Raine Radar - Special Report Moore Wallace Executives Lining Up and Ready to Take on RR Donnelley: Summary of Q4 Earnings Call By Susan Kelly February 9, 2004 -- Moore Wallace Inc. (TSX, NYSE: MWI) Mississauga , Ontario , and New York , NY , today held their conference call for their fourth quarter 2003. Moore Wallace reported financial results for its fourth quarter ended December 31 st , 2003 . Fourth quarter sales totaled $882.7 million, with GAAP net earnings of $40.1 million, or $0.25 per diluted share for the fourth quarter. GAAP income from operations for the fourth quarter was $84.5 million, or 9.6% of sales. These results were unfavorably affected by acquisition-related items and restructuring actions taken as a result of the merger. Full year 2003 sales totaled $2.87 billion, with GAAP net earnings of $114.2 million, or $0.81 per diluted share for the full year. Editor's Note: Even though Moore Wallace's press releases advertised the advanced earnings call from their original February 23rd date, it appeared that Moore Wallace was selective about the participant list for this call. Moore Wallace's Chief Executive Officer (and soon-to-be R. R. Donnelly's CEO), Mark Angelson, controlled the 50 minute call and limited the Q&A portion. It was also evident that the new CEO for the combined company was showcasing Moore Wallace Executives which we interpreted as a signal of the new Moore Wallace team that could be managing R.R. Donnelley as of March 1st . Even though analysts asked about the bench strength for the combined entity and the recent departure of Tom Oliva, former President and COO of Moore Wallace; Mr. Angelson, stated that they have more talent than they need and departures are imminent on both sides. The Management Team for the combined entity will be announced later this month. Topics: CEO Comments Financial Summary Q&A CEO Comments: Mr. Mark Angelson, Moore Wallace's Chief Executive Officer, prefaced the call to heed their legal advisors and would limit their comments about the pending deal with RRD. This earnings call would not give any future guidance due to lawyer's constraints. Mr. Angelson started the call by commenting that “the internal hurdles of the Wallace integration through closing plants, moving equipment and customers, are behind us. It was not just about cutting cost but about consistency and commitment to our customers. Moore Wallace is a full year ahead of realizing the run rates that they promised their shareholders. Each quarter Moore Wallace sees a stronger balance sheet. Shareholder equity passed the $1 billion mark. The healthcare and telecom sectors are doing well and so are our Outsourcing and Commercial Print segments.” “The R.R. Donnelly integration process was up and running right after the announcement was made. Integration teams have been formed and are co-chaired by both a Moore Wallace and RRD representative. There have been no additional requests by SEC for this pending transaction. Canada 's Review Board will have decision by February 17th . The shareholder vote is scheduled for February 23 rd which will then trigger a February 25th decision by the Canada Review Board with the intention to close the transaction on March 1 st , 2004 .” “ RRD ” will be the new stock symbol and Mark Angelson will be moving to Chicago on March 1 st , 2004 . It will take a while before he will have comprehensive information to publicly communicate about the entire business. Mark admitted that they have been and will continue to be selective in their outreach of investor information. They plan to make official debut the RRD Annual Shareholder's Meeting which is scheduled for April 14th in Chicago . At this meeting they will share business strategy, operational priorities, and guidance for 2004. The new management team will be announced later this month. The CEO is excited about the combination to create a global print powerhouse and an excellent platform to create shareholder value. “A rigorous integration process is to be expected but bear in mind this will not happen as fast as the Moore Wallace integration and rewards will not come until 2005 and 2006.” Financial Summary: Mr. Mark Hiltwein, Moore Wallace's Chief Financial Officer, reported additional financial performance indicators: • This is the 12th straight quarter of meeting and exceeding shareholder expectations. • Forms and Labels reported revenue growth to $476.7 million, an 8% increase over last quarter. This includes the training of new personnel and Moore Wallace believes they are now right-sized for this segment • Outsourcing continued to experience strong growth of 16% to $87.7 million in revenue. Moore Wallace continues to invest in their invoice and statement processing business. This is what they believe is their fastest growing business. • Commercial Print at 3% growth quarter over quarter from $308 million to $318 million. Their Direct Mail business showed operating margin performance. • Restructuring adjustment was a $5.9 million charge. • Operating margins have increased to 10.8% from 9.2 % from last quarter. • Net Cash was $91.9 million versus $50.7 million for third quarter. • SG&A expense was 16.4% which was flat quarter over quarter. • Net debt has decreased from $923 million to $908 million since last quarter. • Capital expenditures for the quarter were $31.6 million versus $12.6 million last quarter. Q&A Organic revenue growth by segment: Commercial Print was down 1%, Outsourcing was up 10%, and Forms and Labels were down mid-single digits. When asked about the completeness of the Moore Wallace integration, Mark Angelson responded in short, to say they are in the “8th inning”. He then corrected himself later on in the call to say they were in the “9th inning.” Tom Quinlan gave further details that talked about “the 70 sales offices that were consolidated under one roof. The bulk of facilities rationalization is behind us and we are ready for March 1 st RRD integration. Capacity is moving the direction we would like and we have disposed of 50 presses and moved over 70 presses.” Operating margins by segment for the quarter: Outsourcing was 22.5%, Forms and Labels was 15.8%, and Commercial Print was 10.6%. These figures do not contain the corporate number. Questions were asked about the bench strength that Mark Angelson referred to in the last conference call and well as the reasons around the recent departure of Tom Oliva from Moore Wallace. Mark Angelson confirmed that he has stated publicly there will be casualties for both companies to create an all-star team. “It is clear we were not going to have a President and COO for the entire company. Tom Oliva wants to spend more time with his family.” Mark Angelson is not going to make any announcements now and will do it in a quarterly way. He confirmed that they will have departures on both sides because “we have more talent than we need. And I could not be happier with the current line up.” The CEO declined to comment on cross selling opportunities. However, he did take the opportunity to share a recent customer visit in the southeast region. Moore Wallace's Bob Nelson, “the best in the world in corporate accounts has presented the total print management platform which has gone remarkably well for us and the revenue synergies for this RRD thing looks good.” On a qualitative basis they are ahead of plan on a margin basis. The CEO said that “it is in significant part because the integration happened more quickly that they expected and because of Mark Hiltwein and his team has knocked the daylights out of this program with their purchasing power and finding the synergies.” Mark Hiltwein commented further that he believes they have right sized the capacity and the cost structure of the entire organization: SG&A, corporate, and operations. When asked if Moore Wallace sees signs of growth in the commercial print business, Mark Angelson replied with a one-word answer “Yes”. Analysts pressed for more information. The CEO's response was that in the last 90 days they are seeing a turn in the industry and if it holds then it will give them the wind at their back. “The economy is looking better to us than a year ago.” They would not provide specific details. Moore Wallace declined to comment about the debt and senior notes at this time. Business forms are seeing an industry decline of 3.5%. Moore Wallace is managing their business for cash and this segment is their cash cow. They see a way to make it a little bigger but will continue to match revenue with expenses, and move fixed into variable expenses. Other products in this segment are office products and labels but a good portion of the financial erosion is due to the company's distraction of the integration. As they get more focused on the middle markets, they will stave off some of this decline and they expect the decline to slow over the next couple of years. Moore Wallace is optimistic because margins are good and they haven't had to invest a lot into the business. When asked to comment on the current competitive or pricing environment, Mark Angelson responded with the question “This is the printing industry, right?” He added that “We have many competitors but there is nobody else that can do everything we do. We have segment competitors. It's still tough out there because there is capacity available.”