Q2 2021 RR Donnelley & Sons Co Earnings Call
Conference call My name is brandy and they will be your operator for today's call.
At this time all participants are in a listen only mode.
After these remarks from company Representatives, we will conduct a question and answer session by zone.
And to ask a question you must be connected by phone as the webcast is a listen only platform.
If you wish to ask a question by phone. Please press star 1 on your Touchtone phone. Please note that this call is being recorded I will now turn the call over to Johan <unk>, Our senior Vice President of Finance.
Thank you, Brian and thanks for everyone for joining our second quarter 2021 results conference call.
Joining me on today's call are Dan Knotts, <unk>, President and Chief Executive Officer, and Terry Peterson, Our Chief Financial Officer.
At the conclusion of today's prepared remarks, Dan and 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 and our dot com.
As we review our results on today's call I will be advancing the slides. If you are connected by webcast. Alternatively, we will periodically reference page numbers on the supplemental slides for those participants who wish to follow along.
By advancing the slides for themselves.
The information reviewed during this call this address in more detail and our second quarter press release, a copy of which is posted on the investors section of our website and R&D Dot com.
This information was also furnished to the FCC and the form 8-K, we filed yesterday.
And Additionally, 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 cash expectations.
For a complete discussion on the factors that could cause actual results to differ materially. Please refer to the cautionary statement extruding and our earnings release and.
And the risk factors included in our annual report on form 10-K.
Our quarterly reports on form 10-Q, and other filings for the SEC.
Further we will discuss non-GAAP financial information.
We believe the presentation of non-GAAP results provides investors with useful supplemental information concerning the company's ongoing operations.
These non-GAAP results are provided for informational purposes only and.
And the references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures and the investors section of our website as part of our press release.
I will now turn the call over to Dan.
Thank you Johan and good morning, everyone. It's great to be with you and thank you for joining our call today on behalf of everyone at R&D I Hope that you and your families continue to stay healthy and safe on today's call I will recap our second quarter results and provide a number of examples that demonstrate how we are and delivering value for our clients and winning.
New business in a recovering a challenging business environment reported before turning the call over to Terry I will also share a number of important awards, we've received recognizing our diversity equity and inclusion efforts.
Building on our first quarter momentum, we delivered strong second quarter results through the ongoing execution of our strategic initiatives, while protecting the health and safety of our colleagues around the globe.
Highlighted by double digit organic net sales growth a significant increase and adjusted income from operations expanded operating margins and our lowest second quarter outstanding debt balance since the spin in 2016, I am very pleased with our performance and the quarter.
And I'd like to provide a little more color on our results.
Net sales of $1..1 5 billion were up 11, 4% organically versus the prior year, representing our fourth consecutive quarter of improved sales trends. Our favorable sales performance is a direct result of our ability to support our clients strengthening demand across our portfolio as the majority of our products and service category.
He has delivered year over year sales growth in the quarter.
Our sales and service teams are working closely with our clients to effectively manage their increasing volumes. While also remaining laser focused on converting our opportunity pipeline into new wins.
On a segment basis business services delivered 11, 6% organic growth driven by very strong performance and our commercial print and packaging and labels offerings marketing solutions also reported double digit organic growth of 10, 3% despite for sensus, not repeating with higher digital print and direct.
Marketing volumes driving the improvement.
As expected, we are seeing client marketing activity, increasing as the economy recovers and we believe that trend will continue as the year progresses I'm on.
Also pleased to report that R&D and marketing solutions, which was established only 4 years ago is now 1 of the 10 largest marketing services agencies in the us and among the 20 largest in the world. According to the 77th at age Agency report.
We reported $41 million and adjusted income from operations, a $20 million or 96% increase compared to the prior year. Despite a number of sizable headwinds, including higher variable incentive compensation, primarily due to an increase and our stock price on.
Favorable foreign exchange and the census project not repeating we also expanded our adjusted operating margin by 150 basis points versus the prior year as a result of our strong operational execution focus and our streamlined cost structure.
Notably both.
Both our adjusted income from operations and operating margin for the quarter exceeded our pre pandemic 2019, and second quarter earnings and margin.
On the balance sheet, our total debt outstanding was down nearly $500 million from the same period, a year ago, which represents our lowest second quarter level since the spin in 2016.
Our favorable results for both the quarter and the first half for the year are directly attributable to the sustained focus and execution of our strategic priorities. We continue to execute at a high level strengthening our core performance by aggressively driving our productivity initiatives, improving our operating leverage and lowering our cost to serve.
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We're favorably shifting our business mix through sustained sales growth and our strategic product categories, and we continue to target our investments towards expanding our capabilities building scale and enhancing our operational agility, while we always have more work to do we are confident in our strategy and the actions, we're taking to position R&D for.
Future success.
We are emerging from the pandemic as a stronger R&D with enhanced ability to flex our capabilities across industries, including financial healthcare retail and services some of our strongest industry verticals, we have and extensive portfolio of products and services and we've demonstrated that we can help clients efficiently connect with their customers and <unk>.
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I'd like to share a few examples that highlight how we are effectively leveraging our industry leading capabilities to support our clients communication needs.
We secured a new agreement with the loom and Australia Digital Diagnostics company, who was recently awarded a $231.8 million contract by the United States government to accelerate production of its COVID-19 home test and the US the company's test is the first over the counter self test authorized by the food and drug admin.
<unk>. This rapid antigen test sold without a prescription can be performed at home with the test results conveniently delivered to your personal smartphone and just 15 minutes.
Alumina selected our need to manage its entire U S supply chain because of our scope and expertise and rapidly scaling diagnostic test kits. The program takes advantage of the integration of our packaging and labels capabilities, coupled with our supply chain solutions and commercial print offerings.
We're excited to expand our relationship with Amyris, leading synthetic biotechnology company that owns and operates a family of fast growing clean beauty brands created with sustainable and natural ingredients and R&D has provided superior printing and packaging capabilities to amyris since 2019, and we are proud to produce the retail carton packaging for the North American law.
<unk> of their new color cosmetics brand and <unk> is committed to using sustainable packaging for us products and R&D was able to offer us offer a customized am stock solution that meets these objectives made from 100% post consumer waste already designed and developed a variety of carton structures and printing shades of custom mixed soy based inks.
Which match the colors of the cosmetics through our breadth and scale R&D has been able to provide the massive scope needed to fulfill amyris is rapidly expanding growth needs.
We are working with <unk>, a global oncology company on an integrated solution and extending beyond printed marketing material Novacare conducts patient satisfaction surveys and Europe and wanted to do the same and the United States. The company leverage our capabilities and survey design print and mail response capture and reporting as well as debt inside.
And <unk> to successfully produce and the other survey R&D compiled compile the results captured responses and leveraged our data analytics team to provide external and actionable insights to novocure.
Building on our current capabilities, we are developing new offerings and support of our clients' evolving needs for our retail clients. We are launching a comprehensive suite of in store marketing support services to seamlessly manage the design ideation procurement and installation of store signage and fixture solutions.
In store communications have become increasingly important to manage rapidly changing consumer expectations and buying behaviors.
Onsite and marketing services as part of our industry, leading capabilities designed to help retailers, including restaurants home improvement stores grocery and convenience stores re imagine their physical environments and drive their growth objectives.
Are these global outsourcing creative team announced this quarter, a PDF remediation solution that will help companies make their documents more accessible to people with site cognition and other disorders that may impact readability of web content. The solution combines <unk> proprietary technology and human expertise.
To help organizations achieve digital inclusivity and regulatory compliance across a variety of communication channels.
Before I turn the call over to Terry I'd like to emphasize our commitment to fostering an environment, where all employees belong are valued and have an equal opportunity to pursue their career aspirations and reach their full potential.
<unk> of our efforts in this area for R&D was recently named to Forbes list of America's Best employers for diversity 2021, recognizing our ongoing dedication to diversity equity and inclusion.
We also were recognized as 1 of the best places to work for those with disabilities by disability in a nonprofit dedicated to business disability inclusion we're honored to receive both of these acknowledged minutes and we will continue our strong focus on enhancing and embracing a diverse equitable and inclusive culture at R&D.
With that I will now turn it over to Terry to review, our financials for the quarter as well as our improved full year guidance that reflects our solid first half operating performance for resilience and scale of our portfolio and the strength of our brand Teri over to you.
Thank you Dan our second quarter was strong across the board and despite a third consecutive quarter of significant foreign exchange headwinds and the lapping of the census project.
Our sales came in near the top end of our earlier estimates and we posted our first organic net sales growth since the pandemic began to impact our global operations late in the first quarter of 2020.
Additionally, our second quarter represents the fourth consecutive quarter, where we have reported improvements in our organic sales performance and fat.
The majority of our products and services categories reported growth in the quarter, including labels and packaging, where we also reported our fourth consecutive quarter of organic growth as demand for E. Commerce related products continues to be strong.
Adjusted income from operations and the current quarter was very strong as it not only exceeded our previous expectation and prior year results, but it also exceeded pre pandemic 2019 second quarter results despite lower sales.
We are seeing a nice flow through on our recovering sales due to the continued focus on our cost structure, which is driving significantly improved operating margins from.
And from a debt perspective, our debt level is up slightly from the beginning of the year as we began to build working capital for the upcoming sales pig, which is consistent with most previous years.
Versus June of 2020, our outstanding debt is down $494 million and we're now sitting at the lowest amount of debt outstanding debt, we have ever reported for any second quarter since for 2016 spend.
While demand for our products and services continues to strengthen we like most companies are working hard to overcome significant challenges related to labor shortages and supply chain disruptions inflationary increases and shipping delays caused by container shortages and key parts, including China.
We have mostly overcome these challenges and the second quarter and we expect to continue doing so for the balance of the year. As these challenges are not expected subside and the foreseeable future.
And more about our outlook later in my prepared remarks, but first let me get started with a review of our second quarter performance.
Turning to slide 8.
Net sales were up 13, 5% and the second quarter, which included $21.7 million of a benefit due to foreign exchange.
On an organic basis, we reported growth and net sales of 11, 4%.
We reported sales increases and most of our product categories due to increasing demand for our products and services, including demand from the continuing recovery from the COVID-19 pandemic.
For the segments business services reported another strong quarter with organic growth of 11, 6%.
All product category us except for statements delivered organic growth importantly.
Importantly, we again delivered organic growth and our strategic focus areas, including packaging labels and supply chain management as we continue to win new business and growth sales with our existing clients.
Also the strong performance and our commercial print products includes increased demand from our clients who sell trading cards.
And.
Marketing solutions reported organic growth of 10, 3% as a result of increases and clients marketing related spend.
We offset by last year's census project, which was completed in mid 2020.
All product categories, except for digital and creative solutions experienced organic growth.
On slide 9 adjusted income from operations of $41 million was $20.1 million higher than the second quarter of 2020.
In addition, the corresponding operating margin increased from 2.1% and 2020 to 3.6% this quarter, representing an increase of 150 basis points.
Higher sales volume combined with targeted actions taken to reduce the company's cost structure benefited both our adjusted income from operations and operating margins and more than offset higher variable incentive compensation expense largely driven by the increase and our stock price approximately $9 million and unfavorable foreign exchange, which is <unk>.
Mostly associated with our operations in China.
And last year's census project.
Adjusted SG&A expense of $143.6 million and the second quarter was up $9 million or 6.7% from the prior year, reflecting an increase in sales commission expense on higher sales as well as higher variable incentive compensation expense.
As a percentage of sales adjusted SG&A expense improved from 13, 3% and 2020 to 12, 5% this quarter, reflecting the companys ongoing efforts to lower our cost to serve.
Adjusted earnings per share from continuing operations was <unk> and the second quarter as compared to a loss per share of <unk> 10 reported and the prior year quarter.
The increase was attributable to higher adjusted income from operations and lower adjusted interest expense, partially offset by unfavorable income taxes.
Our adjusted effective tax rate was 66, 9% and the quarter versus 28, 2% a year ago.
Last year's tax rate reflects the benefits from the cares Act and the current period is negatively impacted by a foreign statutory tax rate increase.
Our GAAP results for the quarter included pretax restructuring impairment and other charges of $9.7 million, which were $18.7 million lower than last year due to lower employee termination charges associated with the aggressive cost actions taken at the beginning of the pandemic to reduce our cost structure and.
And 1 time charges related to our consulting and agreement.
In addition, we incurred a $9.2 million charge related to terminating certain interest rate swap agreements associated with a portion of our term loans repaid and the quarter and a loss on debt extinguishment of $6.2 million, primarily associated with writing off unamortized debt issue costs.
Turning now to the balance sheet and cash flow on slide 10.
As of June 32021, we had total cash on hand of $237.2 million.
And total debt outstanding of $1, $5, 4 billion, which was up $38.8 million versus the prior year and due to slightly higher networking capital as we begin to prepare for the upcoming holiday season.
Availability on the credit facility was $462 million at the end of the quarter and total available liquidity, including cash on hand was $699.2 million.
Our gross leverage ratio of 3.8 times at June 32021 improved from 4.7 times at June 32020, and while the net leverage ratio of 3.3 times improved from 3.9 times a year ago.
Cash used in operating activities. During the 6 months ended June 32021 was $64.8 million compared to $44.2 million and the prior year period.
The increase in cash used from operations. During 2021 is primarily driven by $23.9 million of LSC bankruptcy related payments, mostly associated with lump sum settlements for employee retirement obligations.
Higher tax and incentive compensation payments, and a $9.2 million payment to terminate certain interest rate swap agreements.
In addition, the prior year results included $16.4 million of positive operating cash flow from discontinued operations.
These factors were partially offset by a lower restructuring and interest payments.
Capital expenditures and the 6 months ended June 32021 of $29.9 million were $8.2 million lower compared to last year.
Slide 11 summarizes several key actions, we have taken to improve our balance sheet.
Collectively our efforts have yielded a reduction and total debt outstanding of nearly $850 million since 2016, while significantly improving both our gross and net leverage and.
And regards to the pending sale of our printing facility in Shenzhen, China, We continue to wait for the required government approvals. So we can complete this transaction. The buyer has recently notified us that the process of getting the regulatory approvals from the Chinese government is taking longer than originally expected and that they do not expect the transaction to close until sometime after.
2022.
Once the transaction does close and we expect to record a significant gain on the sale and repatriate the net proceeds to the us.
To date, we have collected $123.3 million and deposits and we are scheduled to collect and additional deposits of approximately $50 million later this year.
Our contract with the buyer requires them to pay the final installment in 2022, even if the government's approval is delayed.
If the buyer fails to comply with terms of the agreement or terminate for any reason our rd is entitled to retain 30% of the purchase price and liquidated damages.
Also year to date, we have sold for properties, which generated proceeds of approximately $5 million.
Slide 12 shows the various maturities of our outstanding debt as of December 31, 2020 and on June 30th.
During the second quarter, we issued $450 million of new senior secured notes due in 2026 and use the proceeds to repay a portion of our term loans and credit facility.
In addition, we amended and extended our credit facility, which now matures in 2026.
<unk> and these 2 transactions represents another significant step forward and our strategic initiative to improve our balance sheet flexibility.
Our expectations for full year 2021 are reflected on slide 13.
Although many uncertainties remain including those related to the pace of recovery from the pandemic supply chain disruptions inflationary increases and shipping delays.
The company is providing the following improved guidance for the year.
Net sales for the year are now expected to be up 1% to 3% taking into consideration reductions from the census project and onetime pandemic related projects and the last half of 2020 offset by further economic recovery recovery as the year progresses.
The company has significantly increased expectation for non-GAAP adjusted income from operations and now expect it to be roughly flat to the prior year after including the negative impact of foreign exchange at current exchange rates Foreign exchange is now expected to be $28 million unfavorable for the year.
This outlook also assumes the company continues to overcome the impact from future inflation labor shortages and supply chain disruptions, while continuing to benefit from aggressive cost reduction actions.
Previously the company had expected full year non-GAAP adjusted income from operations to be flat to up slightly versus the prior year, excluding the unpredictable impact from changes and foreign exchange.
Depreciation expense is expected to be approximately $135 million for the year non.
Non-GAAP interest expense is expected to be approximately $120 million, excluding the second quarter GAAP only charge of $9.2 million associated with terminating certain interest rate swap agreements and connection with the April 2021 term loan repayment.
The approximately $15 million reduction is expected to include benefits from prior repurchases and repayment of higher interest rate debt, along with lower average borrowings and a lower average interest rate and 2021 as compared to 2020.
The full year non-GAAP effective tax rate is expected to be approximately 38%, which is higher than reported in 2020 as nonrecurring benefits from the cares Act were reflected in the prior year.
Operating cash flow is expected to be slightly lower than the prior year, reflecting a reduction due to payments to settle LLC bankruptcy related obligations and repayment of half of the employer portion of payroll taxes deferred in 2020.
Capital expenditures are expected to be approximately $80 million.
And that's part of our agreement to sell the printing facility in China. The company expects to collect 1 additional deposits of approximately $50 million later in 2021. The company also expects to continue generating proceeds from monetizing other assets, including proceeds from selling additional facilities.
And now operator, let's open up the line for questions.
Thank you we will now begin the question and answer session.
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Your first question comes from the line of Charles <unk> with CJS Securities.
Hi, good morning.
Hi, Charlie.
Hey, Barry.
And impressive growth and the quarter and what does it take.
I'll take a few minutes, if we could and maybe to just delve a little deeper byproduct behind us.
The drivers there obviously commercial print.
Pretty big outlier and growth and you mentioned credit and.
And Tim mentioned credit cards, as being part of that but maybe it does.
And probably a little bit deeper here to try and figure out what was more kind of a ketchup business kind of 1 time versus potentially more sustainable growth.
Yes, Joe.
And I'll touch on a number of the different product categories that we that we mentioned that really contributed to our growth in the quarter and if I start within within business services commercial print being at the top of that of that let us I think it's important to note that the trading cards clearly had an impact on that but it's also important to note within that business, it's really a combination of.
And different types of products that we are producing as part of that commercial print platform. So there are.
And there are brochures and such that are that are more of the more a little bit more of the marketing variety there our informational type documents in terms of instructions for use et cetera, there are health care documents.
Debt run run through that platform and the trading card piece of runs to that platform. So a lot of different products within that but I'd say generally Charlie I would attribute it more to a.
Strengthening of broad client demand as opposed to specific or unique onetime events.
Outside of the strengthening of trading cards, and the peaks and valleys, we see within that but I would describe that more as a general.
Recovery of small and midsized and large client volumes flowing through flowing through commercial print.
Within packaging and label as Terry touched on it but continued strength through E. Commerce channels is making a continue to drive volumes on that front, particularly from a label standpoint and from a packaging.
Net new wins that we've had there and strengthening overall demand on that front from from clients.
The economy recovers.
Core element of that as well.
And <unk> and supporting that from a supply chain services perspective.
And also within business services if.
If I shift to marketing solutions and a focus on really the digital print and the direct marketing side.
And I would say the same thing that digital print has a variety of different products that run through it.
And and DM pretty much straightforward there on another type of product thats running through that but the general message I would give everyone. There is thats a recovering client demand environment as opposed to being driven by 1 off type activities that occurred and the second quarter.
Excellent. Thank you very much sorry for.
And then a couple of minutes, maybe just talk about the guidance and a little bit more as to what we should see EBITDA.
Current Q3 quarter.
And how we should think about the assumptions there.
And I will continue on the cost.
The focus on the cost structure on that will continue to have.
The benefits and hopefully offset some of these challenges for us.
The stock price is another item right now that the <unk>.
Providing and creating some volatility for us we have a number of our.
Our awards that are subject to variable accounting, which means that we have to adjust them to whatever the current stock prices at every given quarter, so and the stock price goes up we take adjustments to record more expensive and the stock price goes down and it goes the other way. So that's been very volatile for us and first and second quarter and.
It's hard to say and the hard to predict what that will do for the last half, but that is that us that's certainly a <unk>.
<unk> for US again, we we.
Work to manage and control of that as much as possible through <unk>.
And then finding.
Cost out actions that can help offset potential negative impact there and we'll continue to focus on trying to get ahead of it through other means like that so.
So again those are some of the kind of the big things to think about as you look to the last half of the year.
Great. Thank you and just lastly, just on the LLC obligations, there and maybe touch a little bit for us too.
Flips of the takeaway try and.
On the lines and put that behind you.
Yes, so the.
The payments most of the work to settle favorite and we had favorable settlement opportunities with the couple of the.
Net plans the multiemployer pension plans that we.
Inherited through the LLC of bankruptcy. So we did settle those.
With the favorable discounts on those obligations on 2 of the 3 so we have 1.1 plans still out there thats roughly I think about $13 million us still on the balance sheet for a portion of that obligation.
At the current time, we are not actively engaged with that.
With that plan to 2.2 subtle of that so my current expectation is that we would just fund that on a on a recurring basis over the next 12 or 13 years and the payment their annual payments are very small, but but again unless we had a.
And a significant opportunity of the settled out at a very very favorable discount.
We do not plan to to further negotiate and further settle on that sub so.
So with that said most of the big payments that we see and 2021here related to the LLC bankruptcy. Most of those are behind us. It's possible. We could have a few small lease charges that we would have to fund for the balance of the year, but the big settlements the $24 million that we paid now that for the most part is behind us and we wouldn't expect <unk>.
Anything like that to repeat and the and the <unk>.
Last half of the of the.
2021 year here.
Great. Thanks, and then just lastly from the for Dan.
And any commentary on the.
Honestly, obviously your response to the chat the weather.
For the commentary the provide us there.
And I wouldn't say we of any additional commentary there Charlie beyond what we have already released.
Great. Thank you very much.
Okay. Thanks, Charlie.
And as a reminder, if you would like and ask a question. Please press Star then the number 1 on your telephone keypad again, the stores and the number 1.
And there are no further questions at this time and we'd now like to turn the call back over to Dan Knotts.
Great. Thanks, Brandi of summary of our key takeaways can be found on slide 15 of our presentation in closing I'd like to express my sincere appreciation and gratitude to all of our employees around the world. The leadership cooperation and teamwork. We are seeing at all levels of R&D is truly remarkable and I'm confident.
And that the hard work, we're doing today is building even stronger R&D for the future. Thank you for everything you are and when you are doing we certainly appreciate you Johan back to you.
Thanks for them.
And as a reminder, information track first of our webcast replay of R&D and second for climate is plenty of 1 of the tough call can be found on the investors section of our website at <unk> Dot com. Thank.
Thank you for joining us and that concludes the or the second quarter 2020.1 earnings call.
Yeah.
[music].
And then.