By Ann Levine August 11, 2003- R.R. Donnelley (NYSE: DNY) headquartered in Chicago, IL reported second quarter earnings per diluted share of $0.17 as compared to $0.21 for the same period last year. The company announced revenues of $1.1 billion for second quarter which was flat from Q2 2002. Income for the quarter was $19 million as compared to $24 million last year. Topics of this summary: * Davis' Retirement * Growth Initiatives * Commercial Print Sector * Outlook * Q & A Davis' Retirement RR Donnelley's Chairman and CEO, Mr. Bill Davis began today's call by reiterating last week's announcement of his impending retirement. A committee of the Board of Directors is in place and working with a professional recruiting firm to identify a successor. Davis noted his plans to retire have been in place for some time. He will continue to actively lead the company until a successor is named and in place. Davis outlined company changes and accomplishments since he's been at the helm: -strategic realignment of manufacturing assets -driven cost reduction, increased reliability, flexibility and quality -introduced marketing approaches that increased sales and profits -created a strong manufacturing platform -implemented cost actions and will be in the front of top line growth -created a culture that is obsessed with customer service -revenues from logistics will approach $1 billion this year, which is quadrupled from 5 years ago -developed disciplines in managing cash flow Davis concluded by stating the company has made major changes and has a foundation in place to move forward. The company has momentum, a clear strategy, and the competitive advantage in its people. Growth Initiatives The logistics segment is the fastest growing segment of Donnelley's business with package volume up 25% in the first half of the year and revenue showing double digit increases of 13% for the quarter. New wins in the logistics segment include QVC, JC Penney, The Sharper Image and the Veteran's Administration Pharmacy. In the technology industry, the company is targeting companies that produce PDA's, cellular phones, video games and other electronic devices. Donnelley provides the printed manuals for these customers. Donnelley has implemented a production optimization solution that provides for just-in-time printing using the customer forecasts. Donnelley announced the opening of a new plant in Shanghai, China that will play an important role for growth in Asia. The plant will accommodate the growth of technology customers internationally. Commercial Print In the first 6 months of the year, despite continued price deterioration, gross margins remained flat. Commercial Print has secured significant business wins such as Johnson Publishing, News America, Business News Publishing, Walgreen's, Farm Progress and Hanley Wood. In July a contract was signed with Johnson Publishing, the largest African American publisher in the world which produces magazines Ebony and JET. Previous to securing this contract, Johnson has been doing business with a competitor for over 50 years. Donnelley was able to offer Johnson Publishing a comprehensive package including print & bind as well as logistics. The Commercial Print segment, under its new leader John Campanelli, will focus on asset optimization, customer solutions, and high quality service delivery. Outlook The company expects full year GAAP earnings per share to be in the range of $1.25-1.40 including $0.06 per diluted share in restructuring charges. Donnelley expects to come in at the lower end of the range, due to the lower than expected earnings in financial services in the second quarter as well as weaker than expected direct mail revenues. This guidance assumes no improvements in capital markets and mutual fund activity in the second half. In the print business, demand has yet to improve and pricing remains challenging in the market place, thus pricing will have a significant impact on the business. Continued growth in logistics and international business has partially offset losses. Capital spending for the year should be below $250 million. Q & A 1. Start-up losses in the logistics area have not been quantified, however they are primarily associated with the start-up of the super center in York, PA and as well as integration costs and closures of other facilities. 2. The direct mail market has shown a weakness and the company has been successful in turning the business around as three Donnelly plants are performing extremely well in terms of cost and service to customers. The challenge remains in direct mail sales. 3. Approximately $17 million has been identified as lower than expected earnings in pension income for the full year, $4 million of which affected the second quarter. 4. Current pricing levels have been consistent and successful thus far. Prices over the past two years have dropped consistently to the point that as renewals continue, prices are lower than 3 years ago. 5. The plant in Shanghai, China is opening gradually; however, growth has been slowed due to the SARS epidemic. Six presses are planned, 4 of which have started up. Growth in China is coming from the telecommunication and technology-related documentation. 6. Although revenues in the financial print sector have dropped significantly, Donnelley believes this will turn around. The sector has been impacted by the industry and volume-related declines. The number of financial transactions has slowed down dramatically to 30% of previous peaks. 7. The company is cautious about guidance for the second half of the year as it has already seen lower-than-expected earnings in the second quarter. The first quarter was also well below expectations. The company is also cautious on recovery assumptions. Since there have been false positives in the past, Donnelley does not want to make assumptions about trends. 8. The business model for the logistics segment includes margins that are relatively low thus the ROI is high. This business complements Donnelley's current portfolio as it allows a mechanism to get the printed product to the market and to the reader.