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Commentary & Analysis

R.R. Donnelley Getting Bullish on '05, Huge Improvement in Q1 Results: Summary of Q1 Earnings Call

R.

By WhatTheyThink Staff
Published: May 18, 2005

R.R. Donnelley & Sons today announced its first quarter 2005 results. The company posted earnings of $109.2 million, or $0.50 per diluted share, on sales of $1.9 billion. In the first quarter of 2004, the company posted a loss of $41.4 million on sales of $1.3 billion almost 50% below first quarter 2005 results. Most of the increase came from the acquisitions of Moore Wallace, which occurred on February 27 th, 2004. R.R. Donnelley’s first quarter results included a $14.7 million charge related to the continued integration of Moore Wallace.

Topics of this Summary

  • Quarter Highlights
  • Segment Performance
  • Guidance
  • Raine Radar
  • Q & A

Quarter Highlights

  • R.R. Donnelley has agreed to purchase UK based Astron Group for $990 million in cash. The move is expected to double the size of the company’s contract printing business, and will put a heavy focus on the Government vertical in Europe.
  • R.R. Donnelley has won a $400 million dollar multi-year phone directory contract from partner R.H. Donnelley.
  • Non-GAAP operating margin, excluding restructuring, integration, and impairment charges, increased to 11% from 4.2% last year.

Segment Performance

Integrated Print Communications

This segment includes books, direct mail, financial print, business communications/services, and short-run commercial print. European and Asian businesses are now reported under the Publishing and Retail segment. Net sales doubled in the first quarter of 2005 to $531.4 million, primarily from the addition of revenue from Moore Wallace. The company also cited increases in financial print. Non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 14.2%, up from 8.9% in the same period last year.

Publishing and Retail Services

This segment includes magazine, catalog and retail, directories, logistics, and pre-media businesses, and the European and Asian businesses. Revenue increased 16.6%, due to sales increases throughout the segment and the acquisition of Moore Wallace, to $985.2 million. First quarter non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 15.3%, down from 9.1% in the same period last year.

Forms and Labels

This segment includes Latin American business in addition to forms and labels. Net sales increased to $409.9 million in the first quarter from $177.9 million from the same period in 2004. The increase was also due to the Moore Wallace acquisition. R.R. Donnelley noted that over-capacity has continued to cause this to be the most price competitive segment. Non-GAAP operating margin (not including restructuring, impairment, or integration charges) was 8.2% compared to 8.0% in the first quarter of 2004.

Guidance

Sales in the first quarter were above expectations. Because of this, R.R. Donnelley has increased its previously announced 2005 guidance of $1.95 per diluted share to $2.07 (non-GAAP).

Raine Radar

Based on the attitude in the Q4 2004 call, the announcement of the Astron purchase was not a big surprise. It was a little surprising that they opted for an all cash debt financed approach, as it may result in a decrease in their debt rating. Regardless, they’re in no danger of leaving their investment grade. It is likely that the CEO will continue to do what he has done in the past at other companies and ramp up additional acquisitions to accelerate the top line growth. This comes at a time when their competitor, Quebecor World. announces the opposite strategy by selling off their commercial printing division. It will be interesting to see which strategy wins in the long term. In fact, one would suspect that Donnelley might be entertaining the idea to buy the competitive assets to take capacity out of the market and relieve price pressure worldwide. Overall Donnelley was very pleased with this first quarter, and with good reason.

Q & A

  1. R.R. Donnelley believes that the postal rate increase that is expected to be passed by congress will not have a major impact on their customers.
  2. The company has not seen a lot of weakness in terms of declining advertising pages.
  3. Donnelley opted for a debt financed, cash only purchase of Astron and does not believe that decision will have a significant negative impact on the capital structure.
  4. The company did concede that the purchase could have an effect on their debt rating.
  5. Paper pricing changes added approximately 50 basis points to revenue, year over year.
  6. Donnelley plans on replacing old equipment and adding new equipment, but declined to comment on when and where those additions would happen.

 

 

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