Q4 2021 RR Donnelley & Sons Co Earnings Call

Okay.

Welcome to the R. R. D fourth quarter 2021 results Conference call. My name is Emma and I will be your operator for today's call.

At this time all participants are in a listen only mode. Please note that this call is being recorded I will now turn the call over to Johan Nice dead or are these senior vice president of finance.

Thank you Emma and thank you everyone for joining our fourth quarter and full year 2021 results conference call.

Joining me on today's call are dominant nuts are our president and Chief Executive Officer, and Terry Peterson, Our Chief Financial Officer.

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.

I sort of view, our resolve some todays call I will be advancing the slides. If you are connected by webcast. Alternatively, we will periodically reference page numbers from the supplemental slides for those participants who wish to follow along by advancing the slides themselves.

The inflammation reviews. It during this call is addressed in more detail in our fourth quarter press release, a copy of which is posted on the investors section of our website at <unk> Dot com.

This information was also furnished to the FCC and the form 8-K, we filed earlier this morning.

In addition, we will also refer to forward looking statements all of which involve risks and uncertainties.

Therefore, 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 included in our earnings release and the risk factors included in our annual report on Form 10-K .

Fortunately 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 provides investors with useful supplementary information concerning the capex ongoing operations and is an appropriate way to evaluate the companys performance.

These 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.

Lastly, due to the pending merger transaction between our R&D and an affiliate of Chatham asset management, where we.

Will not be conducting a Q&A session following our prepared remarks today.

And with that I'll turn the call over to Dan Great. Thank you Johan and good morning, Good afternoon, and good evening, everyone and thank you for joining US today first and foremost I'm pleased to share that we finished a very strong 2021 with fourth quarter results that exceeded our expectations before providing more color on our fourth.

Quarter and full year performance I want to first make a few comments regarding the merger agreement with Chatham asset management, a leading private investment firm.

On December 14th 2021, we announced a definitive merger agreement with Chatham asset management.

Our board of directors unanimously approved the transaction following a thorough review of alternatives to maximize value for our stockholders. We believe that this proposed transaction represents the best path forward for our company and our stockholders on February 23rd five days from today, our stockholders will have.

Of an opportunity to vote on the merger agreement.

If it is approved we expect the closing to take place expeditiously, possibly even as soon as Friday February the 25th once the transaction closes R&D will become a private company for the first time since 1956, let's now turn to our financial results for the fourth quarter, we reported a one 9%.

Increase in organic sales, which marks our third consecutive quarter of organic growth on a segment basis business services grew one 1% organically driven by increased demand in commercial print labels and statements product categories marketing solutions achieved a four 9% organic growth for the quarter.

Primarily due to stronger client demand in our direct marketing and digital print product categories.

Through the combination of organic sales growth and our ongoing cost management efforts, we reported $96 4 million and adjusted income from operations in the quarter, which is an increase of 2% versus the prior year similar to our third quarter results, our fourth quarter adjusted <unk> in operating margin.

<unk> also exceeded our 2019 pre pandemic performance.

For the full year we.

We delivered very strong operational and financial performance highlighted by a three 2% increase in organic sales a six 9% increase in adjusted income from operations and a 20 basis point improvement in adjusted operating margin.

To provide additional context on our full year earnings performance. Our 2021 adjusted income from operations and operating margin Mark our third consecutive year of improved performance. Additionally, they also represent our best annual performance for those metrics.

Since 2016.

On the balance sheet, our total debt outstanding of 1.4 dollars 7 billion.

Gross leverage of three six times and net leverage of two nine times were all favorable to the prior year in each of those metrics are also at their lowest levels since the spin in 2016.

Our 2021 performance is a direct testament to the R&D teams continued execution of our strategic priorities to strengthen our core drive revenue growth and improved financial flexibility our sales and marketing teams are delivering improved client to customer connections generating new client wins.

And expanding existing client relationships, our operating teams are providing superior products and services to our clients, while continually assessing and improving our work processes to drive client satisfaction and improve efficiencies across all of our businesses importantly, our operating teams also delivered and.

Another stellar year of safety performance.

Especially proud of our 2021 results given the ongoing pandemic and supply chain related disruptions, we are facing and the R&D team is aggressively managing through these challenges and is well positioned for continued success going forward.

At the end of 2021, we also mitigated a ransomware cyber attack as a result of the systems intrusion, we are making steady progress in recovering from the cyber attack due to the incredible efforts of all of the R&D employees, who have worked tirelessly to manage this unprecedented event.

I want to extend my sincerest appreciation to our clients and employees for their patience and support as we swiftly investigated and restored systems to minimize business disruption.

Over the past few quarters, we have highlighted some of the many awards and recognitions. Our team has received and we're especially proud of those acknowledging R&D as a workplace, where each and every one of our employees feel they belong and have the opportunity to reach their full potential as a testament to our inclusive culture, we received a score of nine.

Five out of 100 on the human rights campaign Foundation's 2022, corporate equality index. The nation's foremost benchmarking survey survey and report measuring corporate policies and practices related to LGBTQ plus workplace equality.

With that I'd like to turn the call over to Terry to provide more detail on our financial results for the fourth quarter Terry over to you.

Thank you Dan turning to slide six we had a remarkable finish to a challenging 2021 as we overcame significant headwinds throughout the year and still managed to deliver organic sales growth and improved adjusted income from operations and adjusted operating margins in fact in 2021, we delivered our highest <unk>.

Adjusted income from operations since 2016, despite a more than $750 million reduction in net sales since our peak in 2017.

Our results continued to reflect the benefits from many difficult decisions, we've had to make over the last few years in order to improve the health of our business.

2021 also presented us with many challenges from inflation and supply chain disruptions labor availability and lastly, unfavorable foreign exchange rates, our team is resilient and tackles issues head on while continuing to serve our clients and deliver results for our stockholders.

Overall, we are very pleased to report adjusted diluted earnings per share from continuing operations for the full year of $1 29, which was up six 6% over the prior year.

We delivered organic growth in the fourth quarter, even though last year's results benefited from large onetime COVID-19 related projects in our domestic production was shut down for the last eight days of December due to the recent systems intrusion.

Our adjusted operating income also improved as we continued to aggressively manage through inflation and supply chain challenges.

Taking more cost out of our infrastructure.

Our operating cash flow and its strong despite significant transaction related payments in the quarter.

And we finished with total debt at its lowest level since the spin.

With that let me begin my more detailed review of fourth quarter's results beginning with net sales on slide seven.

Net sales of $1 38 billion were up $28 $6 million or two 1% in the quarter, which included $3 million of a benefit due to foreign exchange.

Net sales were up one 9% organically, marking our third consecutive quarter of organic growth.

Within the commercial print product category, we continued to see strong sales growth in domestic trading cards as well as other printed products in China, principally children's books and religious materials.

The decline in supply chain management was due to the large onetime COVID-19 related projects, we produced in the prior year.

On slide eight our adjusted income from operations of $96 $4 million was $1 $9 million higher than the fourth quarter of 2020, making it the third consecutive quarter, where our 2021 adjusted <unk> exceeded pre pandemic results in 2019.

The increase was primarily due to aggressive actions taken to reduce the company's cost structure, and lower depreciation and amortization expense and higher sales, partially offset by the impact from higher inflation, including wages and material prices.

The combination of material energy and wage inflation as challenge us to find alternatives and offer creative solutions to our clients and we expect those increases to continue into 2022.

We have experienced price increases from nearly all of our suppliers in 2021, and we expect pricing increases to continue into 2022 as well we have taken numerous actions to combat. These forces. Our Rd has offered clients product alternatives format changes and other solutions to minimize the impact.

We have also increased inventory levels to help ensure product availability and have adjusted prices for many of our products and services to recover inflationary increases.

Once again, we focus on those matters within our control and have delivered results that demonstrate that our strategy is working during this uncertain and volatile time.

Adjusted SG&A expense of $144 $4 million in the fourth quarter was down $16 $5 million or 10, 3% from the prior year, reflecting the ongoing execution of our strategic initiative to lower our cost to serve.

Our GAAP results for income from operations for the fourth quarter were down $41 million from the prior year, primarily driven by merger related expenses and increased restructuring and other charges of $7 $6 million.

Adjusted earnings per share of 58 in the fourth quarter decreased 13 cents as compared to earnings per share of <unk> 71 in the prior year period. This decrease was due to a higher effective tax rate, partially offset by lower interest expense and higher adjusted income from operations.

Our adjusted effective tax rate increased from 22, 5% in 2020% to 46% in 2021, primarily due to the mix of earnings interest expense deduction limitations and nondeductible compensation expense.

Turning now to the balance sheet and cash flow on slide nine.

As of December 31, 2021, we had total cash on hand of $280 million and total debt outstanding of 1.4 dollars $7 billion.

<unk> ability on the credit facility was $557 million at the end of the year and total available liquidity, including cash on hand was $839 million up.

From $739 $2 million at the beginning of the quarter.

As of December 31, 2021, there are no scheduled debt maturities prior to November of 2023.

Our leverage at the end of the year improved on both a gross and net basis, both our ending debt and leverage represent the lowest level since the 2016 spin.

Also the unfunded status of our pension and other post retirement plans also improved from the prior year at the end of 2021, our plans were overfunded by $42 million, which is a $146 million improvement from the $104 million. They were underfunded by the end of 2020.

The improvement is due primarily to updated actuarial assumptions strong asset returns and slightly higher discount rates. This is the first time since the spin that our plans have collectively been in an overfunded status.

Full year net cash provided by operating activities of $92 $1 million in 2021 was $57 $7 million lower than 2020, due primarily to payments in excess of $100 million related to the planned merger settlement of LSC bankruptcy related claims repayment of <unk>.

The payroll taxes deferred in 2020 and payments made to terminate certain interest rate swap agreements 20.

'twenty one 2021 results also reflect investments in working capital and lower restructuring tax and interest payments as compared to the prior year.

Capital expenditures of $73 $3 million in 2021 were $12 $3 million lower than 2020.

And with that I will turn the call back to Dan for his closing remarks.

Thank you Terry before we conclude the call I'd like to take a moment to thank our 32000 employees for their tremendous contributions support and teamwork to deliver the high level of business performance we have today.

We're working hard to help clients optimally engage with their customers through their marketing and business communications and I'm excited about what the future holds for R&D.

Again for joining us today and I hope all of you continue to stay safe and healthy Johan over to you for closing instructions.

Thanks, Dan.

A reminder, information to access a telephonic replay of our R&D support for 'twenty to 'twenty. One results can be found in our fourth quarter press release, a copy of which is posted on the investors section of our website at <unk> Dot com.

Thank you for joining us today and that concludes the our R&D fourth quarter 'twenty to 'twenty one earnings call.

Please wait the conference will begin shortly.

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