R.R. Donnelley & Sons Management Discusses Q2 2012 Results - Earnings Call Transcript

R.R. Donnelley & Sons (RRD)

Q2 2012 Earnings Call

August 01, 2012 10:00 am ET

Executives

Dave Gardella - Vice President of Investor Relations

Thomas J. Quinlan - Chief Executive Officer, President and Director

Daniel N. Leib - Chief Financial Officer and Executive Vice President

Analysts

Charles Strauzer - CJS Securities, Inc.

Scott Wipperman - Goldman Sachs Group Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Presentation

Operator

Welcome to the RR Donnelley Second Quarter 2012 Results Conference Call. My name is Christine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dave Gardella. You may begin.

Dave Gardella

Thank you, Christine. Good morning, everyone, and thank you for joining us for RR Donnelley's Second Quarter 2012 Results Conference Call. Earlier this morning, we released our earnings report, a copy of which can be found in the Investors section of our website at rrdonnelley.com. During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to cautionary statement included in our earnings release and further detailed in our annual report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP and pro forma financial information. We believe the presentation of non-GAAP and pro forma results provides you with useful, supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the press release and related footnotes for GAAP information and reconciliation of GAAP to non-GAAP information. We also posted to our website, in the Investors section, a description, as well as reconciliations of non-GAAP measures to which we will refer on this call.

We are joined this morning by Tom Quinlan, Dan Leib and Drew Coxhead. I'll now turn the call over to Tom.

Thomas J. Quinlan

Thank you, Dave, and good morning, everyone. During the second quarter, we posted GAAP earnings per diluted share of $0.49, up from $0.06 from the same quarter a year ago. Our non-GAAP EPS was also $0.49 and was driven by higher operating margins compared to a year ago. As we announced our results this morning, we also reaffirmed our 2012 full year guidance for non-GAAP earnings per diluted share in the range of $1.84 to $1.92, and we expect full year operating cash flow, less capital expenditures, of approximately $500 million. We have been clear and precise during our conference calls this year in outlining the 5 elements of our guiding strategy. While I will touch on all 5 today, the continuing implementation of 2 of these is particularly reflected by the improved operating margins and operating earnings that we posted during the quarter. These 2 are working to increase margins through continuing aggressive cost compression and leveraging our unmatched operating expertise, procurement scale and customer relationships in order to drive efficiencies and create revenue opportunities. As I have said before, these are core everyday activities, and we will continue to match our cost to our expected revenues.

Dan will take you through the results in more detail but before he does, I will touch briefly on how we are pursuing the other elements -- other 3 elements of our strategy as well. The first of these is our focus on winning share by aggressively pursuing all appropriate print opportunities across a diverse range of vertical segments and by using the comprehensive range of our integrated product and service offering as a key value added differentiator. One example of these competitive advantages is the unique combination of our unmatched geographic reach and our advanced technology offering. I'll share an example. For U.S.-based global industrial manufacturer, we use our exclusive self-service CustomPoint interface to win an opportunity to serve their locations in Canada, the U.S., Western Europe and Asia. Now for this customer, more than 2,000 users order any of 18,000 custom SKUs for either release from inventory or print-on-demand. Each of the 6,000 to 8,000 of this customers' orders each month are processed through CustomPoint and promptly routed to the nearest RR Donnelley service facility internationally.

The next pillar of our strategy is building on our relationships with customers internationally to sell more services that diversify and increase our revenue base. We are aggressively pursuing growth opportunities through our service offerings to help mitigate the impact of the secular changes occurring in some of the product categories we provide, and our services revenues are growing. During the second quarter, our services revenues grew 27.2% as compared with the same period a year ago. For the quarter, services represented 13.4% of our total revenues. Through the first half, services revenues are up 14.3% versus the same period in 2011 and represented 13.2% of our total revenues. We have a broad services portfolio. For example, we have more than 10 million of our customers' pictures, logos and other elements in our proprietary digital asset management system. We believe that we are one of the top 20 providers of translation services in the world, with an offering whose revenues are approximately 360% larger than they were in 2009. One very significant factor in the growth of our services revenue has been our ability to expand relationships with our customers to include more of our logistics offering. During the quarter, our logistics revenues increased 11.3% as compared with the same period a year ago. A number of factors are driving this. As I mentioned before, RR Donnelley has been named a top third-party logistics provider. We are leveraging our logistics scale to help customers move far more than printed materials through the lanes that we routinely run: Pet food, ketchup and mustard, golf clubs, car and tractor parts, vending machines, plastic school lunch trays and even local motors are all example of freight moves we have managed. We are attractive to customers in 3 free out space because of our scale and financial stability. Our scale, for instance, helps us to ensure availability of transportation resources during peak times, which can occur at different times in different shipping lanes throughout the year. For RR Donnelley, 3PL is a especially attractive because it requires no capital investment in fleets or ongoing expense of fleet maintenance.

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