate it a summary of our key takeaways from the call can be found on slide 20 of the presentation and in closing I'd like to express my sincere appreciation and gratitude to all of my fellow R&D employees around the world.
Though we would never ever wish for a crisis, especially one like this it's in times of crisis that leaders emerge and the focus cooperation and teamwork, we're seeing at all levels of R&D is truly remarkable.
Confident that the hard work, we're doing today will set us up to be an even stronger R&D in the future. Thank you for everything you're doing we appreciate you Johan back to you.
Thanks them as a reminder, information tech sets the webcast replay of our R&D second quarter 2020 without Colin can be found on the investors section of our website at our R&D dotcom.
Thank you for joining us that concludes the R&D second quarter 2020, earning call.
Ladies and gentlemen, you may now disconnect.
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