Q3 2021 RR Donnelley & Sons Co Earnings Call
Yeah.
Welcome to the R. R D third quarter 2021 conference call. My name is I'm interested and I will be operator for today's call. At this time all participants are in a listen only mode.
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I'll now turn the call over to you on a nice dead or are these senior vice president of finance.
Thanks, Jeremy trusts and thank you everyone for joining R. R D Socs for 2021 results conference call.
Joining me to review our financial results and comment on the acquisition US are Dan Knotts, <unk>, President and Chief Executive Officer, and Ty Peterson, Our Chief Financial Officer at.
At 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 <unk> Dot com as we review our results on her taste calls I would be advancing the slides if you have connected by webcast.
I'll try that heavily we will periodically reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves.
The information reviewed during this call is addressed in more detail in our third quarter and acquisition press releases copies of which are posted on the investors section of our website at <unk> Dot com.
Formation must also furnished to the FTC and the form eight Ks filed earlier this morning.
In addition, we will also refer to forward looking statements.
Including comments on our strategy, which involves risks and uncertainties. Therefore, our actual results could differ materially from our current expectations for a complete discussion of the factors that could cause our actual results to differ materially. Please refer to the cautionary statement.
Children are in its 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 SEC.
Further we will discuss non-GAAP financial information, we believe the presentation of non-GAAP results provides investors with useful supplementary information concerning the countless ongoing operations. This non-GAAP results are provided for informational purposes only.
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'll now turn the call over to Dan Great. Thanks, Joanne and good morning, everyone. It's great to be with you and thank you for joining us on our call today.
Before we discuss our third quarter results I'm going to first review the press release, we issued earlier. This morning announcing that we have entered into a definitive agreement to be acquired by affiliates of Atlas holdings for $8.52 per share in cash the transaction that we announced today represents a total enterprise value of approximately 2.1.
$1 billion, including net debt.
The $8 52 per share is a 73% premium over the closing price on October 11th 2021, which is the last trading day prior to the announcement of an unsolicited offer by Chatham asset management to acquire all of the common stock of Rd, not already owned by them as we stated in.
Our press release, we believe that this transaction is in the best interest of Rd, and its stockholders and after careful and thorough analysis together with our independent advisors. Our board of directors unanimously unanimously approved the transaction with Atlas under the agreement R&D may solicit superior proposals from third parties.
For a period of 'twenty five calendar days in accordance with the agreement <unk> Board of directors with the assistance of its advisors intends to solicit superior proposals during this period.
We will be filing in due course, the merger agreement and related materials and we recommend you review them once they become available.
Turning to slide five, let's now turn to the quarter built.
Building on our first half momentum, we delivered very strong third quarter results through the consistent execution of our well defined strategy and underlying strategic initiatives on the topline we achieved our second consecutive quarter of organic sales growth with both our business services and marketing solution set.
<unk> delivering favorable year over year performance on the earnings front.
Our adjusted income from operations and operating margin both exceeded last year's third quarter. While also surpassing our 2019 pre pandemic third quarter adjusted income from operations and operating margin performance on the balance sheet, our quarter end debt level was down 500.
$8 million from the prior year third quarter, which represents the lowest debt level for any third quarter, we've reported since the spin.
Our favorable results are a direct result of our sales teams aggressively pursuing targeted opportunities with new and existing clients to drive growth.
Our client services and operations teams executing at a high level and demonstrating tremendous agility to support our clients' requirements all while battling labor challenges in our procurement teams around the world are working diligently to compact to combat global supply chain bottlenecks truly a collector.
Team effort and I am appreciative of the entire R&D team's hard work to achieve these positive results.
To provide a little more color on our Q3 performance.
Net sales were $1 $2 $7 billion up five 5% organically versus the prior year on a segment level business services reported a five 9% organic growth rate led by strong performance across our commercial print packaging and labels product categories.
Top brands continued to leverage our industry, leading packaging and label solutions to keep pace with growing online sales and differentiate their products on store shelves. They value our end to end single source capabilities, which include our premium folding cartons that were showcased at pack Expo in Las Vegas in September.
Including our favorable Q3 performance, we've now achieved five consecutive quarters of net sales growth in these key strategic areas.
Marketing solutions achieved three 8% organic growth growth for the quarter as client demand continues its recovery from the pandemic close direct marketing and digital print led the overall increase for marketing solutions.
We reported $81.5 million and adjusted income from operations, an increase of 10.3% compared to the prior year.
Our adjusted operating margin improved by 20 basis points over the prior year due to our continued focus on cost management.
Our favorable financial performance underscores the successful execution of our strategic initiatives to strengthen our core drive revenue growth through higher value offerings and improve our financial Flexibilities.
Our teams have been working diligently to increase productivity and become more agile while supporting our clients first through the pandemic and now through supply chain disruptions labor shortages and inflationary challenges.
Related to supply chain disruptions paper and other fiber based suppliers have implemented allocations and moratorium processes to manage the surge in demand and limited supply in response, we are providing our clients with product alternatives, including innovative format changes and are introducing new suppliers to provide optionality for our.
Clients are functional teams are working closely together to successfully navigate this volatile supply chain environment and find answers for our clients to that and there are many recent client wins across already this quarter and I'd like to share a few examples that reinforce the breadth of our solutions that we're providing to both new and <unk>.
<unk> clients on slide six as you may recall, we provided a broad range of COVID-19 test kit services last year and that has opened new opportunities for home diagnostics, we secured a new agreement with <unk>, Inc. A Seattle based company, that's developed patient centric technology for anytime anywhere blood.
<unk>. These types of products require supply chain partners, who are compliant with HIPAA privacy rules as well as with FDA regulations involving good manufacturing practices. In addition to having state of the art third party logistics solutions.
This quarter, we will complete our systems integration and begin providing digital print communications kitting fulfillment and logistics services for Tassos blood collection devices. This win is another example of our incubator strategy, where we work side by side with startups to bring new products to market with the potential to quickly scale and meet increasing demand.
Our ongoing investments in our digital print platform continues to drive new business for us as well, we recently established a partnership with mixed tiles, a fast growing international company those redefining the way consumers print and hanging photos in our homes and offices, we're leveraging our extensive high quality variable data printing capabilities to produce and ship the comp.
These photo titles directly to their customers R&D is committed to continuing to lead the way in print technology innovation and meet the dynamic needs of our clients for personalized on demand printing.
Turning to slide seven we are supporting a large health insurer, who just completed the merger by consolidating the design production and fulfillment of welcome kits to new members. We created a standard design for multiple health plans that integrates numerous inserts into an all in one book supported by a print on demand strategy, our comprehensive solution drives efficiency.
And consistency, while eliminating costs associated with storage materials obsolescence and manual assembly of their welcome kits.
As a final example.
We recently won a contract with a leading employee benefits administrator, who is outsourcing the printed printing of their critical business communications. So that they can focus on their core business model. This client has an innovative digital platform that offers easy to use communication tools to assist people in making benefit selections and under this new agreement.
R&D will be providing the printed materials, including annual enrollment communications, new higher package benefits information and other forms as requested by their customers.
Going forward, we will leverage our extensive capabilities to support their current and future requirements as they grow and evolve their business model.
Turning to slide eight before I turn the call over to Terry I'd like to highlight two recent honors. We received the first recognizing the high level of quality and service, we are providing to our clients and the second representing our commitment to supplier diversity first Hormel foods recently recognized <unk> with the 2000 Twenty's Spirit of Excellence Award.
Celebrating our outstanding labeling work for the global branded food company. We were one of 30 suppliers, who met or exceeded hormel stringent standards for quality customer support and on time deliveries second JP Morgan Chase publicly recognized already for our commitment to increase our spending with diverse suppliers over the next three years.
Ours, we apply J P. Morgan for urging its business partners to use their collective purchasing power to help minority owned businesses supplier diversity is an important component of our commitment toward a more diverse equitable and inclusive world and we are honored to receive this recognition and with that I will turn it over to Terry.
To take you through the financials alright.
Alright, Thank you Dan our third quarter was strong across the board. Despite a fourth consecutive quarter of significant foreign exchange headwinds our sales income from operations and diluted earnings per share all came in better than we had expected.
Several of our product and service categories reported growth in the quarter, including labels and packaging, where we also reported our fifth consecutive quarter of organic growth as demand for E. Commerce related products continues to be strong.
Adjusted income from operations in the current year was very strong as it not only exceeded our previous expectation and prior year results that it also exceeded our pre pandemic 2019 third quarter results despite lower sales.
We are seeing a nice flow through to the bottom line on recovering sales due to continued focus on our cost structure, which is driving improved operating margins from a debt perspective, our debt level is down $508 million versus September of 2020, and we are now sitting at the lowest amount of debt outstanding and leverage that we have ever reported for any third.
Orders since the 2016 spin.
While demand for our products and services continues to strengthen we like many companies are working hard to overcome significant challenges with our supply chain and labor availability.
As Dan previously mentioned, we have seen price increases from nearly all our all of our material suppliers, we have experienced labor shortages and elevated wage pressures for manufacturing workers due to current market conditions.
And we have experienced disruptions from the shipping delays caused by container shortages in key domestic and international ports, including China.
We have taken numerous actions to overcome these challenges, including working with our clients on product alternatives and new formats.
And in some cases, we have secured new suppliers and we continue to work closely with our transportation suppliers.
We've also increased inventory levels to help ensure product availability and have adjusted prices for many of our products and services to recover inflationary increases and.
And lastly, our ongoing efforts to reduce our cost structure have also played an important role in helping to offset the impact of these issues with.
With that let me get started with a review of our third quarter performance.
Turning to slide nine.
Net sales were up six 4% in the third quarter, which included $10 $8 million of a benefit due to foreign exchange on an organic basis, we reported growth in net sales of five 5%. We reported sales increases in several of our product categories due to increasing demand for our products and services.
For the segments business services reported another strong quarter with organic growth of five 9%.
This marks the fifth consecutive quarter, we have delivered organic growth in our strategic focus areas of packaging and labels as we continue to win new business and grow sales with our existing clients.
Also commercial print products performed exceptionally well in the third quarter driven by strong demand for trading cards in the U S market and other printed products produced in China.
As expected our supply chain management services reported a decline in the quarter due to a couple of large onetime COVID-19 related kitting projects in the prior year we.
We expect this product category to report another decline in the fourth quarter as the prior year fourth quarter included additional large onetime projects.
Marketing solutions reported organic growth of three 8% as a result of increases in clients' marketing related spend.
While marketing demand is improving we continue to see delays in ramping up due in part to the supply chain disruptions our clients are experiencing.
On slide 10, adjusted income from operations of $81 $5 million with $7 $6 million higher than the third quarter of 2020.
In addition, the corresponding operating margin increased from the prior year 20 basis points to six 4% this quarter.
Higher sales combined with targeted actions taken to reduce the company's cost structure benefited both our adjusted income from operations and operating margin.
And more than offset the impact from last year's onetime COVID-19 related projects higher variable incentive compensation expense and approximately $7 million and unfavorable foreign exchange.
Adjusted SG&A expense of $141 $2 million in the third quarter was up $3 $7 million or two 7%.
As a percent of sales and adjusted SG&A expense improved from 11, 5% in 2022 11, 1% this quarter.
Reflecting the company's ongoing efforts to lower our cost to serve.
Adjusted earnings per share from continuing operations was 57 in the third quarter as compared to 32 reported in the prior year quarter.
The increase was attributable to favorable income taxes higher adjusted income from operations and lower interest expense.
Our adjusted effective tax rate was 26, 8% in the quarter versus 44, 9% a year ago.
This year's tax rate reflects benefits from a greater interest expense deduction, driven by improved U S earnings and a favorable discrete benefit.
Our GAAP results for the quarter included pretax restructuring impairment and other charges of $4 million, which were $52 million lower than the last year, primarily due to a onetime charge recorded in the prior year for Lsc's mirth liability as well as lower employee termination charges associated with aggressive cost action.
Taken during 2020 to reduce our cost structure.
Turning now to the balance sheet and cash flow on slide 11.
As of September 32021, we had total cash on hand of $223 5 million and total debt outstanding of $1 five $1 billion avere.
Availability on the credit facility was $515 $7 million at the end of the quarter and total availability, including cash on hand was $739 $2 million.
Our gross leverage ratio of three seven times at September 32021 improved from four seven times at September 30 of 2020, while the net leverage ratio of three two times improved from three seven times a year ago.
Cash used in operating activities. During the nine months ended September 32021 was $29 million compared to cash provided by operating activities of $25 $2 million in the prior year period.
The increase in cash used from operations during 2021, primarily driven by working capital investments due to increased volume and inflation.
$23 $9 million of LSC bankruptcy related payments.
Incentive compensation and tax payments and a $9 $2 million payment to terminate certain interest rate swap agreements.
In addition, the prior year results benefited from the deferral of the payroll taxes as part of the cares Act and included $15 $7 million of positive operating cash flow from discontinued operations.
These factors were partially offset by lower restructuring and interest payments.
Capital expenditures in the nine months ended September 32021 of $48 $6 million were $5 $8 million lower compared to last year.
And now operator, let's open up the line for questions.
Thank you well now we will now begin the question and answer session.
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Your first question pencils on line of Charles Strawser with CJ Securities.
Hi, good morning.
Charlie Charlie.
So exciting news, obviously today and just wanted to congratulate you guys on getting to this point and obviously with the.
Go shop will be interesting to see how this plays out but I was wondering if you could talk a little bit about processes.
Kind of when it began how you came about to meet with Atlas.
That was.
Ongoing for a while now.
And maybe talk a little bit more about that.
Yes, Charlie I'll go ahead, and take it and Dan can jump in and.
Filling some gaps as well but.
Our board has taken a.
Our strategic review and a strategic look at our assets and our.
Strategic options.
It's been several.
Several years really since the spin they've always taken that part of their responsibility very seriously and have been.
<unk> been very very diligent each year and looking at options specifically to the Atlas option.
That's been a process that has been in place I've been we've been working on that with them with extensive due diligence and such for you know it's been a multi month long process.
But you know I can't really get into too many details about what that process has looked like and and who contacted who first but I will tell you that obviously, we will be preparing for an eventual shareholder meeting where the shareholders will be able to vote on the presented transaction and as part of those material.
There will be lengthy descriptions and discussions about the process that we followed.
And the valuation considerations that the board also are considered including details about a fairness opinion that we did receive from our advisers.
Charlie I'll, just add I mean, the R&D board regular reviews are.
Are these strategic priorities.
In the best interest of R&D and our stockholders.
Evaluated numerous strategic options over the past several years.
The Atlas announcement as Gerry mentioned is the result of a multi month process that included rigorous due diligence on that.
Additional details will be in the background.
We've provided in the background of the merger section of our proxy filing so more to come on that.
And just to reinforce it.
Unanimously believes this transaction is the strongest path forward in the best interest of our R&D and our stockholders.
Thanks, Dan and basically if you look at the go shop period is there a breakup fee.
Except this.
I guess, there is a breakup fee payable by Rd in certain circumstances.
Including for termination for R&D to enter into an alternative agreement for a superior proposal.
Got you and can you quantify that at this point the terms of the breakup fee and triggers are set forth in the merger agreement, which is being filed.
That will be filed later today.
Got it great and then just one.
Housekeeping question.
The results Terry if he could would.
Would you be able to supply.
Products and services, the EBITDA margin for each product line.
We did not.
Publish EBITDA.
EBITDA margins by the individual product categories.
I don't have that and that's not something that we have produced in the past.
Got it and any commentary just in terms of you know.
How.
The various product lines that performed though in terms of profitability.
I mean, I'll tell you that.
We win when we have approached our opportunities for cost reductions and improving our cost structure, we have not focused in any one or two single areas. We've really kind of taken a very very broad approach and we went across all of our different business lines as well as the SG&A functions in the company.
I would say that that most of our categories.
Maybe I'll bet certainly most of those categories at.
All are seeing some benefit from that so from a profitability standpoint, they are contributing to two two improved margins across the board, but if you look at just the business and the product categories.
I'd have to call out for this quarter that the strongest performance.
From a top line is in the commercial print category.
You'd see that.
That product category for the quarter alone was up over 20%. It's about just over $70 million of increase there and we really had two very very strong products that led that increase and it was the the trading cards domestically and the commercial print products that we produce.
In China, many of which are exported back to the to the U S. So again those are those are kind of the.
Standouts for the quarter, but again many of our products.
<unk> had really nice performance in the quarter, but those were the two.
Portions that were standouts within commercial print.
And Charlie just to add to that one of the things. We said last year as we when we were making changes to our cost structure that a significant portion of those changes we're going to be remain in place would be changes to our fixed cost infrastructure.
And would not be coming back as volumes return, obviously things like sales commissions and such.
Return with volume, but the cost changes that we made were permanent cost changes and not temporary cost changes and youre seeing the financial impact of those flow through as volume does recover.
That's fair. Thank you very much for that and then just lastly, then.
Any foreseen central Hart Scott issues that.
Could delay.
Combination with Atlas.
Yes.
Not going to speculate on any of those types of issues Charlie.
Great. Thank you very much and congratulations alright, thanks I appreciate it.
Your next question comes from the line of Bill <unk> with Baird.
A couple of fixed income questions for you the beginning with the Atlas proposal is there any type of detail that you can share on the capital structure with the proposed acquisitions just in terms of the amount of debt.
As well as maybe the contribution by the Atlas funds.
Yes, certainly there were equity commitments from affiliates within Atlas and then they.
Have a backstop facility that is led by JP Morgan and.
Also participating in and named in the press release was Macquarie. So.
Those are in place we do have firm commitments on all of those items, but details of what that capital structure will look like.
I have not been released yet so I really cannot comment specifically on that.
I guess, then maybe Terry more broadly on it and it's been well publicized that Chatham has propose subordinating, our appetizing at $654 million high yield holdings.
Does the Atlas proposal would provide a superior value proposition for holders of your high yield bonds at this point.
Sure.
I am going to have to kind of defer you to.
Information that will be publishing in our proxy statement that'll be out within the next.
And in advance of a shareholder meeting so I can't really comment too specifically on what that is going to look like but certainly as the board evaluated.
The proposal they certainly took into consideration what they felt was best for stockholders as well as other stakeholders.
Okay, and I guess.
Maybe closely related to that and understanding that there may be additional proposals that might come up.
How far are you willing to stretch leverage in any type of acquisition, but what's your comfort level would be another way of stating it.
That's something that I'm really not able to comment on because that would be.
Not really.
It's a decision that would be made by a buyer.
Okay Alright.
Really can't comment on that.
Okay I can appreciate the constraints I. Thank you for for what you can provide.
Yeah.
Alright, great. Thanks.
There are no further questions at this time I would now like to turn the call over to Mr. Dan Knotts.
Great. Thank you again, everyone for joining today's call there's excitement around whats coming for R&D as we continue to March forward with our strategy the announced acquisition by Atlas. We believe will further advance our strategic objective of helping our clients better connect with their customers and we look forward to partnering with Atlas to drive value to our employees at R&D. Thank you for continuing to priority.
Why is the important work, we are providing for our clients and the outstanding performances over every single day. Thanks, again, everyone and have a great day Johan back to you.
Thanks, Dan as a reminder, information to access the web cast replay of our third quarter spending depending upon results can be found on the investors section of our website at <unk> Dot com.
Thank you for joining us and that concludes the Archie suck for quite an extended one but let me just call.
Yeah.
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