Q3 2020 RR Donnelley & Sons Co Earnings Call
Again, thank you for standing by and welcome to the R&D third quarter Twentytwenty results Conference call.
My name is Amy and I will be your conference operator today.
At this time all participants are in a listen only mode.
After company remarks, we will conduct a question and answer session by phone.
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Please note that this call is being recorded.
I will now turn the call over to Johan Nystedt, R&D Senior Vice President of Finance.
Thank you Amy and thanks, everyone for joining our team.
For 2020 results conference call joining.
Joining me on today's call, Dan Knotts, R&D, as President and Chief Executive Officer, and Terry Pearson Chief Financial Officer.
The conclusion of today's prepared remarks, Dan Terry and I will take questions.
As a reminder, we have prepared supplemental slides for today's call, which can be found on the investors section of our website at the R&D Dot com.
As we review third quarter results on todays call I will be advancing the slides FPL connected by webcast I'll.
Alternatively, I will reference page numbers for the supplemental slides for those participants who wish to follow along by advancing the slides themselves.
The information that will be reviewed during this call is address in more detail in our third quarter press release, a copy of which is posted on the investors section of our website at R&D dotcom.
This information was also furnished to the FCC in the form 8-K, we filed yesterday.
Beginning in the third quarter up 2020, we have reflected our logistics business as discontinued operations for all periods presented in the consolidated statements of operations.
Our references today to net sales SDMA income from operations net income or loss and per share amounts on this call will be on on a continuing basis without logistics.
In addition, we will also refer to forward looking statements, including comments on our financial outlook and strategy all of which involve risks and uncertainties.
Therefore, our actual results could differ materially from our current expectations for.
For a complete discussion of the factors that could cause our actual results to matter materially. Please refer to the cautionary statement included in our earnings release and the risk factors included in our annual report on form 10-K, our quarterly reports on form 10-Q, and other filings with the FCC.
Further we will discuss non-GAAP financial information.
We believe the presentation of non-GAAP results provide investors with useful supplementary information concerning the campus ongoing operations and is an appropriate way to evaluate the countless performance.
This non-GAAP results are provided for informational purposes soundly any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the investors section of our website as part of our press release.
I will now turn the call over to Dan.
Great. Thanks, Johan good morning, everyone. Thank you for joining it's great to be with you today on behalf of all of US at R&D I Hope that you and your families remain healthy and safe entrees.
On today's call I'm going to provide an update on how we're navigating the current pandemic through the execution of our COVID-19 operating plan will share several key actions taken to advance our long term strategy and I'm going to recap what we expect to see as we close out the year.
We delivered strong operating performance and financial results for the third quarter against a backdrop of uncertainty and volatility related to the global pandemic, while improving the patient recovery has been uneven and the resurgence of the virus across multiple geographies is threatening to elongate the recovery period as such our approach to exit.
Excluding our COVID-19, operating plan, which entails protecting our employees maintaining operational continuity for our clients and effectively managing our business performance remains firmly intact and we are executing well in all three of these critical areas.
As we have said from the outside of the pandemic protecting the health and safety of our 35000 employees is a top priority across the company or maintaining a high level of discipline and adherence to our safety protocols, particularly as the cold and flu season approaches.
Our cross functional COVID-19 task force is meeting regularly to ensure the company adheres to the latest guidelines from the World Health organization and centers for disease control.
From a client perspective, we remain steadfast in our commitment to supporting more than 50000 clients around the world just like we've done for over 150 years were fully operational crossed our 250, plus global locations and our talented sales service and production teams are working diligently to produce the critical coming.
Locations, our clients are utilizing to connect with their customers. During this unprecedented time.
Our client's requirements are changing frequently in this volatile business environment and the our team is responding with the agility in creativity needed to deliver on our commitments.
The third component of our COVID-19 plan is prudently managing our business performance through these near term challenges, while strengthening R&D for the long term.
We are aggressively working to reduce costs to preserve liquidity and leverage the power of our portfolio to capture new sales opportunities, including those being created by the pandemic.
During the quarter, we signed more new business delivered on our substantial cost out plans and improved our capital structure with a disciplined focus on generating cash flow.
On the topline while organic sales declined 12.1% versus the prior year related to lower overall market demand our organic sales performance significantly exceeded the midpoint of our expectations.
We delivered adjusted income from operations equal to the prior year, despite softer organic sales, reflecting the significant reductions we made in our operating in ESG in a cost structures.
Our adjusted operating margin increased 100 basis points versus the prior year and 400 basis points from the second quarter.
And to our strong focus on working capital management.
We achieved our third consecutive quarter of year over year operating cash flow improvement.
Our positive results for the quarter were driven by the successful execution of our COVID-19 operating plan and I am pleased with the high level performance we delivered.
The global pandemic is serving to disrupt longstanding business models and forcing many companies to rethink the way they communicate and connect with their customers.
We are flexing, our industry, leading portfolio of capabilities to support our clients as they pursue more effective ways to inspire service and transact with their customers.
Our ability to serve as a trusted business partner, especially during this unprecedented time.
Capable of managing critical initiatives of varying scope and scale across a broad range of print and digital channels has enabled us to expand existing client relationships, while also adding new clients to our roster. Let me share a few examples of notable wins, we have secured over the past several months.
We recently completed a significant new project with Aetna, a Cvs health company.
In light of the challenges. Many people are currently facing coupled with a rapidly approaching flu season.
No sought to ship millions of care packages to its Medicare members through a partner that can manage a project of this scale with little lead time R&D.
R&D was that partner.
The care packages called caring for you kits provide members with several items to encourage self care, while while at home such as a thermometer Hanson sanitizer and face masks and returned to R&D to execute this critical high visibility and large scale project because of our ability to manage every component of the.
Project, including all aspects of print production and fulfillment.
We're also working with a major us based pharmaceutical company to support the launch of their new medical data device that will help patients better manage their diabetes.
Building on our more than 20 year relationship. This client turned to R&D because of our scale the breadth of our capabilities in our proven ability to meet their requirements. We're managing all aspects of this project as well, including packaging design packaging production in keeping with our extensive medical device kitting experience.
We're enabling our clients to focus on the development of new and innovative products, while we manage the business processes in project execution required to ensure supply chain continuity and reliability.
Finally, we recently expanded our relationship with direct energy one of North Americas largest retail providers and electricity natural gas and home and business energy related services.
This enhanced partnership began as an initiative to help direct energy increase the efficiency of their supply chain. It has expanded to include the review and Digitization of their assets to increase efficiencies and enforce brand consistency across all businesses were also supporting direct energy to develop a new customer facing website.
And mobile application for the home warranty service offering.
These new opportunities, which range from large scale project work to ongoing communication programs.
Our leveraging our broad range of capabilities from digital to print and demonstrate the agility scale and differentiated performance, we are delivering to win new business in the markets we serve.
As our clients needs evolve we are expanding our capabilities by developing new innovative offerings. We recently introduced a flex mailer, which is a patented recyclable mailing solution that converts mail packages to a smaller size that needs the user stickiness and flexibility guidelines to qualify as an automated flat.
This offering provides notable cost savings for our clients, while also reducing the environmental impact of the package.
RP a longstanding client recently utilized the flex mailer to deliver 50000 face masks to their volunteers our solution enabled them to customize both the exterior and interior of the package with their local logo and marketing messaging will also saving on shipping costs.
Additionally, we launched touchless world by R&D, which is a comprehensive set of solutions that utilizes the power of dynamic Scannable Smart tags touchless World is enhanced with NFC Q RC and other two d. in Threeq code technology to interact optimally with smartphones in enable easy consumer end.
Agent we.
We are integrating these smart tags with the offerings, we provide in our existing platforms, including labels retail signage commercial print packaging forms and direct mail dynamic content can then be delivered across any of these mediums to consumer smartphone and create a touchless experience.
While we execute our operating plan to navigate through this challenging period. We are also advancing our strategic priorities to strengthen our core.
Drive our revenue performance and improve our financial flexibility and build a stronger R&D for the long term.
In September we entered into a definitive agreement to sell the DLX worldwide portion of our logistics business to Tia by international for $225 million in cash. This transaction has received regulatory approval.
We also signed a separate definitive agreement to sell our international mail and parcel business last week, we expect both of these transactions to close by the end of the year. After customary closing conditions are satisfied.
We plan to continue providing list logistic services to our clients through commercial agreements completed with the respective buyers of these two businesses.
With the divestiture of the remainder of our lower margin logistics businesses. We are further optimizing our business portfolio, reducing our debt and strengthening our balance sheet. These strategic transactions combined with our cost takeout and revenue generating actions in the quarter reinforce our firm commitment to positioning.
R&D for the future through the execution of our long term strategy.
I'd like to personally thank our deal us worldwide and international Mail and parcel leadership teams and employees as well as the working groups across the company that that have been involved in these transactions a.
A tremendous amount of work goes into the smooth execution of any business divestiture, let alone two simultaneous transactions and our teams have done a fantastic job of maintaining business continuity for our clients. During this time I'm.
Im very confident in our ability to complete the outstanding closing conditions and finalize these transactions by the end of the year.
Before turning the call over to Terry I would like to provide an update on what we expect to see across our two segments as we close the year.
For marketing solutions, we've begun to see a gradual, albeit uneven return of client marketing spend as part of the economy stabilize and businesses reopened.
Unique conditions and impact of COVID-19 on different industries means that the pace of recovery in the mix of marketing activity will continue to vary greatly.
What all of our marketing solutions clients share is the need to reassess how changes in consumer behaviors are affecting their traditional marketing approach.
In this context integrated marketing programs with the Monster ball ROI are critical to marketers as they are increasingly challenged to restore topline growth at the same time clients marketing budgets have been constrained and they are being very selective about the projects and programs they push forward.
Increasingly we believe that a premium will be placed on reliability and flexibility as clients adjust their marketing approach and that R&D marketing solutions team is well positioned to provide solutions that optimize our clients overall marketing spend as the economy recovers.
For business services demand for print and support services will closely correlate with the return of consumer and business product spending and will also be industry dependent.
We saw a rebound begin to occur for select verticals during the third quarter. However for certain industries, such as travel and hospitality, we expect to see a longer period for recovery.
We're also seeing the changes in consumer behaviors the shift to E. Commerce in alternative methods for health care delivery are creating new opportunities for client acquisition and expansion across our supply chain packaging and labels businesses.
As we look to the remainder of the year. We are focused on the ongoing execution of our COVID-19 operating plan, while simultaneously advancing our long term strategy. Our teams are executing well and I'm confident we will successfully navigate through this pandemic and emerge a stronger R&D with that I will turn the call over to Terry.
Thank you Dan please.
Please turn to slide 10, as I begin my prepared remarks, we entered the third quarter in the mid significant uncertainty and volatility.
By the challenging business environment, we focused on matters within our control on the sales front, we leveraged our broad set of capabilities to bring innovative new solutions to meet our clients' evolving needs and.
And capture new opportunities created by the pandemic.
On the cost front, we aggressively attacked both our operating and SGN a cost to minimize the bottom line impact from lower demand.
Further we tightened our focus on working capital management in order to maximize liquidity.
At the same time, we continued to advance our strategic priorities by executing definitive agreements to sell our two remaining logistics businesses.
Our focused efforts paid off as we reported a significant improvement in our organic sales performance as our actual results exceeded the midpoint of our previous guidance by over $100 million.
Our adjusted income from operations was flat to the prior year, which yielded a 100 basis point improvement in our adjusted operating margin and our operating cash flow showed year over year improvement for the third consecutive quarter.
Overall, we are very pleased to report adjusted diluted earnings per share from continuing operations for the third quarter of 32 cents, which was up 28% over the prior year.
On a reported basis net sales of $1.19 billion declined $225.9 million in the quarter, which included a reduction of $62.9 million associated with the previous disposition of our GDS business and closure of our operations in Chile.
Net sales were down 12.1% organically, which improved significantly from second quarter's organic decline rate of 17.8%.
Across our 10 different products and services categories. We saw notable differences in how the pandemic impacted demand.
Similar to last quarter for categories, where the work is more transactional and clients can make quick decisions to reduce orders like commercial print digital print and fulfillment and direct marketing we saw greater reduction in demand.
By contrast, other categories experienced less disruption and in many cases benefited from new products and additional COVID-19 related orders for supply chain services packaging and labels east reporting growth over the prior year.
Most products and services category as reported improving year over year trends in the third quarter as compared to what was reported in the second quarter.
Our sales decline was also impacted by our continued efforts to exit 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 of COVID-19.
Our direct marketing sales were also negatively impacted by the lapping of the census work as that project was completed in the third quarter of this year.
On slide 11, our adjusted income from operations of $73.9 million was essentially flat versus the third quarter of 2019.
Combination of our ongoing cost reduction initiatives and favorable product mix more than offset the impact of lower volume and pricing.
Adjusted SG and expense of 137 point.
$137.5 million in the third quarter was down $30.5 million or 18.2% from the prior year, reflecting the ongoing execution of our strategic initiatives to lower our cost to serve.
Adjusted earnings per share from continuing operations of 32 cents in the third quarter increased seven cents as compared to 25 cents per share reported in the prior year period.
In addition to being favorably impacted by lower expenses. Our adjusted earnings also benefited from lower income taxes and interest expense.
The effective tax rate was 44.9% in the quarter and it was favorable to the prior year, primarily due to recent tax law changes that allow for a greater reduction of interest expense.
Interest expense in the current quarter was $3.1 million lower than the prior year period, primarily due to lower rates on our credit facility and term loan.
Our GAAP results for the quarter included pre tax restructuring and other charges of $54.2 million, which included a pre tax charge of $34.5 million related to the estimated mapped withdrawal obligations associated with the LSC bankruptcy.
And restructuring charges associated with our cost reduction initiatives.
Prior year GAAP results included a significantly higher tax expense.
Turning now to the balance sheet and cash flow on slide 12.
As of September Thirtyth 2020, we had total cash on hand of $415 million and total debt outstanding of $2.02 billion, including $410 million drawn against our credit facility.
Remaining availability on the credit facility was $128 million at the end of the quarter and total available liquidity, including cash on hand was $543 million, which was $83 million higher than the end of the second quarter.
Net cash provided by operating activities of $69.4 million in the quarter improved $40.1 million due to working capital improvements deferral of the employer paid portion of payroll taxes as allowed for under the cares Act and lower interest payments.
Capital expenditures of $16.3 million in the quarter were $14.7 million lower compared to the 2019 period due to the strategic investments. We made in 2019 related to the new China facility and the 2020 cents. This project as well as lower spend in 2020 as we continue to.
Preserve liquidity during this volatile period.
Recently, we took two important steps toward optimizing our business portfolio.
We signed a definitive agreement to sell our logistics de LS worldwide business for $225 million in September and last week, we signed a definitive agreement to sell our international logistics business for an undisclosed amount.
Both transactions are expected to close before the end of the year at a significant book gain.
And we plan to use the net proceeds from the divestitures to further reduce debt outstanding.
With the completion of these transactions, we will have fully divested our logistics businesses, but we'll continue to support our clients logistics requirements through commercial agreements with the buyers of these businesses.
In regards to the pending sale of our printing printing facility in Shenzhen, China on slide 13.
The buyer continues to work with the government to obtain the necessary approvals. So we can complete the sale.
Once the transaction closes we expect to record a significant gain on the sale.
During the third quarter, we collected another scheduled deposit of $24.1 million from the buyer.
To date, we have collected $122.3 million in deposits and we are scheduled to collect one additional deposit of $48 million in 2021.
Our contract with the buyer requires them to pay the final installment in 2022, even if the government's approval is further delayed.
If the buyer fails to comply with the terms of the agreement or terminate for any reason, our R&D is entitled to retain 30% of the purchase price in liquidated damages.
Slide 14 shows the various maturities of our outstanding debt as of December 30, Onest and September Thirtyth.
Since the beginning of the year, we have successfully reduced the amounts due on our senior notes and debentures maturing through 2024 by $642 million.
In aggregate these maturities now total $380 million, which is down from over $1 billion at the beginning of the year.
During the third quarter, we opportunistically repurchased $14.5 million of senior notes due in 2021 and 2022.
Yesterday, we notified the remaining holders of our 7.875% senior notes due March 15th 2021 that we plan to redeem the remaining $83.3 million of aggregate principal outstanding on December 4th.
The redemption price is equal to the sum of 100% of the principal amount of the senior notes.
A may call amount calculated in accordance with the terms of the related indenture and accrued and unpaid interest to the redemption date.
After this redemption is complete we expect the remaining maturities due in 2021 will be reduced to $56 million and we expect to repay them using existing liquidity.
The extent to which the pandemic 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 15 with perspectives on our expected fourth quarter performance and liquidity as we manage our R&D through the pandemic.
We have updated our net sales forecast taking into consideration current demand projections for our products and services among other factors.
Based on this assessment, we expect fourth quarter net sales to be unfavorable to the prior year by $200 million to $275 million, including a reduction of $25 million from the recent dispositions of GDS and Chile.
Organically. This represents a range of down approximately 12% to 18% and takes into consideration the ongoing impact from the pandemic and census work in the prior year period that will not repeat.
While difficult to predict with certainty it is possible that our fourth quarter adjusted income from operations may be lower than the amounts reported in the third quarter of 2020, and the fourth quarter of 2019.
Fourth quarter results will benefit from additional cost reductions, but it is difficult to predict how much the pandemic will impact demand for our products and services, including onetime orders specifically related to COVID-19.
Interest expense is also expected to be significantly lower than the third quarter amount.
Operating cash flow is expected to be lower than the amount reported in the fourth quarter of 2019 as working capital improvements have been achieved earlier in 2020.
We also expect operating cash flow to be negatively impacted due to the divestitures of our logistics businesses.
Lets the sale of R&D LS worldwide business closes.
We expect to use the net cash proceeds plus additional cash on hand to reduce our borrowings under our credit facility.
By year end, we expect that gross debt outstanding will be between 350 and $400 million lower than the amount outstanding at the end of third quarter.
As I previously mentioned our liquidity consists of availability on the revolving credit facility and cash on hand.
On September Thirtyth.
Our R&D had total liquidity of $543 million.
We expect to maintain higher cash balances and amounts outstanding on our credit facility until we close the dlcs worldwide sale.
We believe our liquidity is sufficient to fund operations as well as our upcoming debt maturities in 2021.
In addition, we continue to pursue opportunities to monetize assets, including certain investments and sales of real estate and non core businesses.
Lastly, we are not currently subject to maintenance financial covenants in our debt agreements, which reduces our financing risk and.
And now operator, let's open up the line for questions.
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Your first question today comes from the line of Charles Strauzer with CJS Securities. Please.
Proceed with your question.
Hi, good morning guidance.
Morning, Charlie Charlie.
Just a.
When a clarification the sales with the lift in the international logistics businesses those both being reported as discontinued ops in the schedule that you reported at the back of the press release.
The back we've restated everything for to pull out the impact of DLX worldwide and international as well as if you go back to the beginning of the year. The Courier business that we sold back in March so that when we have adjusted those 2019 numbers as well as the earlier 2020 numbers those three logistics businesses have.
Pulled out of all the numbers that are presented in those tables at the very back of the press release.
Great Thats helpful. Thank you and then just looking at the business and generally you feel.
A fair amount of color into the end of the workings of summit.
Declines in the different pieces of business, but where are you seeing that perhaps some pickup seeing any pickup at all direct marketing specifically in commercial print.
They talk to your clients going into Q4, you are with the general tone there.
As Charlie as Stan.
Just to touch on.
That question and respond across a number of those product categories and businesses within within marketing solutions shipped from a direct marketing standpoint, we are we are seeing clients.
Have a strong desire to return.
Back to the mainstream which is which obviously rep. It represents a very good thing and good sign going.
Going forward the challenge there that theyre facing is the economy and as the virus is a bit of a resurgence et cetera is making sure that they are utilizing that marketing spend most effectively and the timing of that is appropriate. So we are we remain cautiously optimistic about.
Direct marketing continued to continuing to rebound with the caveat that the resurging virus in new businesses and economies close down thats going to elongate that that recovery a bit more from a commercial print stand.
Standpoint, I'd say, it's the recovery is happening, albeit slower than than what we would like it to occur.
We are seeing that continue to continue to rebound a bit we have from a facility consolidation platform rationalization standpoint closed a number of facilities and exited business as a result of that of a general trend improving heading in the right direction on that front.
Strong quarter for packaging labels supply chain driven by the things that we mentioned relative to pickup in product that picked up in product spending pick pick up in E Commerce.
Online orders et cetera, so that that that recovered in in the Q3 nicely.
Annual we expect is that the those dynamics and market continue to happen, we should be the recipient of ongoing strength in those in those product categories.
Think about retail retail in store signage, that's all about foot traffic in recovery are there as well so based on the elongated recovery I think thats going to be a bit slower a two on a on a going on a going forward basis. So all in all the general trend upward as represented by the organic significant organic improvement from.
Q1 to Q2 and remain we remain cautiously optimistic that those trends will continue.
Got it and I assume that the growth in packaging is related to the.
We're coming out of the new China plant.
To say.
I would say what's more fair to say is it's a combination of activity in China as well as is.
Activity in the us packaging side, our teams are performing very well there and we are seeing increased demand.
In that in that platform, so not just related China, it's related to the us position as well.
Excellent and then just looking at.
The cash flows and the balance sheet.
Very good job, obviously deploying the cash to reduce debt.
Is that really the main priority use of cash year.
That play.
Well.
Charlie as Terry again, certainly make sure that that liquidity is sufficient to handle all the unknowns in the uncertainties created by the pandemic is is and continues to be our top priority but.
Debt reduction in debt repayment satisfying upcoming maturities.
That that priority is right at the top as well but.
Especially as we as we close on these logistics transactions and and receive in a fairly large infusion of cash from from those sales were feeling more comfortable with the amount of liquidity that we have which is why we we will I feel like we can accomplish both of those objectives by now still preserving liquidity for the unknowns.
As well as paying down debt for the throughout the fourth quarter.
Great and then just lastly from me just looking at the.
The facility that's coming due in 22, there any update on essentially extending or many unit.
Yes at this point, we Havent, we haven't announced anything on that.
At that credit facility is still alive, just just under two years away from the maturing.
So we will certainly and begin to to work on addressing that Anna and during that time.
Generally I will aim for doing that before that facility becomes current so so I would expect we will be tackling that in the early part of 2021.
Great. Thank you very much enjoyed hey, Charlie it's Dan I want to come back to the the other part of.
The use of from a cash standpoint, while we have while our capital spending is lower we are absolutely continue to invest back into our business one of our strategic priorities of that centers around and supports a.
Driving revenue was investing to expand and grow and expand capacity and grow in our higher value higher growth categories. So from a capital standpoint, it is down but we remain focused on investing back in the business and we are prioritizing a growth investments in packaging and labels direct marketing as an example, so.
We are not taking the eye off the ball, there and positioning ourselves as the economy and markets do recover that we've got the capacity required to support the growth our clients are looking for us to provide.
Excellent. Thank you Dan.
Thanks, Charlie.
And your next question today comes from the line of Jason Kim with Goldman Sachs.
Proceed with your question.
Good morning, and thank you will.
Love to get your thoughts on the durability of your margin expansion the yet seen so far which has been impressive to protect your bottom line in the face of difficult top line environment, how much of the cost savings you think is permanent and how much of the savings you willing to reinvest in the business as you see top not recover in the future.
Sure.
Hi, Jason its Dan ill take that one early on when we saw this hit and I think it's important to take it back a bit though we originally saw the impact of the pandemic hit in China in in February.
Timeframe, which are experienced and moving through that and as I said on the last call. Our China team did a phenomenal job of managing through that and continues to do so.
So as that virus in the pandemic spread to the to the US we had that experience we saw that impact and we run various scenarios at that point in time, the what if scenarios if it looks like this it looks like that and there's really two approaches that we contemplated one is we will adjust as we go or.
Are the other approaches we are going to aggressively look to reduce our cost structure in.
And figure out how to operate at a new level and when I talk about adjusting the cost structure. The vast majority of that is permanent reductions not temporary reductions. So when we think about.
Facility closures and consolidations platform rationalization activity the head count the difficult decisions, we make sure we had to make for head count reductions those actions were were meant to be taken.
To reduce our overall fixed cost infrastructure for the long term and we consistently have talked about the need to lower our cost to serve and that's exactly what we're doing in that needs to be done on a on a permanent basis I'm very proud of the fact that if you look at a 12% organic sales decline.
Nine dramatically improved from Q2, our teams are working hard winning new business to offset the the market demand impact.
We are currently facing with Covance, but if you look at a 12% topline drop and still being able to deliver adjusted income from operations sales essentially equal to the prior year on a 12.1% organic sales decline.
Decline Thats, a tremendous accomplishment a tremendous tribute to our team and our ability to manage effectively managing our business and adjust our cost structure to our revenues. So the short answer to your question is the majority of those costs are permanent reductions to our business model and particularly as it relates to facility closures.
Now, having said that I think the other important part for everybody to understand is that Theres a balance here and the balance is what you believe about the ability for the market to recover in and in particularly related to specific product offerings and adjusting there is some aspect of this that remains flexible.
Because the last thing we want to do is take capacity offline or skill sets off line on a permanent basis see the market recover and we don't have the opportunity to participate in that because we took those cost offline. So we've taken a very aggressive approach a very aggressive posture to permanently reducing our cost structure.
Now having said that we've also been very strategic and thoughtful about where those cost reductions have come from and where they're not coming from yet as we want to continue to be positioned as the market rebounds rebounds to be able to satisfy the needs of our clients and the return to growth for for those clients and.
In terms of the cost savings themselves you know Terry touched on it what we're what we're planning and looking at from a use of of cash standpoint debt reduction remains a top priority liquidity remains a top priority as part of that.
And investing back in our business strategically remains a critical component of the use of those funds as well, yeah, and Jason just to add on to that too I would say that.
Like every quarter, we are continually implementing more actions to to to take a swing at that cost pressure in and make ourselves more efficient and as we especially as we look forward to a times when the pandemic is largely behind us and we start to open up.
Things like travel and may be incurred reinstatement of our travel the travel practices and employee.
Cost of living a cost of living increases as we start to.
Reintroduce some of those costs again into the cost structure, our challenge and what we are challenging all our folks to be able to demonstrate is to identify other cost savings to be able to offset that so even though there are some temporary reductions are some increases that will eventually come back again.
Our goal and plan is to to not see the effects of those because they will be offset by and funded by other cost saving actions.
That's great that's very helpful.
And then on the topline.
As far as the fourth quarter organic revenue guidance is concerned with how are you thinking about the year over year trends.
Being a little softer in fourth quarter versus what you saw in the third quarter are there any one time issues. We should be aware of that are less favorable in fourq Q versus threeq two or is it just conservatism in terms of pace of economic recovery stepping choppy markets. That's leading you to guidance or are we getting.
Revenue trends to be a bit weaker versus threeq.
Yes, I think it's it's Dan I think the way I would describe that is you know.
As we sit here today, we are giving our best snapshot of what we think that the fourth quarter. The range of what the fourth quarter is going is going to look like.
And if you think about our business mix in our business profile. There are some components of that they are fairly predictable. If you think about statements as its monthly statements. As example that businesses is on the more predictable side, but if you think about our commercial print digital print that is a daily transactional order flow or if you think about.
Even forms and labels type business Thats, a daily inventory I'll pull from a client standpoint, we really have a very.
Short term visibility short term visibility.
To client demand. So at this point in time, we're taking the providing the range that we think is most appropriate relative to the.
Year over year comparisons Terry had mentioned Neos census in Q3 Q4 last year with strong census is not here in Q3 and Q4 of this of this year. So that is a year over year comp not a significant quarter over quarter comp change so the.
It's very uncertain or also reading the news seeing the resurgence of Covidien, we're seeing economies in states and counties and cities and towns greater Lockdowns et cetera, consumer spending in the in the fourth quarter is going to be a critical component of of this as well so very hard to.
Predict in this uncertain volatile environment.
Okay Thats fair.
Then on the working capital in the past couple of years, obviously fourth quarter has been a very strong free cash flow quarter, and working capital as a big component of that.
But just given the strong outperformance in working capital this year and managing that any color you can give us in terms of the magnitude of the change you expect.
From your usual seasonal patterns in fourth quarter.
Yes, I did indicate in my prepared remarks that we do expect operating cash flow in the fourth quarter to be less than what we've seen in the past and working capital is the primary driver for that.
In the past we've had much higher working capital levels going into the fourth quarter that Weve worked down as we have come off of our busy season and turned a lot of that into our collections. So we'll still have some of that this year by kind of our starting point is is us certainly less.
Than than what it's been in the past years and.
I will.
Shooting and sell our working to be more efficient than we've been in the past even at the end of the quarter we.
I do believe that we have actually seen some of that cash flow that we might have otherwise seen come through in fourth quarter, we seen that actually come through and the earlier quarters here sub so we do expect it to be down it's hard to say for sure how much that will be down, but definitely down and.
I would also expect that thats still going to be higher than what we saw in the third quarter, so somewhere between that third quarter amount and the the prior amount so from a fourth quarter timeframe. So.
Thats really kind of what our expectation is at this point, but again there are some challenges with.
With that having visibility and being able to predict that as as reliably as we have otherwise been able to in past years.
Understood and then my last question is regarding the asset sales I'm any tax leakage, who should be incorporating into your logistics.
Business and then on what will be the annual well balanced you will have half of this sale.
And lastly are.
Are there any other assets that you think is attractive to monetize some of the company. Thank you.
Alan I missed the first part of your question, but on the NFL side, we will actually have a gain from the sale of the logistics businesses and some of that gain will have a gain on both books and as well as for taxes, but we will be able to shelter a significant portion of that tax gain with.
The utilization of our.
Loss carry forwards from the past so.
There will be.
Only a small tax leakage as a result of that sale, but it is tax there is a tax gain on it.
But again, we will be able to shelter most not quite all of that but most of that will be sheltered with past operating loss carryforwards.
And did I get that part of any other assets.
Oh, yes. It is asking about if there will be any tax leakage from the asset sales, but the equity answer yes.
Yes in any other assets that you think is will be attractive to monetize.
Hi, well, we're constantly looking at.
Facilities that we that we own we constantly got a.
Number that are on the market that we are looking to sell but nothing nothing.
On the real estate front is as large as the property in Shenzhen, China are the or the active.
Activity that we're seeing here so far.
On the business front tag again, my prepared remarks sales, where we continue to look at.
Parts of the portfolio as we are always seeking ways to monetize and get more focused and kind of the core part of our business that supports our strategy going forward. So nothing to announce there at all we're always evaluating and looking at opportunities in the marketplace, but that does not necessarily mean those turn into.
We completed transactions and just to just to add to that an important component of our of our long term strategy as we talk about in terms of driving our financial improving our financial flexibility portfolio optimization has.
Played a key role in that and if you look at our historical performance going back a couple of years the sale of our print logistics business, our R&D day.
Business, our GDS Europe statement business, the exiting of Brazil, and Chile, and now the sale of the additional logistics businesses that we've we've announced courier earlier in the year International Mail and deal US worldwide that we just recently announced and mentioned on our call those are all.
Critical components and were part of our identified longer term strategic roadmap. So as we go forward.
Portfolio optimization will remain a component of our longer term.
Strategy, we don't put out there what businesses for lots of reasons, we would be evaluating and in that in that area, but we will continue to pursue portfolio optimization opportunities as they make sense for us to do so.
Understood. Thank you very much.
Thank you Jason appreciate it.
Your next question from the line of Bill Stein with Baird. Please proceed with your question.
Thank you Dan I would like to go back to one of your earlier comments about the retail industry and about the slowdown in foot traffic. It seems as though throughout the retail industry that you've had this tremendous surge in digital sales.
And I am just wondering for your own planning purposes are you assuming that this is going to be kind of a steady state in that foot traffic will come back or are these structural changes where.
Things like volumes and maybe margins are going to plateau. So so that would be my first question and I do have a follow up yes.
On the retail side, there's a lot to that a lot to that question right and in law that is going to be predicated in in your conversation with retailers and reading about what different retailers are saying certainly a rise in.
In E commerce, but they continue to believe that that in store is a critical opponent critical component of their marketing campaign and delivering a well rounded consumer experience. So we do expect.
Traffic, we do expect to see rebound.
In foot traffic as the economy opens up restrictions open up now people get back out there and it's really about the completing that full retail.
Experience, even though books make a moment still by and still buy online continue to believe that the retail category in the in the brick and mortar will play a role in those companies marketing strategies.
Having said that it's also important to recognize that their extreme differences between types of retailers and need to think about what we're seeing from a for example from a grocery store standpoint to other other.
No big box retailers, having very strong in store experience and online experience versus others that are not fairing. So well, we do believe that there'll be a continued shift in.
In in brick and mortar as those companies work to figure out what model in their strategies on a going forward basis, but we do the short answer there is we do expect to see that recovery.
Occur and we expect to participate in that as it does occur.
Okay and so the next question I have is for Terry and Terry I want to make sure I heard you on.
Properly and that is that the 87 eights, which are due April 15th of next year at $55 million that is neither going to come out of cash.
From the balance sheet or.
Be redeemed through the AB else did I just want to make sure did hear that correctly, yes.
That is correct, Okay, and then finally.
With all the changes that you've had in your business over the last several years some of the dispositions and whatnot I'm.
Im just wondering what is the new minimum liquidity level that you really need to run the company in in this Kobe 19 environment.
Yes, so that certainly has come down a little bit better, but again, we saw substantial operations.
Over internationally, so we maintain liquidity pool as Paul said internationally for that for those countries support their AD working capital and seasonal needs.
And then in the states as well so if you're asking for liquidity it's Neil.
Needs.
I'm going to feel comfortable with.
Three $400 million at a minimum.
For that going on the business side going forward, but we are continuing to to maintain liquidity in excess of that right now because of.
Just because of the added uncertainty with the with the.
A pandemic right now.
Great. Thank you for all the color and good luck in the upcoming quarter. Thank.
Thank you Bill I think though.
And again, ladies and gentlemen, we would like to ask a question.
Please press Star then the number one on your telephone keypad.
This concludes our question answer session for today I will now turn the call back to Dan.
Great. Thank you a summary of our key takeaways for the call can be found on slide 17 of our presentation in closing I'd like to thank all of our employees around the world for your tremendous commitment to R&D. During this challenging an unprecedented time in particular, thank you too.
Our service and operations teams, our sales teams for continuing to deliver for our clients in spite of the many challenges. We are facing we are incredibly appreciative of your efforts and dedication to our company with that Johan back to you.
Thanks, Dan as a reminder, information Tech Fest, the telephonic replay of our DCE third or finding spend results can be found in our third quarter press release, a copy of which is posted on the investors section of our website at our dotcom. Thank.
Thank you for joining us and Thats concludes the R&D Cook for filing expanding our next call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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